Does producing an animated television commercial using computer graphics qualify for Texas's motion picture exemption, and does the computer/software used to make the master tape qualify for the manufacturing exemption?

Plain-English summary

A taxpayer asked the Comptroller whether producing an animated television commercial qualifies for the motion picture exemption in Rule 3.350. Computer graphics are used to produce a master video tape, which is then sold to the client.

The Comptroller answered that using computer graphics to produce a master video tape that will be sold, broadcast, or distributed qualifies for the motion picture exemption. Separately, the computer and graphics software qualify for the manufacturing exemption (Rule 3.300) if used exclusively to produce tangible personal property for sale, and equipment used to make copies of the master tape also qualifies for the manufacturing exemption.

On the sale itself: the client purchasing the motion picture master can give the taxpayer's company an exemption certificate claiming the motion picture master exemption instead of paying sales tax. However, sales of copies of the motion picture master are taxable.

What this means for you

Animation, video, and commercial-production businesses

If you use computer graphics or animation software to produce a master video tape (for example, a television commercial) that will be sold, broadcast, or distributed, that production activity can qualify for the motion picture exemption under Rule 3.350.

Equipment and software used in production

Computers and graphics software used exclusively to produce tangible personal property for sale — such as the master tape itself — can qualify for the manufacturing exemption under Rule 3.300. Equipment used solely to duplicate the master tape can also qualify.

Selling masters vs. selling copies

If your client is buying the motion picture master, they can give you an exemption certificate instead of paying sales tax. But if you sell copies of that master (rather than the master itself), those copy sales are taxable.

Common questions

Q: Does producing an animated commercial with computer graphics qualify for a sales tax exemption?
A: Yes — producing a master video tape by computer graphics that will be sold, broadcast, or distributed qualifies for the motion picture exemption in Rule 3.350.

Q: Do the computers and software used to make the animation qualify for an exemption too?
A: Yes, but only if used exclusively to produce tangible personal property for sale — in that case they qualify for the manufacturing exemption under Rule 3.300.

Q: Can a client avoid paying sales tax when buying the finished motion picture master?
A: Yes. The client can give an exemption certificate claiming the motion picture master exemption instead of paying sales tax.

Q: Are sales of copies of the master tape taxable?
A: Yes. The exemption applies to the master; sales of copies of the motion picture master are taxable.

Q: Can I rely on this letter for my own production business?
A: No. This opinion is based on the facts presented to the Comptroller, and if there are additional or different facts, the opinion may change; it only applies as a reliance defense for the taxpayer it was issued to.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.350 (motion picture exemption)
• 34 Tex. Admin. Code Rule 3.300 (manufacturing exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9601885L

Original ruling text

January 9, 1996

Dear ****:

In your letter, you asked if the production of an animated television
commercial qualifies for the motion picture exemption in Rule 3.350 - Motion
Pictures. Computer graphics are used to produce the video tape. A master tape
will be sold to the client.

Using computer graphics to produce a master video tape, that will be sold,
broadcast, or distributed would qualify for the motion picture exemption.

The computer and graphics software if used exclusively to produce tangible
personal property for sale would qualify for the manufacturing exemption [Rule
3.300]. Equipment used to produce copies of the master tape would also qualify
for the manufacturing exemption.

The client for the purchase of a motion picture master could issue your company
an exemption certificate claiming the motion picture master exemption instead
of paying sales tax. The sale of copies of the motion picture master are
taxable.

This opinion is based upon the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441 extension 5-0892. The direct line
is 512/475-0892. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

John J. Fitzgibbons, CPA
Tax Policy