Does a studio's equipment used to transfer raw film footage onto a video master tape qualify for the manufacturing exemption, and is the studio's transfer service or the sale of the resulting video master/duplicates subject to Texas sales tax?

Plain-English summary

A tax advisor asked the Comptroller two related questions on behalf of a client, "Company X," a studio that transfers raw, processed negative film (16 mm and 35 mm) shot by production companies, commercial agencies, and film/television producers onto a video master tape. During the transfer, Company X's own studio engineers (not the customer's staff) operate hi-tech computer equipment to color the film, adjust its shading and speed, and enhance its intensity level. The finished video master is then sent out to a separate post-production house for editing and dubbing (Company X does not do that part), after which the master is duplicated and sold. The advisor asked (1) whether Company X's equipment qualifies for the manufacturing exemption, and (2) whether the transfer service itself is taxable.

The Comptroller ruled that Company X's computer equipment used to convert the processed negative film into the video master qualifies for the manufacturing exemption under Texas Tax Code Sec. 151.318. Separately, the sale of the video master itself is not taxable under Sec. 151.318(p) — the motion picture master exemption — as long as the purchaser gives Company X an exemption certificate claiming that exemption, because the master will be sold, offered for sale, licensed, distributed, broadcast, or exhibited. However, the sale of duplicates made from that video master IS taxable. The ruling notes it is based on the facts presented and could change if the facts are different.

What this means for you

Film/video post-production and transfer studios

If your studio uses specialized equipment (like computerized color/shading/intensity correction systems) to convert raw film into a video master, that equipment purchase can qualify for the manufacturing exemption under Sec. 151.318 — provided your own personnel operate it as part of producing tangible personal property (the video master) for sale, rather than simply providing a service using the customer's own equipment/staff.

Businesses selling video masters vs. duplicates

The sale of the master recording itself can be tax-exempt under the motion picture master exemption (Sec. 151.318(p)), but only if the purchaser furnishes an exemption certificate showing the master will be sold, licensed, distributed, broadcast, or exhibited. Don't assume this exemption extends to duplicate copies sold afterward — those sales are taxable.

Anyone requesting a similar ruling

Remember this letter is fact-specific: it says explicitly that different facts could yield a different result, and under STAR's rules it can only be relied upon by the taxpayer to whom it was issued.

Common questions

Q: Does equipment used to transfer film onto a video master qualify for the Texas manufacturing exemption?
A: Yes, according to this ruling — the Comptroller found that the studio's computer equipment used to convert processed negative film into a video master tape qualified for the manufacturing exemption under Texas Tax Code Sec. 151.318.

Q: Is the sale of a video master subject to Texas sales tax?
A: No, if the purchaser gives the seller an exemption certificate claiming the motion picture master exemption under Sec. 151.318(p), because the master will be sold, offered for sale, licensed, distributed, broadcast, or exhibited.

Q: Is the sale of duplicate copies of the video master taxable?
A: Yes. The ruling states that sales of duplicates of the video master are taxable, even though the sale of the original master can be exempt.

Q: Can I rely on this letter for my own film/video business?
A: No. The Comptroller states the opinion is based on the facts submitted and that other facts, though similar, may yield different results; under STAR's rules, only the taxpayer to whom this letter was issued can rely on it.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 151.318 (manufacturing exemption for machinery and equipment)
• Texas Tax Code Sec. 151.318(p) (motion picture master exemption for sale of a master recording)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9603L1399F11

Original ruling text

March 4, 1996

Dear **:

In your letter, you asked if the equipment used by your client qualified
for the manufacturing exemption and the taxability of the service provided.

I have copied the facts from your letter and responded to your questions.

Facts

Company X is in the business of providing services which involve the
operation of a studio used to convert film into video tapes. The services
performed by Company X are provided to production companies, commercial
agencies, independent directors, and motion picture film and
television producers.

Company X's services consist of transferring both 16 mm
and 35 mm processed negative film onto a video master tape. The processed
negative film provided to Company X is actual footage (raw footage) which was
shot on location by the above stated companies, producers, or directors.
During the course of transferring the processed negative film, Company X uses
hi-tech computer equipment to adjust many of the film's features. This
equipment is used to color the processed negative film. Other steps completed
by Company X during the transfer process include the adjustment of the shading
and speed of the processed negative film and the enhancement of the film's
intensity level.

In the course of its business, Company X's studio
engineers operate the hi-tech computer equipment. Company X does not allow the
personnel of its customers to operate their equipment.

Once the processed negative film is transferred onto a
video master tape, the tape is sent to an editorial (post-production) house for
final editing and dubbing. Company X is not engaged in editing and dubbing
services. Once the editing and dubbing is completed, then the video master tape
is duplicated and ready for ultimate sale.

Based upon the facts presented above, we respectfully request a ruling that
Company X's purchases of machinery and equipment are exempt from sales tax
and that the service it provides is not subject to sales tax.

In a telephone conversation, you confirmed that your client sells the master
video tape and other times sell duplicates of the master video tape.

Response

The equipment qualifies for the manufacturing exemption
as described in Texas Tax Code Sec. 151.318.

The sale of a video master, a copy that will be sold,
offered for sale, licensed, distributed, broadcast, or exhibited is not taxable
(Texas Tax Code Sec. 151.318(p)), when the purchaser issues an exemption
certificate claiming the motion picture master exemption. The sale of
duplicates of the video 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
50892. 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

NOTE: Previous Accession Number 9603063L