Tax Type
Retail Sales and Use Tax
Description
Motion Pictures; Stock footage royalties and licensing fees
Topic
Royalties
Taxability of Persons and Transactions
Date Issued
03-29-1996
March 29, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*******
This will reply to your letter of January 22, 1996 in which you seek correction of sales and use tax assessed to your client, ****** (the "Taxpayer"), for the period April 1992 through June 1995.
FACTS
The Taxpayer is a nonprofit organization engaged in the development and production of educational and cultural films and video programming. The Taxpayer produces its film products at the request of customers which are generally government agencies and private organizations.
In order to develop the film product for its customer, the Taxpayer acquires video and text information in the tangible form of pictures, image clips, and tape reels from libraries, archives, and government repositories. The auditor assessed sales tax on stock footage royalties and licensing fees paid by the Taxpayer for the right to use such items in its film productions.
You disagree with the tax and argue that the Taxpayer is unlike traditional for--profit production companies in that the tangible items do not become the property of the Taxpayer, but are used on a one time basis in the production of film products legally owned by its customers. Additionally, you assert that the tangible items are generally returned after use and that payment of the disputed fees merely grants the Taxpayer an exempt intangible right.
DETERMINATION
The term "sale" is defined in Code of Virginia § 58.1-602 to mean "[a]ny transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration..."
The department has traditionally held that royalties paid by a taxpayer which provide not only the intangible right to use theatrical scripts and musical scores but also the tangible copies of these items are analogous to leases of tangible personal property, and as such are taxable. [See P.D. 90-163 (9/11/90) specifically relating to royalties on theatrical works and P.D. 91-29 (3/11/91) relating to royalties in general, copies enclosed.]
Further, in P.D. 87-209 (9/15/87), copy enclosed, the department addressed an analogous situation concerning the application of the sales tax to the licensing of computer software. The ruling indicates that if the licensing of computer software includes the provision of software in tangible form, the licensing agreement constitutes a taxable sale subject to the tax.
In this case, it is immaterial whether the tangible item is returned after use or that the film product's legal ownership is held by another party. A taxable transaction is deemed to take place when the Taxpayer is licensed the right to use video and text information and such information is provided in tangible form. The transaction constitutes a taxable sale as defined above and is consistent with the policy applied to royalties and computer software licensing agreements. Moreover, it does not matter that the Taxpayer is a nonprofit entity for federal income tax purposes. As you will note in P.D. 90-163, the taxpayer in that instance was a nonprofit theatre company.
However, the department has also determined that the electronic transfer of information does not constitute a taxable transfer of tangible personal property. Therefore, when the Taxpayer obtains, for example, computerized library images or other types of video or text information electronically obtained by downloading from a third party's database, the transaction is not subject to the sales tax. [See P.D. 88-299 (10/31/88), copy enclosed.]
The Taxpayer is further advised that effective July 1, 1995 through June 30, 1997, Code of Virginia § 58.1-609.6(6), copy enclosed, provides an exemption from the sales and use tax for tangible personal property, including by not limited to, scripts, musical scores, film, and tapes for use in audiovisual works intended for distribution, broadcast, other commercial exhibition, or for use in the production of another work.
Based on the Taxpayer's production of films and video programming which are ultimately viewed by general public audiences and televised on the Public Broadcasting System, the stock footage royalties and licensing fees paid in connection with the receipt of tangible items would now qualify for exemption under the above statute. I am also enclosing Tax Bulletin 95-5 issued by the department on June 23, 1995 which provides further explanation of the exemption. Also included is the exemption certificate developed for the audiovisual exemption (Form ST-20A), which the Taxpayer should complete and provide to its vendors.
Accordingly, the assessment is upheld and the Taxpayer will receive an updated assessment including penalty and interest computed through the date of the letter of protest. Should you have additional questions, please contact ***** in the Office of Tax Policy at ******* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10578J
Rulings of the Tax Commissioner