Does New York sales tax apply to a recording studio's ISDN transmission of radio commercials, studio rental time, hook-up fees, or backup dubs?

Plain-English summary

CAV Corp, doing business as Soundtrack NY, runs a New York recording studio that produces radio commercials for clients and then transmits the finished spots over ISDN lines -- sometimes directly to out-of-state receiving studios, sometimes to a California switching center run by a third party that "fits" the signal onto a single ISDN line for distribution to many radio stations nationwide, including some in New York. Clients pay an hourly rate for studio time (with Soundtrack's staff running the equipment under the client's direction), a hook-up fee to make the ISDN connection between Soundtrack's equipment and the receiving facility's, and sometimes an extra fee for a safety/backup dub that Soundtrack keeps in New York until the client asks for it to be sent elsewhere. Soundtrack asked whether each of these three charges is taxable.

On the ISDN transmissions, the Department found them nontaxable. New York taxes intrastate telephony and telegraph service, but explicitly excludes interstate and international service. Since Soundtrack's commercials are transmitted to out-of-state destinations, the service qualifies as interstate and isn't taxed under § 1105(b) -- and because the hook-up fee is just incidental to setting up that same nontaxable transmission, it isn't taxed either.

On studio time, the answer split in two. The bare rental of the sound studio itself (real property) isn't taxed. But because the client directs and controls the recording equipment during the session -- which under New York's possession-transfer rules means the equipment is effectively "transferred" to the client -- renting that equipment can be a taxable sale of tangible personal property, unless it qualifies for the production exemption (since it's being used to produce a commercial for sale) or the studio fee is broken out so the nontaxable real-property rental is separately and reasonably stated. If the studio and equipment charges are lumped together without a reasonable separate statement, the whole fee becomes taxable.

On the backup dub, the Department followed its own earlier ruling that producing a radio or TV commercial is the production of tangible personal property (embodied in a tape, film, or soundtrack). Because Soundtrack's safety/backup dub is a physical copy that's delivered to -- and kept in -- New York (even though the client is the one who eventually decides where it goes), the charge for creating it is taxable, unless the dub itself is later used to produce other tapes for sale, in which case the production exemption may apply.

What this means for you

Recording studios and production companies handling interstate distribution

Transmitting finished work product to out-of-state destinations by ISDN or similar means can qualify as a nontaxable interstate telecommunications service, and fees incidental to setting up that transmission (like a hook-up fee) ride along untaxed with it. But keep this analysis separate from any physical copy you retain in New York -- that copy is taxable tangible personal property in its own right.

Studios billing separately for room time versus equipment

If your client directs and controls the recording equipment during a session, that equipment rental can be taxed as a sale of tangible personal property distinct from the (nontaxable) real-property rental of the room itself. Separately and reasonably stating the room charge protects it from being swept into a taxable bundled fee.

Accountants and tax professionals

This ruling threads together three distinct doctrines worth remembering together: the interstate-service exclusion for telephony/telegraphy under § 1105(b), the equipment-possession-transfer test under 20 NYCRR § 526.7(e)(6) for client-directed equipment rentals, and the production-of-tangible-personal-property holding for commercials from William J. Young, TSB-A-88(57)S -- each applies to a different piece of the same transaction.

Common questions

Q: Is transmitting a commercial by ISDN line always exempt from sales tax?
A: Only when it's genuinely interstate or international -- New York still taxes intrastate telephony and telegraph service under § 1105(b).

Q: Does keeping a backup copy in New York change the tax result?
A: Yes. Even though the ISDN transmission of the final commercial is nontaxable, a physical safety/backup dub delivered to and retained in New York is a taxable sale of tangible personal property (the recorded commercial itself) under prior Department precedent.

Q: Does this ruling apply to my studio's transmission and billing setup?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. It shows how the Department reasons, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4)(i) (retail sale)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(b) (tax on telephony and telegraph service; interstate exclusion)
• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• 20 NYCRR § 526.7(e)(4), (6) (transfer of possession)
• 20 NYCRR § 527.2(d) (telephony and telegraphy service)
• 20 NYCRR § 528.13 (production exemption)

Prior rulings referenced: William J. Young, Adv Op Comm T&F, November 7, 1988, TSB-A-88(57)S.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_33s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(33)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S971023B

On October 23, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from CAV Corp dba Soundtrack NY, 936 Broadway, 4th
Floor, New York, NY 10010.
The issues raised by Petitioner, CAV Corp dba Soundtrack NY, are:
1.

Whether Petitioner's direct dial digital transmission of
radio commercials using an integrated service digital
network (hereinafter "ISDN") line is subject to New York
State and local sales and use taxes.

2.

Whether studio time and hook up fees are subject to New
York State and local sales and use taxes if no tangible
personal property is created.

3.

Whether the creation of a safety/backup dub at a New
York studio is subject to New York State and local sales
and use taxes.

Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner's New York recording studio uses direct dial digital, via ISDN
lines, to transmit radio commercials that are recorded at the New York studio to
receiving studios outside New York. Sometimes Petitioner transmits commercials
from its New York studio to a switching center in California operated by a third
party (Company A).
Petitioner sends to Company A, along with the radio
commercial, a list of the radio stations where the commercials are to be
distributed.
Company A sends the data it receives from computer to computer
"fitting" the signal onto a single ISDN line by slowing the data down. This
system is used primarily for distributing finished radio commercials to many
radio stations located both within and outside of New York State.
Petitioner’s clients use its recording studio to produce commercials.
Petitioner charges its clients an hourly rate for studio time. Petitioner’s
employees operate the studio equipment under the direction of the client who
supervises the production of the commercial. Petitioner also charges its clients
a hook up fee for direct dial digital transmissions which relates to making the
connection between Petitioner's audio codec box and the receiving or sending
facility's codec box, i.e., for setting the equipment to be compatible with the
other facility's equipment and then dialing up over ISDN telephone lines. The
hook up fee is in addition to the usage or transmission charges that Petitioner
passes on to its clients. In addition, Petitioner charges its client if it
creates a safety/backup dub at the New York studio. A safety/backup dub stays
in New York until its client requests that the dub be sent elsewhere.

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Sales Tax

Applicable Laws and Regulations
Section 1105(a) of the Tax Law imposes a tax on the “receipts from every
retail sale of tangible personal property . . . . ”
Section 1101(b)(4)(i) of the Tax Law defines “retail sale,” in part, as
follows:
A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical
component part of tangible personal property, or (B) for use by that
person in performing the services subject to tax under paragraphs
(1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five.
Section 1105(b) of the Tax Law imposes sales tax on “[t]he receipts from
every sale, other than sales for resale, of gas, electricity, refrigeration and
steam, and gas, electric, refrigeration and steam service of whatever nature, and
from every sale, other than sales for resale, of telephony and telegraphy and
telephone and telegraph service of whatever nature except interstate and
international telephony and telegraphy and telephone and telegraph service and
from every sale, other than sales for resale, of a telephone answering service.”
(emphasis added)
Section 526.7(e) of the Sales and Use Tax Regulations provides as follows:
(1) Except as otherwise provided in paragraph (3) of this
subdivision, a sale is taxable at the place where the tangible
personal property or service is delivered, or the point at which
possession is transferred by the vendor to the purchaser or his
designee.
*
*
*
(4) Transfer of possession with respect to a rental, lease or
license to use, means that one of the following attributes of
property ownership has been transferred:
(i) custody or possession of the tangible personal property,
actual or constructive;
(ii) the right
personal property;

to

custody

(iii) the right to use,
tangible personal property.
*

or
or
*

possession
control

or
*

of

the

tangible

direct the use of,

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Sales Tax

(6) When a lease of equipment includes the services of
an operator, possession is deemed to be transferred where the lessee
has the right to direct and control the use of the equipment.
The operator's wages, when separately stated, are excludible from
the receipt of the lease, provided they reflect prevailing wage
rates.
Section 527.2(d) of the Sales and Use Tax Regulations provides, in part,
as follows:
(d) Telephony and telegraphy; telephone and telegraph service.
(1) The provisions of section 1105(b) of the Tax Law with respect to
telephony and telegraphy and telephone and telegraph service impose
a tax on receipts from intrastate communication by means of devices
employing the principles of telephony and telegraphy.
(2) The term telephony and telegraphy
operation of any apparatus for transmission
reproduction or coded or other signals.
*

includes use or
of sound, sound

*

Example 3:

Message switching services, transmitted to
a computer over lines leased from a
communication
carrier
are
telegraph
services subject to the tax imposed under
section 1105(b) of the Tax Law.

Example 4:

Facsimile
transmission
services are
telegraph services subject to the tax
imposed under section 1105(b) of the Tax
Law.

*

Opinion
William J. Young, Adv Op Comm T&F, November 7, 1988, TSB-A-88(57)S,
concluded that the creation of a radio or television commercial is considered the
production of tangible personal property. Therefore, sales of television or
radio commercials embodied in tangible form in an original negative film, video
tape or sound track are subject to sales tax if the property is delivered to the
customer or its designee in New York State.
In this case, Petitioner's New York recording studio uses direct dial
digital, via ISDN lines, to transmit radio commercials that are recorded at its
New York studio to out-of-state receiving studios or to Company A's switching
center located in California.
Petitioner sends to Company A, along with the
radio commercial, a play list of radio stations for the commercial. Company A
sends the data it receives from computer to computer "fitting" the signal onto

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a single ISDN line by slowing the data down.
This system is used primarily for
distributing finished radio commercials to many radio stations located both
within and outside of New York State. In addition, Petitioner may create a
safety/backup dub at the New York studio which stays in New York until its client
requests that the dub be sent elsewhere.
With respect to issue "1", to the extent Petitioner's transmissions of
radio commercials using ISDN lines may constitute the sale of telephony or
telegraphy or telephone or telegraph service under Section 1105(b) of the Tax Law
and Section 527.2(d) of the Sales and Use Tax Regulations, since the commercials
are being sent to a location outside New York, Petitioner's service is an
interstate service.
Petitioner's transmission charges in this case are not
taxable under Section 1105(b) of the Tax Law.
Concerning issue "2", Petitioner’s charges for studio time are charges for
the rental of Petitioner’s recording studio and of the equipment contained in the
studio.
Petitioner’s studio equipment is considered to be transferred to
Petitioner’s clients, since the clients direct and control the use of the
equipment. See Section 526.7(e)(6) of the Sales and Use Tax Regulations. The
rental of real property such as a sound studio is not subject to New York State
and local sales and use taxes. Therefore, the fees paid for studio time are not
subject to New York State and local sales and use taxes if such fees are solely
for the rental of real property. However, the rental of recording equipment may
be considered the sale of tangible personal property and, therefore, subject to
sales tax, unless it otherwise qualifies for exemption. The production exemption
under Section 1115(a)(12) of the Tax Law may apply if equipment is used to
produce tangible personal property for sale. See Section 528.13 of the Sales and
Use Tax Regulations. If Petitioner's rental fee includes both the rental of a
sound studio and the rental of taxable equipment, the entire fee is taxable
unless the nontaxable charges for the sound studio rental are separately stated
on the bill or invoice and are reasonably related to its true value.
The hook ups performed by Petitioner for its clients are incidental to the
transmission services described above.
Since Petitioner's transmissions of
commercials are not taxable, the hook up fees are not taxable either.
As for issue "3", in accordance with William J. Young, supra, the fees paid
for a safety/backup dub embodied in tangible form are subject to New York State
and local sales and use taxes if delivered to the customer or its designee in New
York State.
Petitioner's charges to its clients for the production of
safety/backup dubs, where the tapes are kept by Petitioner in New York for an

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Sales Tax

indefinite period of time until a client requests that its tape be sent to an
out-of-state location, are subject to sales and use tax. It is noted, however,
that if the safety/backup dub is used to produce other tapes for sale, that such
safety/backup dub may qualify for exemption as production equipment under Section
1115(a)(12) of the Tax Law.

DATED: May 20, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.