Is a stock photo agency's fee for selling customers unlimited reproduction rights to 'royalty free' images -- delivered either on CD-ROM or by internet download -- subject to New York sales tax?

Plain-English summary

The Stock Market Photo Agency licenses photographers' images to advertising agencies and publishers. Its traditional "royalty" model sends a physical transparency for a one-time specific use, returned afterward, with the customer paying a royalty shared with the photographer. The company was launching a new "royalty free" product line instead: a flat one-time fee buys unlimited, indefinite reproduction rights to an image, sold either as a single digital download over the internet or as a collection on a CD-ROM -- with ownership of the underlying image always staying with the photographer.

New York's regulations draw a sharp line between a nontaxable "right to reproduce" and a taxable "license to use" tangible personal property. A reproduction right stays nontaxable only if the customer's possession of the physical image is merely temporary (just long enough to make copies) and the payment is genuinely in the nature of a royalty -- traditionally tied to actual usage or copies made, not a flat fee. The Department found the new "royalty free" product fails both tests: the license agreement's own name and structure show a one-time lump-sum fee rather than a per-use royalty, and the customer keeps the image (or the CD-ROM containing it) permanently for unlimited future use rather than temporarily for one reproduction job. That makes it a "license to use" tangible personal property, not a protected reproduction right.

But that "license to use" label only matters when the license is actually attached to tangible personal property. When the "royalty free" collection is delivered on a physical CD-ROM within New York, the disc is tangible personal property and the transaction is a taxable retail sale -- unless the customer supplies a valid exemption certificate (for example, using the images directly and predominantly to manufacture other property for sale) or the disc is delivered outside New York, in which case the destination rule makes it untaxed regardless of where the sale was arranged. But when the exact same unlimited-use rights are delivered by downloading a digital file over the internet -- no disc, no physical medium at all -- the Department treats the transaction as the sale of an intangible, which falls outside the sales tax entirely, independent of the royalty/license distinction.

What this means for you

Stock photography, media licensing, and digital content companies

The taxable/nontaxable line here doesn't turn on what rights you're granting -- it turns on (1) whether the payment is a true royalty tied to actual use/copies versus a flat license fee, and (2) whether anything tangible (a disc, print, or other physical medium) is delivered. The same license terms can be taxable on physical media and completely untaxed when delivered purely electronically.

Companies selling both physical and downloadable versions of the same digital product

Structure and price your delivery-method options carefully -- under this reasoning, offering a customer the choice between a CD-ROM and a pure download isn't just a convenience difference, it can be the difference between a taxable and a nontaxable New York sale.

Accountants and tax professionals

Watch how a license agreement is actually written and named -- the Department looked specifically at whether the fee structure resembled a true royalty (tied to usage/copies) versus a flat license fee, and a "Royalty Free License Agreement" naming convention actually cut against royalty treatment here.

Common questions

Q: Is unlimited reproduction of a stock image always taxable?
A: Not by itself -- it depends on delivery method. It's taxable when delivered on a physical medium like a CD-ROM within New York, but not taxable when delivered purely by electronic download.

Q: Why does a flat license fee lose the royalty exemption?
A: Because a genuine royalty is tied to per-use or per-copy payment; a flat one-time fee for permanent, unlimited use doesn't match that structure, regardless of how the agreement is titled.

Q: Does delivering the CD-ROM outside New York change the answer?
A: Yes -- under the destination rule, no New York sales tax applies if delivery of the physical disc occurs outside the state, even if the sale itself was arranged from within New York.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4)(i) (retail sale)
• Tax Law § 1101(b)(5) (sale, selling or purchase, including license to use)
• Tax Law § 1101(b)(6) (definition of tangible personal property)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• 20 NYCRR § 525.2(a)(3) (destination rule -- delivery outside New York)
• 20 NYCRR § 526.7(f) (reproduction rights vs. license to use)
• 20 NYCRR § 526.8(a) (definition of tangible personal property)

Prior rulings and cases referenced:

• Alan/Anthony, Inc., TSB-A-92(60)S (July 30, 1992)
• Jim Bush Photography, TSB-A-88(48)S (September 20, 1988)
• New York Society of Renderers, TSB-A-98(43)S (July 1, 1998)
• Gentile, Wiener, Penta & Co. CPA's PC, TSB-A-96(91)S (December 27, 1996)
• Howitt v. Street and Smith Publications, Inc., 276 N.Y. 345
• Matter of Frissell v. McGoldrick, 300 N.Y. 370

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_48s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(48)S
Sales Tax
November 12, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990316A

On March 16, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from The Stock Market Photo Agency, Inc., 360 Park Avenue South, New York, NY 10010.
The issue raised by Petitioner, The Stock Market Photo Agency, Inc., is whether its licensing
of unlimited reproduction rights to photographic images, which are transferred to its customers either
over the Internet or in CD-ROM form, is subject to sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a “stock photography agency” which licenses photographic reproduction rights
on behalf of professional photographers. Petitioner’s customers choose images from mass-marketed
material, which includes catalogs, CD-ROM’s and Petitioner’s Web site. The customers are mainly
advertising agencies or publishing houses that reproduce the images in advertising, packaging and
publishing magazines and books. Once an image is selected and ordered, a photographic
transparency corresponding to the image is delivered to the customer. The customer purchases the
reproduction rights to this image which are for a specific one-time use of the image in a form of
media such as a brochure, poster or print advertisement. After the customer completes its project,
the transparencies are returned to Petitioner. The customer pays a royalty fee to Petitioner, which
Petitioner shares with the photographer. The photographers are paid their share of the royalty fee
once Petitioner receives payment from its customers.
Petitioner is about to start up a new line of business in which it will offer a new collection
of images -- called “royalty free” images in the stock photo industry -- to its customers on an
unlimited reproduction rights basis. The reproduction rights to these royalty free images will be sold
over the Internet for a single image or in the form of a collection on a CD-ROM. A fee is paid for
the right to reproduce the images. The payment of the fee allows the customer to use the image more
than once. The primary difference between a “royalty free” image and a “royalty” image is that the
reproduction rights under a “royalty free” arrangement allow a customer to have unlimited usage
privileges, whereas the reproduction rights granted under the “royalty” fee arrangement are for a
limited, specified use. In both cases, however, the customer pays a fee for the right to reproduce an
image. Regardless of whether an image is classified as a “royalty” or as a “royalty free” image by
the industry, ownership of all images remains with the photographer(s) and at no point in time is title
transferred to the customer.
For single images, customers will log on to Petitioner’s Web site and search for the image
they want to use. Once an image is selected, the customer can download the image in a digital file

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format directly onto its computer via the Internet. The customer pays a fee for unlimited reproduction
rights to the selected image. There is no need for the customer to return the digital file even after
it completes its project since the original image remains with Petitioner. The images are paid for
either by credit card or by check. The original photographs and title to all images remain in the
ownership of the photographer(s). No ownership rights are transferred to the customer at any time.
A customer may also select a “royalty free” image from a CD-ROM. The customer’s
purchase of a CD-ROM grants it unlimited reproduction rights to all of the images on the CD-ROM.
The CD-ROMS are purchased by credit card or by check. The original photographs and title to all
images on the CD-ROM remain in the ownership of the photographer(s). No ownership rights in
the images are transferred to the customer at any time.
As part of its petition, Petitioner submitted samples of its proposed “Royalty Free” License
Agreement and proposed customer invoice for review.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for purposes of the taxes imposed by subdivisions (a), (b), (c) and
(d) of section eleven hundred five and by section eleven hundred ten, the following terms shall mean:
*

*

*

(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such. . . .
(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume (including, with respect
to computer software, merely the right to reproduce), conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration
or any agreement therefor.
(6) Tangible personal property.
nature. . . .

Corporeal personal property of any

Section 1105(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property unless otherwise exempted or excluded from tax.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:

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Sale, selling or purchase. [Tax Law § 1101(b)(5)]
(a) Definition. (1) The words sale, selling or purchase mean any transaction
in which there is a transfer of title or possession, or both, of tangible personal
property for a consideration.
(2) Among the transactions included in the words sale, selling or purchase
are exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.
*

*

*

(c) Rentals, leases, licenses to use. (1) The terms rental, lease and license to
use refer to all transactions in which there is a transfer for a consideration of
possession of tangible personal property without a transfer of title to the property.
Whether a transaction is a “sale” or a “rental, lease or license to use” shall be
determined in accordance with the provisions of the agreement. . . .
*

*

*

(e)(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 to custody or possession of the tangible personal property;
(iii) the right to use, or control or direct the use of, tangible personal property.
(f) Reproduction rights. (1) The granting of a right to reproduce an original
painting, illustration, photograph, sculpture, manuscript or other similar work is not
a license to use or a sale, and is not taxable, where the payment made for such right
is in the nature of a royalty to the grantor under the laws relating to artistic and
literary property.
(2) Mere temporary possession or custody for the purpose of making the
reproduction is not deemed to be a transfer of possession which would convert the
reproduction right into a license to use. (See Howitt v. Street and Smith Publications,
Inc., 276 N.Y.345 and Matter of Frissell v. McGoldrick, 300 N.Y. 370.)

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(3) Where some use other than reproduction is made of the original work,
such as retouching or exhibiting a photograph, the transaction is a license to use,
which is taxable.
Example 1: A person contracts with an artist for a right to reproduce one of
the artist’s paintings on a book cover. No other right is given by the artist for the use
of his painting. The person who obtains the reproduction right to the painting may
have copies made and returns the painting to the artist without alteration, change or
correction, and without having destroyed or publicly exhibited the painting. The
transfer is not held to be a transaction subject to the sales tax, as a rental, lease or
license to use.
Section 526.8(a) of the Sales and Use Tax Regulations provides, in part:
. . . The term tangible personal property means corporeal personal property
of any nature having a material existence and perceptibility to the human senses.
Tangible personal property includes, without limitation:
*

*

*

(3) artistic items, such as sketches, paintings, photographs, moving picture
films and recordings . . .
Opinion
Petitioner provides photographic images to its customers who are mainly advertising agencies
and publishing houses that reproduce the images in advertising, packaging, and publishing books and
magazines. The “royalty free” images at issue in this opinion will be sold singly in digital file format
(over the Internet) or as a collection on a CD-ROM.
The granting of a right to reproduce a photographic image provided in tangible format is not
a taxable license to use or a sale if the customer merely takes temporary possession or custody of the
photographic image for the sole purpose of making a reproduction and if payment for the right to
reproduce the image is made in the nature of a royalty (see Alan/Anthony, Inc., Adv Op Comm T&F,
July 30, 1992, TSB-A-92(60)S; Jim Bush Photography, Adv Op Comm T&F, September 20, 1988,
TSB-A-88(48)S). If the customer’s use of the property is not limited to reproduction purposes, then
the transfer of the property to the customer for a consideration will be considered a sale that may be
subject to tax under Section 1105(a) of the Tax Law (see New York Society of Renderers, Adv Op
Comm T&F, July 1, 1998, TSB-A-98(43)S; Gentile, Wiener, Penta & Co. CPA’s PC, Adv Op
Comm T&F, December 27, 1996, TSB-A-96(91)S).

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In order for Petitioner’s transaction to qualify as a right to reproduce photographs, certain
criteria must be met pursuant to Section 526.7(f) of the Sales and Use Tax Regulations. First, the
fee paid for the right to reproduce must be in the nature of a royalty. A royalty payment is defined
as a “payment which is made to an author or composer by an assignee or licensee in respect of each
copy of his work which is sold, or to an inventor in respect of each article sold under the patent” (see
Black’s Law Dictionary, 4th ed, p. 1496). The sample “Royalty Free” License Agreement and
customer invoice submitted by Petitioner do not provide for the payment of fees described above but
for the payment of a one-time lump-sum license fee. The very name of the Agreement suggests the
fee payable under this agreement is not considered to be in the nature of a royalty payment.
Additionally, under Section 526.7(f), a license to use property is deemed to exist where possession
or custody of the property is more than merely temporary for purposes of making the reproduction.
In the case of the “royalty free” images, property is permanently transferred to a customer in
connection with the right to unlimited reproduction of images for an unspecified period of time.
Since the conditions of Section 526.7(f) of the Sales and Use Tax Regulations are not met, it is
concluded that the result of Petitioner’s service is considered to be a license to use tangible personal
property, where the photographic images are transferred in a tangible format, i.e., on CD-ROMs.
The sale of a computer disk containing photographic images may be exempt from tax if the disk is
used by a customer directly and predominantly in the production of tangible personal property for
sale (New York Society of Renderers, supra; Gentile, Wiener, Penta &Co. CPA’s PC, supra).
Accordingly, where delivery occurs within New York State, receipts from Petitioner’s sale of its
“royalty free” photographic images are subject to sales tax under Section 1105(a) of the Tax Law
when sold on a disk, unless Petitioner receives a properly completed exemption certificate from its
customer. No New York State or local sales tax is due on otherwise taxable products if delivery
occurs outside New York State. See Section 525.2(a)(3) of the Sales and Use Tax Regulations.
On the other hand, receipts from the electronic transfer of digital photographic images over
the Internet represent receipts from the sale of an intangible and are not subject to sales tax (New
York Society of Renderers, supra).

DATED: November 12, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.