Is producing a master film, audio, or video recording treated as manufacturing for Texas sales tax purposes, and is duplicating (dubbing) that master taxable?

Subject

Masters (Audio Or Video Recordings) — Manufacturing Exemption For Production, Taxable Duplication Of Dubs

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1283F09

Plain-English Summary

This December 9, 1993 letter from the Comptroller's Tax Administration Division answers a question about the tax treatment of producing a master film, audio, or video recording, and then making dub/duplicate copies of it. The Comptroller explained that, for tax purposes, producing a motion picture or an audio or video recording — where a copy of it will be sold, licensed, distributed, broadcast, or exhibited — counts as "manufacturing." That classification matters because it means producers and production companies can claim the tax exemptions in Tax Code 151.318 (the general manufacturing exemption).

Specifically, the letter says a producer or production company may claim an exemption when renting or leasing equipment that is necessary and essential to the production and used directly in it — the letter gives the example of editing equipment. A post-production company editing a master film, tape, or video (where a copy will be sold, licensed, distributed, broadcast, or exhibited) can likewise claim the exemption on equipment it rents or leases and uses directly in that editing process. Producers and production companies can also use an exemption certificate to buy tape stock and necessary supplies tax free, and to cover a list of post-production processes: editing, tape-to-tape transfers, edit assemblies, sound mixing, and tape duplication — but only when that duplication is part of the editing process itself.

Once the master film or tape is finished, the picture changes: duplication services performed on the completed master (making dubs) are taxable. The one exception is if the dubs being made will themselves be resold — in that case the producer, production company, or other purchaser can use a resale certificate to buy the duplication services tax free, since the dubs are inventory intended for resale rather than something being consumed in production.

About the ALERT banner: The version of this letter on STAR carries an alert noting that Section 151.3185 was added to the Tax Code effective October 1, 1999, specifically to address the motion picture industry. That statute did not exist when this letter was written in 1993 — at that time, the only exemption basis available to producers, production companies, and post-production companies was the general manufacturing exemption in Tax Code 151.318, which is what this letter relies on throughout. The 1999 addition of Section 151.3185 created a motion-picture-industry-specific exemption on top of (or in place of) the general manufacturing exemption this 1993 letter describes. The alert is STAR's way of flagging that a reader relying on this letter today should be aware a more specific, later statute now exists for the motion picture industry — this letter's own analysis, however, is entirely a Section 151.318 analysis and does not mention or apply Section 151.3185.

What This Means For You

If you produce master films, audio recordings, or video recordings for sale, license, distribution, broadcast, or exhibition: This letter treats that production activity as manufacturing, opening the door to the Tax Code 151.318 exemption on necessary and essential equipment rentals used directly in production, and on tape stock and supplies via an exemption certificate.

If you run a post-production or editing business: Equipment you rent or lease and use directly to edit a master (where a copy will be sold, licensed, distributed, broadcast, or exhibited) can also qualify for the exemption under this letter's reasoning — the exemption isn't limited to the original producer.

If you make dub/duplicate copies: Be careful about timing and purpose. Duplication that is part of the editing process on an unfinished master can be covered by the exemption certificate described here. But once the master is complete, duplication services become taxable — unless the dubs you're making will be resold, in which case a resale certificate is the correct tool, not the manufacturing exemption certificate.

On the 1999 alert: Because Section 151.3185 was added six years after this letter was issued, do not treat this 1993 letter as the last word on today's motion-picture-industry tax rules. This letter is grounded entirely in the general manufacturing exemption (151.318); anyone in the motion picture industry today should also check how the later, industry-specific Section 151.3185 applies, since this letter neither discusses nor was written with that statute in mind.

Q&A

Q: Is making a master video recording considered "manufacturing" under this letter?
A: Yes. The letter states that for tax purposes, producing a motion picture or an audio or video recording — where a copy will be sold, licensed, distributed, broadcast, or exhibited — is manufacturing, which lets producers and production companies claim the Tax Code 151.318 exemptions.

Q: Can a post-production company that only edits (and didn't originally produce) the recording claim the exemption too?
A: Yes, according to the letter — when a post-production company is editing a master film, tape, or video that will be sold, licensed, distributed, broadcast, or exhibited, it may claim a tax exemption on equipment it rents or leases and uses directly in that editing process.

Q: Is duplicating (dubbing) copies of a finished master taxable?
A: Yes. The letter says that once the master film or tape is complete, duplication services are taxable. The exception is when the dubs will be resold — then the producer, production company, or other purchaser may use a resale certificate to buy the duplication tax free.

Q: Does the exemption certificate cover tape duplication done during editing?
A: Yes, but only when the duplication is part of the editing process — the letter lists "tape duplication (when the duplication is part of the editing process)" among the post-production processes an exemption certificate can cover, alongside editing, tape-to-tape transfers, edit assemblies, and sound mixing.

Q: Does this letter's 151.318 analysis still fully apply to the motion picture industry today?
A: Not necessarily without checking further. The STAR alert on this letter notes that Section 151.3185 was added to the Tax Code effective October 1, 1999 specifically for the motion picture industry — a statute that postdates this 1993 letter and that the letter does not address, since it relies solely on the general manufacturing exemption in Section 151.318.

Original ruling text

ALERT: Section 151.3185 was added to the Tax Code to specifically address the motion picture industry effective 10/01/1999.

December 9, 1993

Dear ****:

Thanks for your patience.

For tax purposes, the production of a motion picture or a video or audio

recording, a copy of which will be sold, licensed, distributed, broadcast or

exhibited, is "manufacturing." That means producers and production companies

may claim the tax exemptions provided in Tax Code 151.318.

A producer or production company may also claim a tax exemption when

renting or leasing certain equipment. The equipment must be necessary

and essential to the production and used directly in the production.

For example, a producer or production company may claim an exemption

from tax on the rental of editing equipment.

When a post-production company is editing, etc., a master film, tape

or video, a copy of which will be sold, licensed, distributed,

broadcast or exhibited, the post-production company may claim a tax

exemption on the equipment rented or leased and used directly in that

process.

A producer or production company may use an exemption certificate to

claim a tax exemption on tape stock, any necessary supplies, and the

following post-production processes.

-- editing,

-- tape-to-tape transfers,

-- edit assemblies,

-- sound mixing, and

-- tape duplication (when the duplication is part of the editing proce

When the master film or tape is complete, duplication services are

taxable. However, if the dubs will be resold, the producer, production company,

or other purchaser may use a resale certificate to buy them tax free.

This response is based on the facts presented, other facts may result in

a different result.

If you have any questions or need information, my number is

1-800-531-5441 ext. 3-4614. Or you may write to the Tax Administration

Division.

Sincerely,

Adina Whittemore

Tax Administration Division

NOTE: Previous Accession Number 9402008L.2 and/or 9402008L