Does a film and video production company owe sales tax on special-effects paint, blank tape stock, and duplicate tapes (dubs) it has made for clients?

Subject

Masters (Audio Or Video Recordings) — Dubs/Duplicates

Plain-English summary

A film and video production and editing facility wrote to the Comptroller with two sets of questions about its Texas sales and use tax responsibilities.

Special-effects paint. The company shoots against a blue-painted "Ultimatte blue" screen to create special effects, which requires painting the studio walls blue beforehand and then repainting them white afterward. The Comptroller ruled:

• The blue paint is used exclusively in creating special effects for a film or video production, so the company may give its supplier an exemption certificate instead of paying tax on the paint itself.
• If a third party paints the walls blue under a lump-sum contract (one combined charge for paint and labor), the whole charge is taxable as nonresidential real property remodeling.
• If a third party paints the walls blue under a separated contract (a separate charge for the paint and a separate charge for the labor), the labor is still taxable as nonresidential real property remodeling, but the blue paint itself qualifies for the manufacturing exemption.
• The white paint used to repaint the walls back to white is not exclusively used in film or video production, so the entire charge for repainting is taxable regardless of how the contract or billing is structured.

Tape stock and dubs. The company shoots and edits video, sometimes producing just one finished master tape and sometimes sending the master out to a duplication house in Houston to make multiple dubs for a client. The Comptroller ruled:

• No sales tax applies to the tape(s) used during shooting and editing.
• Once the master is completed, sales tax applies only to the charge for dubbing, including the tape(s) used to make the dubs.
• The duplication house must charge the production company sales tax on the dubs unless the company issues a resale certificate claiming the dubs will be resold to the client. A resale certificate lets the company buy the dubs tax-free, but the company must then collect sales tax when it resells the dubs to the client. The client, in turn, may issue its own resale certificate if it will resell the dubs.

As with other letters of this kind, the Comptroller notes the opinion is based on the facts presented and could change if the facts are different.

What this means for you

Film and video production companies

Tape used while you're shooting and editing is not taxable to you, but once you create a finished master and start dubbing (copying) it, sales tax kicks in on the dubbing charge, including the tape used for the dubs. If you send masters to an outside duplication house, give that house a resale certificate so you buy the dubs tax-free, and then be sure to collect sales tax when you invoice your client for those dubs (unless your client gives you its own resale certificate because it will resell them).

Businesses buying paint or materials for special effects

If a material is used exclusively to create a special effect for a film or video production, it may qualify for the manufacturing exemption and can be purchased tax-free with an exemption certificate. But once you bring in a painting contractor, watch how the invoice is structured: a single lump-sum charge for paint and labor makes the whole job taxable as nonresidential real property remodeling, while separately billing the paint and the labor keeps the paint exemption alive even though the labor stays taxable.

Accountants and tax professionals

This letter illustrates how the same underlying transaction (repainting a wall) can be taxed differently depending on (1) whether the material is exclusively used in production versus general-purpose, and (2) whether a contract is billed lump-sum or with separated charges for materials and labor. It also confirms the standard resale-certificate mechanics for a duplication vendor and a production company that resells finished dubs to its own client.

Common questions

Q: Do I owe tax on the blue paint used for a blue-screen special effect?
A: No sales tax is owed on the paint purchase itself if you give your supplier an exemption certificate, because the blue paint is used exclusively in creating special effects for a film or video production.

Q: What if I hire a contractor to paint the walls blue?
A: If the contractor bills you a single lump-sum charge for paint and labor, the whole charge is taxable as nonresidential real property remodeling. If the contractor separately bills the paint and the labor, the labor is still taxable as remodeling, but the paint itself qualifies for the manufacturing exemption.

Q: Is the white paint used to repaint the studio back to white treated the same way?
A: No. Because the white paint is not exclusively used in film or video production, the entire charge for repainting the walls white is taxable no matter how the contract or billing is structured.

Q: Do I charge my client tax on the tape used while filming and editing?
A: No. Sales tax should not be charged on tape used during shooting and editing. Tax applies only to the charge for dubbing (including the tape) once the master is completed.

Q: If a duplication house charges me tax on dubs, do I also charge my client tax?
A: The duplication house must charge you sales tax on the dubs unless you give it a resale certificate claiming the dubs will be resold to your client. With a resale certificate, you buy the dubs tax-free but must collect sales tax when you resell them to the client. Your client may also give you a resale certificate if it intends to resell the dubs.

Q: Could this answer change under different facts?
A: Yes — the letter states the opinion is based on the facts presented, and could change if there are additional or different facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1432G11

Original ruling text

August 16, 1996

Dear ***:

Thank you for your letter of July 30, 1996, requesting information on your
Texas sales and use Tax responsibilities.

You spoke with Melissa in the Tax Assistance Division in CITY A and she
recommended that you write regarding a couple of questions about charging (or
being charged) tax.

You are a film and video production and editing facility. You shoot, write,
produce and edit film and video for a variety of clients (indirectly through an
ad agency or directly for a client). Sometimes you are hired to do all these
services; sometimes you only do part of these services.

Sometimes a client comes to you and wants you to "turn-key" a production for
them. So, they hire you to write a script; produce and hire crew for a shoot
and edit their video/film through "on line" or through the finished product.
The finished product may be one videotape only (VHS or BetaSP) or multiple dubs
(in which case, we'd probably go to an outside duplication house).

Other times, a client comes to you with video/film footage already shot and
they just want you to edit their video/film through "on line" or through the
finished product. (In other words, they don't want you to do any writing,
producing or shooting). Again, the finished product may be one videotape only
(VHS or BetaSP) or multiple dubs (in which case, we'd probably go to an outside
duplication house).

Sometimes they come to you with video/film footage already shot and they just
want you to edit their video/film through "off line" only (they then take a
computer disc to another edit/post house and that edit facility finishes the
video production and makes the dubs for the client).

Part of your specialty in shooting and editing is "special effects". You carry
out this production/editing process (necessary in completing a job for a
client) by ;shooting on "blue screen" also known as "Ultimatte blue paint".
You shoot people/objects against this blue screen/Ultimatte blue. Before
shooting, you must have the studio walls painted with Ultimatte blue paint.
This is an expensive paint sold by the gallon. Many times this paint must be
shipped from out of town. If you did not have this paint, you would not be
able to shoot against blue screen and you would not be able to provide the
client with their finished product. Once you have finished shooting against
this blue paint, you are obligated to paint the studio back to white. You must
also purchase a special white paint and sealant in order to do this.

Question 1. Do you have to pay tax on purchasing the Ultimatte blue and white
paint?

Answer: Because the blue paint is used exclusively in creating special effects
for a film or video production, you may give your supplier an exemption
certificate in lieu of tax on the purchase of the blue paint. If you contract
with a third party to paint the walls blue under a lump-sum contact or billing
(a single charge for the paint and labor), the total charge will be taxable as
nonresidential real property remodeling. However, if you contract with a third
party to paint the walls blue under a separated contract or billing (a separate
charge for the paint and a separate charge for the labor), the labor will be
taxable as nonresidential real property remodeling, but the blue paint
qualifies for the manufacturing exemption.

Because the white paint is not exclusively used in film or video production,
the total charge for repainting the walls white is taxable, regardless of the
terms of the contract or billing.

Once you have finished editing for an ad agency, you almost always make a dub
(copy) of the production for approval. The ad agency takes this "approval
dub" and either shows it to its client or the person editing with you shows it
to his/her boss. These dubs are usually either in the format of VHS (1/2") or
BetaSP.

Your client, at this point, either says the approval dub is fine and that's all
they want, or the client goes to another edit house to finish "on line" their
production (in which case that edit house is responsible for making final
dubs/multiple dubs). So, you may not make any more dubs after these approval
dubs.

Sometimes the client approves the production and then wants you to make
multiple dubs for them (using your master tape). For the most part, you send
your master out to a professional duplication house in Houston and they make
the dubs for the client.

Question 2. At what point should you charge the client tax for tape stock?

Answer: You should not charge the client sales tax on the tape(s) used during
shooting and editing. After the master is completed, you should charge sales
tax only on the charge for dubbing, including the tape(s).

Question 2. If the duplication house charges you tax, do you in turn charge
your client tax? Or should the duplication house not charge you tax, but you
charge 8.25% tax to your client?

Answer: The duplication house must charge you sales tax for the dubs unless
you issue a resale certificate claiming the dubs will be resold to your client.
The resale certificate allows you to buy the dubs tax free, but you must
collect sales tax when you resell them to your client. The client may issue a
resale certificate if it will resell the dubs.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9608598L