Is equipment for a home recording studio exempt from Texas sales tax if it's used to produce master audio recordings for distribution to record labels?

Subject

Home Recording Studio — Equipment Used To Produce Masters Of Musician'S Own Recordings And Provide As Samples To Recording Companies — Exempt Use

Plain-English summary

A musician building a home recording studio wrote to the Comptroller asking whether the equipment he was buying to write, compose, arrange, record, and master his own songs qualified for a sales tax exemption. He explained that he intended to mass-produce the finished recordings and submit them to as many record labels as possible for sale to, and distribution by, any label that picked him up, and that he had already graduated from an audio engineering course and considered himself a professional.

The Comptroller agreed that he qualified. The letter explains that producing a motion picture, video, or audio recording that will be sold, licensed, distributed, broadcast, or exhibited is "manufacturing" for Texas sales and use tax purposes. Because the musician was producing audio recordings for distribution, he was entitled to the manufacturing exemption in Texas Tax Code 151.318, Property Used in Manufacturing.

The exemption has real limits, though. It covers machinery and equipment (including rented or leased equipment) that is necessary and essential to, and used directly in, the production -- but it does not extend to motor vehicles, other transportation equipment, office equipment, hand tools, or equipment that is merely incidental to production. Producers also still owe tax on taxable services they buy for the production, except services performed directly on the recording that make it more marketable.

If tax was already paid on equipment that turns out to qualify, the letter explains the producer can seek a refund from the supplier by issuing a properly completed exemption certificate, subject to the limits in subsection (f) of Rule 3.300.

Finally, the letter warns about "divergent use" -- using the equipment for something other than producing recordings that will be sold, licensed, distributed, broadcast, or exhibited. For equipment bought on or after January 1, 1995 with the full exemption claimed, divergent use triggers tax on either the fair market rental value or the full purchase price for the period of non-manufacturing use, under sec. 3.287. For equipment bought between January 1, 1990 and December 31, 1994 at the reduced tax rate, the equipment must be used primarily or predominantly for manufacturing; no additional tax is due if divergent use stays under 50% of overall use, but full tax on the purchase price is due if the primary use is not eligible for exemption.

An editorial ALERT at the top of the published letter flags that this area of law changed later: property used to produce motion picture, video, or audio recordings and broadcasts became subject to Texas Tax Code 151.3185 effective October 1, 1999 -- after this 1996 letter was issued.

What this means for you

Independent musicians and home-studio producers

If you're building a home studio to produce your own recordings for sale, licensing, distribution, broadcast, or exhibition, this letter indicates you may qualify as a "producer" and claim the Texas Tax Code 151.318 manufacturing exemption on equipment that is necessary and essential to, and used directly in, that production -- even if the studio is in your home and you're just starting out. But remember: this letter predates the October 1, 1999 effective date of Tax Code 151.3185, which specifically covers property used to produce motion picture, video, or audio recordings and broadcasts, so current rules should be checked before relying on this 1996 letter.

Studio owners buying, renting, or leasing equipment

The exemption does not cover everything in a studio. Motor vehicles, other transportation equipment, office equipment, hand tools, and equipment that's merely incidental to production fall outside it. If you already paid tax on qualifying equipment, this letter describes a path to a refund from your supplier via a validly completed exemption certificate, subject to the limitations in subsection (f) of Rule 3.300.

Accountants and tax professionals advising producers

Watch for "divergent use." The tax treatment depends on when the equipment was purchased: equipment bought on or after January 1, 1995 with the full exemption claimed is taxed on fair market rental value or full purchase price for any period used outside manufacturing (sec. 3.287); equipment bought between January 1, 1990 and December 31, 1994 at the reduced rate must be used primarily or predominantly in manufacturing, with no extra tax owed if divergent use is under 50%, but full tax due if the primary use isn't exempt.

Common questions

Q: Does making your own music at home count as "manufacturing" for Texas sales tax purposes?
A: According to this letter, yes -- producing an audio recording that will be sold, licensed, distributed, broadcast, or exhibited is manufacturing for sales and use tax purposes, and a home-studio musician producing recordings for distribution to record labels was found to be a "producer" entitled to the exemption.

Q: Is all studio equipment exempt?
A: No. The exemption covers machinery and equipment necessary and essential to, and used directly in, the production. It does not extend to motor vehicles, other transportation equipment, office equipment, hand tools, or equipment incidental to the production.

Q: What if I already paid sales tax on qualifying equipment?
A: The letter says you may request a refund of that tax from your supplier by issuing a validly completed exemption certificate, subject to the limitations in subsection (f) of Rule 3.300.

Q: What happens if the equipment is later used for something other than producing recordings for sale or distribution?
A: That's "divergent use." For equipment bought on or after January 1, 1995 with the full exemption claimed, tax becomes due on the fair market rental value or the full purchase price for the period of divergent use. For equipment bought between January 1, 1990 and December 31, 1994 at the reduced tax rate, no additional tax is due if divergent use is less than 50% of overall use, but the full purchase price is taxed if the primary use isn't an exempt use.

Q: Is this letter still current law?
A: The published letter carries an ALERT noting that property used in the production of motion picture, video, or audio recordings and broadcasts became subject to Texas Tax Code 151.3185 effective October 1, 1999 -- a change that postdates this October 1, 1996 letter. Confirm current rules with a Texas tax professional.

Citations and references

Statutes and rules:

• Texas Tax Code 151.318, Property Used in Manufacturing
• Rule 3.300, subsection (f) (exemption certificate refund limitations)
• sec. 3.287 of this title, relating to Exemption Certificates (divergent-use tax on equipment purchased on or after January 1, 1995)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9610L1429F03

Original ruling text

ALERT: Property used in the production of motion picture, video, or audio recordings and broadcasts became subject to the provisions of 151.3185 effective 10/01/1999.

COMPTROLLER OF PUBLIC ACCOUNTS

STATE OF TEXAS

AUSTIN, 78774

October 1, 1996

Dear **:

This is to restate my response to you, of July 31,

1996, concerning your request for a clarification of the tax law as it relates

to the Texas music industry. After further review, it was decided that you do

qualify for the exemptions available to producers. Your original inquiry is

restated below followed by my response:

I am currently engaged in the construction of a home

recording studio and have spent several thousand dollars purchasing some of

the basic equipment required and have underlined some of the items on the

attachment. I am also currently engaged in the production of my own recording

(the writing, composing, arranging, recording, and mixdown or mastering) of my

compositions. This by all definitions makes me the producer. It is my explicit

intent to mass produce and submit these recordings after final mastering to as

many record company labels as possible for sales to, and distribution by the

purchasing label, if any. However in order to achieve the level of quality

required, the substantial purchase of additional equipment is required. This is

far more than just a hobby for me and I am fully committed to making the

financial sacrifice to purchasing this incredibly expensive equipment. My

dilemma is this, am I eligible for the Tax Exemption of not. If I already have

to have the equipment to be engaged in the production of music at a

professional level, then what is the point of the exemption. Either it's intent

is to encourage the expansion and growth of this industry at a lower economic

level, or to merely benefit those already in it. I can already purchase all the

equipment required out of state through mail order catalogs and be exempt from

sales tax. l would however prefer to purchase it locally. I have recently

graduated from an Audio Engineering course at a local recording studio and

consider myself to be a professional in this field. I understand that I may be

misinformed or misinterpreting the requirements for exemption and would like to

receive a ruling as soon as possible before I purchase any more equipment.

Response: The production of a motion picture or a

video or audio recording, a copy of which is sold, licensed, distributed,

broadcast or exhibited, is "manufacturing" for sales and use tax purposes.

Because you are producing audio recordings for distribution, you are entitled

to the exemptions found in Texas Tax Code 151.318, Property Used in

Manufacturing.

Producers may also claim a tax exemption when renting

or leasing machinery or equipment for the production, provided these items are

necessary and essential to and are used directly in the production. This

exemption does not extend to motor vehicles, other transportation equipment,

office equipment, hand tools or equipment incidental to the production.

Producers owe tax on taxable services purchased for

production, except those services directly performed on the motion picture,

video or audio recording and that make the film or recording more marketable.

If you have paid Texas sales or use tax on equipment

that qualifies for exemption you may request a refund of that tax from your

supplier(s) by issuing a validly completed exemption certificate and subject to

the limitations found in subsection (f) of Rule 3.300.

Use of this equipment other than for the production of

audio recordings that will be sold, licensed, distributed, broadcast or

exhibited is considered divergent use. Machinery and equipment purchased on or

after January 1, 1995, and on which the full sales tax exemption is claimed is

subject to tax on either the fair market rental value or on the full purchase

price during any period of use for other than manufacturing purposes as

provided for under sec. 3.287 of this title (relating to Exemption

Certificates). Machinery and equipment purchased between January 1, 1990, and

December 31, 1994, and on which the reduced tax was paid must be used primarily

or predominantly in the manufacturing process. No additional tax is due on a

divergent use provided the divergent use is less than 50% of the overall use.

Tax is due on the full purchase price if the use is primarily for a use not

eligible for exemption.

This opinion is based on the facts presented. Other

facts though similar may provide a different result.

You may call me toll-free at 1-800-531-5441, extension

3-4502. The direct line is 512/463-4502. You may also write to Tax Policy

Division, Comptroller of Public Accounts. My Internet address is:

[email protected].

Sincerely,

Gilbert Zamora

Tax Policy Division