PS 92(13)

Taxation of the Audio or Video Production Process

This publication has been cited in Ruling 95-7

PURPOSE: This Policy Statement announces a change in the policy of the Department with regard to the imposition of sales and use taxes on audio and video productions.

BACKGROUND: In the past, the gross receipts from the sale of audio and video productions have been taxed as the sale of tangible personal property when the master copy was sold by the production house to its customer, without deduction for the cost of fabrication labor, the services purchased or the tangible personal property purchased for such production.

DEFINITION: The term "master copy," for purposes of this policy statement means the single, original physical representation of an audio or video production in its finished form, whether recorded on tape, film or disk, as opposed to a duplicate copy of such representation. Included in the term are what are known in the industry as "duplication masters" and "duplication negatives."

DISCUSSION: The Sales and Use Taxes Act Conn. Gen. Stat. §12-406 et. seq., imposes tax on retail sales of tangible personal property and certain enumerated services. Sales of intangible personal property are not subject to sales and use taxes.

Certain types of personal property represent the intellectual work product of a creator, such as an author, artist or composer. The sale of intellectual property often has both tangible and intangible components. For example, the sale of a manuscript, which represents an author's intellectual work product, to a publisher is essentially the sale of an intangible, of which the tangible component is an inconsequential element. Once a manuscript is printed in book form, however, the sale of the printed books becomes taxable as the sale of tangible personal property. Similarly, the creation of a master copy of an audio or video production is the physical representation of the intellectual work product of its creator, and as such its sale will be treated as the sale of intangible property. However, it should be noted that it is possible, in some circumstances, that the sale of a master copy of an audio or video production may be treated as the sale of tangible personal property. One example is the sale of a master copy to a collector, where the consideration is based upon the value of the tangible component of the property instead of its intangible component.

The Connecticut Supreme Court has recognized that intellectual property often has both a tangible and intangible component, as in Northeast Datacom. Inc. v. Wallingford, 212 Conn. 639, 563 A.2d 688 (1989), where the court rejected the attempt of a town to tax custom computer software as tangible personal property:

When one buys a video cassette recording, a book, sheet music or a musical recording, one acquires a limited right to use and enjoy the materials content. One does not acquire, however, all that the owner has to sell. These additional incidents of ownership include the right to produce and sell more copies, the right to change the underlying work, the right to license its use to others and the right to transfer the copyright itself. It is these incidents of the intellectual, intangible component of the software property that Wallingford has impermissibly assessed as tangible personal property by linking these incorporeal incidents with the tangible medium in which the software is stored and transmitted.  212 Conn. 639, 645-646

In Columbia Pictures Industries, Inc. v. Tax Commissioner, 176 Conn. 604, 416 A.2d 457 (1979), the court acknowledged that "a copyright may be an incorporeal right to publish and does exist detached from the personal property out of which it arises [citations omitted]." 176 Conn. at 608. There, the object of the transaction was to acquire possession of a copy of a film in order to exhibit it to an audience. The court differentiated between the imposition of tax on the sales price of the film as tangible personal property and the imposition of tax on the full production cost of making the movie, and held that the tax was not to be measured on the basis of the production costs, because the taxpayer's "objective was to acquire possession of the film in its finished state in order to reproduce it for profit rather than to acquire the services performed in producing the film." 176 Conn. at 610.

The transfer of a copy of an audio or video production (other than the master copy), whether by sale, lease or by the grant of a limited license to use the production (as in Columbia Pictures, supra), is taxable as the sale of tangible personal property. On the other hand, in the usual case when the master copy is sold along with the additional incidents of ownership thereto, such as the rights to reproduce and market the audio or video production, the true object of the transaction is the transfer of the incorporeal incidents of which the tangible medium is an inconsequential element.

In instances where less than all of the incorporeal incident of ownership of an audio or video production are passed along to the purchaser, the commissioner will examine the facts and circumstances of each case, using the following criteria, to determine whether the object of the transaction is the sale and purchase of intangible personal property:

• the degree of disparity between the price to the purchaser for the finished audio or video production and the cost of the film or tape on which it is recorded.
• whether the right to produce and sell copies of the production is transferred.
• whether the right to change the underlying work is transferred.
• whether the right to license the use of the work to others is transferred.
• the existence of artistic or copyrightable elements (as determined under the Copyright Act of 1976, 17 U.S.C. §101 et seq., as amended), whether designated as royalties or otherwise.
• whether the right to transfer the copyright itself to others is transferred.

The more of these criteria that are present, the greater is the likelihood that the true object of the transaction is the sale of intangible property.

Note that these rules do not apply to audio or video productions produced and sold for private noncommercial use, such as videotapes of weddings or graduations to be used as family mementos or accident reconstruction videotapes to be used for legal analysis. Such productions are subject to tax as the sale of tangible personal property.

PURCHASES BY AUDIO OR VIDEO PRODUCTION HOUSES: A person who performs audio or video production is the consumer of tangible personal property and taxable services used or consumed during the audio or video production process, and sales and use taxes apply to sales to and rentals by such person. The exemptions for manufacturing provided in Conn. Gen. Stat. §§12-412(18) and 12-412(34) do not apply to audio or video productions because they do not qualify under the definitions provided in the regulations thereunder. In addition, the exclusions provided in Conn. Gen. Stat. §§12-410(5) and 12-411(14) for the resale of taxable services do not apply to audio or video productions, because what is being sold is intangible personal property, not a service described in Conn. Gen. Stat. §12-407(2)(I).

The sale or lease of equipment used in producing and broadcasting programs is no longer exempt under Conn. Gen. Stat. §12-412(44).* Thus, charges for equipment are taxable, whether the equipment is used by a production company to produce audio or video tapes or is rented to its customers for their use. See Conn. Agencies Regs. §12-426-25(d) for a description of the distinction between the lease or rental of tangible personal property with an operator and the provision of services.

*Webmaster Note: Conn. Gen. Stat. §12-412(44) was amended in 1997 to restore and expand the exemptions for certain motion picture, video, television and radio production and broadcast equipment.  See Conn. Gen. Stat. §12-412(44) for the complete text of the exemption.

Charges for the provision of studio, editing room and other post-production facilities, including the equipment therein, are not taxable. Such charges are deemed to be for the rental of real property instead of the rental of tangible personal property, and thus are not subject to sales and use taxes.

EFFECT ON OTHER DOCUMENTS: Ruling No. 89-49 and Ruling No. 89-272 are superseded. Ruling No. 89-111 is modified and superseded.

EFFECTIVE DATE: Effective for sales occurring on and after November 1, 1992. 

PS 92(13)
Sales and use taxes
Issued 10/27/92