The California State Board of Equalization (“SBE”) recently adopted Sales and Use Tax Regulations that potentially provide sales and use tax refund and planning opportunities resulting from Heather Preston v. State Board of Equalization (2001) 25 Cal. 4th 197.
Background
On April 2, 2001, the California Supreme Court ruled in Preston that tax does not apply to a copyright interest transferred in conjunction with copyrighted artwork and pursuant to a written agreement contemplating the commercial exploitation of the copyrighted material. The court concluded that the transaction constituted a technology transfer agreement, pursuant to Cal. Rev. & Tax Code Sec. 6011 and 6012; thus tax only applied to the tangible personal property component of the transfer, such as the paper and ink used in the artwork. In response to Preston, the SBE adopted Regulation 1507, concluding that sales tax applies only to the value of the tangible personal property and not the transfer of exploitation rights, i.e., the transfer of a copyright or patent interest. The SBE also approved revisions to regulations that apply to advertisers, printers, and publishers (Regulations 1540, 1541, and 1543). The SBE approved the revisions to 1540, 1541 and 1543 on May 29, 2002. These regulations must be approved by the Office of Administrative Law in order to be officially adopted by the state. Regulation 1507 is final with an effective date of July 6, 2002.
Targeted Industries
The new regulatory changes potentially impact a broad range of industries. Potential refunds may exist in the printing, publishing, advertising, commercial arts, healthcare, biotech, and other industries.
Opportunity
A refund or planning opportunity may exist if a client has a writing (contract, invoice, or purchase order) that transfers exploitation rights (e.g., a copyright or patent) or the right to use a patented process. The value of the exploitation rights is not subject to sales tax.
EXAMPLE 1: Retailer purchases artwork from Graphic Artist for use in a store catalog. Retailer purchases both a physical rendition of the artwork and the right to reproduce the artwork for catalog distribution. Graphic Artist’s transfer to Retailer constitutes a technology transfer agreement. Tax does not apply to the amounts Graphic Artist receives for providing Retailer the right to copy and publish the artwork in the catalog. Tax only applies to the value of the tangible personal property transferred, i.e., the rendition transferred to Retailer.
EXAMPLE 2: Company X holds a copyright interest in a Los Angeles NFL football team logo. Company X transfers artwork with the logo to Company Y and, in writing, transfers a copyright interest to Company Y authorizing it to reproduce and sell t-shirts displaying the artwork and logo. Company X’s transfer to Company Y constitutes a technology transfer agreement. Tax does not apply to the amounts received by Company X for the transfer of the copyright interest in the artwork and logo. Tax only applies to the tangible value of the artwork and logo, i.e., a nominal amount.
EXAMPLE 3: Company X manufactures and leases patented X-ray equipment to Hospital. As part of the lease of the equipment, Company X also transfers to Hospital, in writing, a separate patent interest in a process external to the X-ray equipment that involves the use, application, or manipulation of the X-ray equipment. Company X charges monthly rentals payable for the equipment as well as a separate charge for each use of the patented process by Hospital. Tax does not apply to the amounts received for the transfer of the patent process.
Prior to the changes in the regulations, the SBE imposed tax on the entire contract amount, including both receipts for the copyright or patented process and receipts for the tangible personal property. Under Regulation 1507, tax only applies to the transfer of the tangible personal property under the technology transfer agreement, as separately stated in the sales price, determined by market value, or calculated at 200% of cost of materials and labor. By any method, the cost of the tangible personal property is generally a nominal amount. Currently, taxpayers potentially have refund opportunities for tax paid on the value of the copyright or patented interests transferred under the prior regulations.
- Topics
- Transaction Tax