Service/TPP Transactions  
The Department has issued a Technical Assistance Advisement, TAA 05A-037, regarding the taxability of transactions pertaining to the creation of video and audio tapes. While the subject of the ruling is multimedia tapes, the ruling is instructive as to the Department’s views on the taxability of services that attend the transfer of some article of tangible personal property.

The ruling includes a lengthy statement of facts, the essentials of which are as follows. The Taxpayer is in the business of creating video and audio tapes for clients–namely, as commercial advertisements, instructional videos or documentaries. The client may sign a written agreement for a fixed price that includes all services necessary to the production of the video tape.

Alternatively, an agreement maybe open-ended in cost and scope with client approvals required at various stages and subject to cancellation by the client at any time. Non-refundable deposits may be required at various stages. In this second type of agreement, the client is billed for various services at set hourly rates for story research and development, ending with a rough storyboard including scripting, soundtracks, voiceovers and camera work. The TAA describes all of this as creative services.

The rough storyboard is converted in the next phase into a formal storyboard and script suitable for the production phase. Hourly charges are also made at this stage for camera work, casting, talent and the like.

Audio and video captures are then created following the formal storyboard and script. After production and editing, those images and sounds are put on CDs, DVDs, removable zip disk drives, or VHS tapes. After client approval, the content is written to master tapes, with the customer receiving two master copies. All rights, title and interest, including copyrights, become the property of the client. Extra copies may be purchased by the client for an additional charge. The Taxpayer’s invoices itemize pre-production and production charges, almost all of which describe the services being rendered, along with charges for duplicates, photographs, etc.

The following rulings are part of the TAA:

1. With a fixed price contract, the lump sum charge will be subject to tax on the proposition that the tapes are tpp and all the services required to create the tapes are “part of the sale.” This finds support in Florida Association of Broadcasters v. Kirk, 264 So.2d 437 (Fla. 1st DCA 1972) pertaining to film with broadcast programming. The TAA mentions the exemption for master tapes in F.S. s. 212.08(12), but inexplicably fails to analyze it or say why the exemption is not available.

2. Tax is due at the moment of sale. That moment arrives “when the contract or agreement is signed” according to this TAA. This statement treats a contract as a single sales transaction for Chapter 212 purposes, a dubious proposition which the Department itself regularly eschews, with respect to leases for example, where each lease payment is treated as an individual transaction, or where exempt items and taxable items are being sold under a single contract for separately stated amounts. The TAA may have intended the statement to apply only to fixed price agreements, but it does not say so.

3. The TAA invokes the AT&T decision, finding separately-stated engineering services sold with hardware to be inextricably tied to the sale of the tpp and therefore constituting “services that are part of the sale.” But it also relies on the “true object” test, if not by name, saying that the provisions of Section 212.08(7)(v)1. are inapplicable “because the main object of the agreements is to create a master video to be used in multimedia presentations.”

4. The Department has been on shifting ground since the AT&T case, but regularly finds some basis for asserting tax against separately-stated services. And while it has issued other rulings that rely on the absence of linkage between the goods and services, the “optionality” test growing out of the B&L Concepts and Florida Hi-Lift decisions, the TAA at hand forsakes the principle. It expressly observes that the customer can cancel the agreement at any time, making further services and the receipt of any tangible item optional, but declines to analyze the significance of that option. An agreement which separately states charges for services and the master tape and which gives the client the option of declining the master tape should not be taxable unless the client takes title to or possession of the tape and then only on the amount charged for the tape itself.

5. In the midst of describing rough and formal storyboards as taxable tpp if transferred to the client, the TAA notes that the hardcopy script is not considered to be tpp and points out that this has been the Department’s position since 1991. How the script is not tpp when the storyboard is, we are left to decipher on our own.

6. Finally, the TAA reminds us that all these tax issues can be avoided if the multimedia in question can be delivered to the client electronically, rather than on some tangible medium.

Posted: 2005-10-04 00:00:00.0

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