Tax Type
Retail Sales and Use Tax
Description
Theatrical royalties; Leases and rentals
Topic
Royalties
Taxability of Persons and Transactions
Date Issued
09-11-1990
September 11, 1990
Re: Ruling Request/ Sales and Use Tax
Dear*****************
This will reply to your letter dated September 20, 1989 in which you request a ruling on the applicability of the Virginia sales and use tax to theatrical royalties.
FACTS
*************(the "taxpayer") is a nonprofit theater company. The taxpayer is requesting a ruling that will specifically address the sales and use tax as it applies to theatrical royalties, i.e. fees to produce plays.
The taxpayer was recently audited by the department and was assessed tax on the royalties. The taxpayer requests the abatement of related penalty and interest already paid or currently owed by the taxpayer with regard to taxes due on royalties.
RULING
The royalties paid by the taxpayer provide not only the intangible right to use the theatrical scripts and musical scores but also the tangible hard copies of these items. As such, these transactions are analogous to leases of tangible personal property. As a general rule, by the definition of "lease or rental" found in Va. Code §58.1-602, the leasing, possession, or use of tangible personal property for consideration is subject to the sales and use tax.
Va. Code §58.1-608.6(a) specifically provides an exception for the leasing, renting or licensing of copyright audio or video tapes, and films for public exhibition at motion picture theaters or by licensed radio and television stations. However, these specific exemptions apply strictly to the transactions referred to, i.e., tapes and films, and not to similar transactions, such as those at issue here.
The tax on leases of tangible personal property is computed based on the "gross proceeds," i.e., the total amount paid for the lease of the property including any related services. (See Va. Reg. 630-10-57, copy enclosed.! Applying this principle to the two sample contracts furnished by the taxpayer, the tax will apply as follows:
Agents
The tax applies to fees paid for individual copies of plays obtained through an agent. In addition, where the agent's contract specifies the payment of a flat fee per performance or a percentage of box office receipts, the tax will also apply as these payments are an integral part of the lease or purchase of the play copies.
The tax does not apply, however, in instances where the agent merely licenses the taxpayer to produce a play and does not furnish the taxpayer copies of the play or any other tangible personal property (for instance, where the taxpayer copies a play from a public source or purchases copies from a bookstore or other theater company).
Playwrights
The tax applies to the sale or lease of an original play as it does to any other creative work in tangible form. For instance, Va. Reg. §630-10-8.2 provides that the tax applies to the sale of original paintings and sculptures without deduction for the labor charges necessary to produce such works. Thus, in this case the tax applies to the amount paid to the playwright for the original manuscript, plus any royalties paid for the continuing use of the manuscript.
Penalty and Interest
Because the recent audit by the department was the first audit of the taxpayer, no penalty was assessed. However, in accordance with the provisions of Va. Reg.§ 630-10-80, the application of interest to all audit deficiencies is mandatory.
I hope the foregoing has answered your questions. Please contact the department's Technical Services Section at P.O. Box 6-L, Richmond, Virginia 23282 if you feel that revisions to the audit are in order as the result of this ruling.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner