Due to a recent California Supreme Court case (Heather Preston v SBE #5083632 4-2-01), Regulations 1540 (advertising agencies, commercial artists & designers) 1541 (printing & related arts) 1543 (publishers) and 1528 (photographers) will again be revised.
BACKGROUND
Heather Preston entered into written agreements to provide artwork for a children’s publisher and a rubber stamp manufacturer. Pursuant to these agreements, tangible property was transferred (artwork) but title was retained by Ms. Preston. Preston received royalties based on the subsequent sales of the books and the rubber stamps, which displayed her artwork. In the past the BOE has always treated these types of transactions as taxable sales of tangible personal property and determined the measure of tax to be on the royalties received. (see annot 295.0570) In this case however, the Court decided that the transfer of the artwork constituted a technology transfer agreement as defined in Revenue & Taxation code 6011( c )(10) & 6012( c )(10) and is non-taxable. Accordingly the opportunity for unclaimed tax refunds exist.
A technology transfer agreement is any agreement under which a person who holds a patent or a copyright interest assigns or licenses to another person the right to make and sell a product or to use a process that is subject to the patent or copyright interest. Technology (according to this case) isn’t limited to hi-tech but includes artwork.
TAX APPLICATION
Regulation 1540 went through recent revisions effective April 2000 (prior to the decision on the Preston case). The most significant change to this Regulation was that lump sum charges of artwork were considered to be 75% exempt from tax. (1540(b)(1)).
After the Preston case the Regulation should be amended to state that the right to license a copyright interest or the right to reproduce artwork are non-taxable. Likewise Regulations regarding printers and publishers (1541 & 1543) concerning artwork should be consistent with the amendment above regarding artwork under Regulation 1540. Presumably since photographers also sell photography along with the right to reproduce the images under a copyright, their Regulation (1528) will also be changed to reflect this case. According to Revenue & Taxation code 6012 ( c )(10) and this case, “if the technology agreement does not separately state a price for the tangible personal property, and the tangible personal property or like tangible personal property has been previously sold or leased, or offered for sale or lease, to third parties at a separate price, the price at which the tangible personal property was sold, leased, or offered to third parties shall be used to establish the retail fair market value of the tangible personal transferred. If the technology transfer agreement does not separately state a price for the tangible personal property, and the tangible personal property or like tangible personal property has not been previously sold or leased, or offered for sale or lease, to third parties at a separate price, the retail fair market value shall be equal to 200 percent of the cost of materials and labor used to produce the tangible personal property subject to tax. The remaining amount charged under the technology transfer agreement is for the intangible personal property transferred.”
In summary, the Preston case has far reaching effects in many industries and as a result we will see many Regulations change.
