TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES

34 TAC §3.350

The Comptroller of Public Accounts adopts new §3.350, concerning master recordings and broadcasts, without changes to the proposed text as published in the November 25, 2016, issue of the Texas Register (41 TexReg 9228). This section is being adopted to implement Tax Code, §151.3185 (Property Used in the Production of Motion Pictures or Video or Audio Recordings and Broadcasts), as amended by House Bill 2507, 84th Legislature, 2015 (effective September 1, 2015), which provides an exemption from sales and use tax for certain taxable items used in the production of motion pictures, video and audio recordings, and broadcasts, including certain equipment used for digital television and digital audio broadcasting. In addition, §3.350 is being proposed to implement Tax Code, §151.3415 (Items Sold to or Used to Construct, Maintain, Expand, Improve, Equip, or Renovate Media Production Facilities at Media Production Locations; Report), which provides an exemption from sales and use tax for certain taxable items purchased by a qualified person for use in a qualified media production location.

The new section replaces repealed §3.309 of this title (relating to Electrical Transcriptions, Recording Studios, Producers) and repealed §3.350 of this title (relating to Motion Pictures). The comptroller repealed both of these sections in order to simplify the consolidation of related sections into a single section. See 27 Tex. Reg. 9386.

Subsection (a) provides definitions of words and phrases used in the new section. Paragraph (1) defines the term "audio recording." This definition is derived from the definition of "sound recording" in the United States Copyright Act, 17 U.S.C. §101.

Paragraph (2) defines the term "broadcast" in accordance with its ordinary meaning and expands the definition to include cable television. In other contexts, the term "broadcasting" may be limited to transmissions over frequencies that are available to the general public. But the legislature has clarified that for purposes of Tax Code, §151.3185, the term "broadcasting" also includes the "production of a broadcast by or for a cable program producer." The term "cable program producer" has more than one reasonable interpretation. The comptroller believes that the use of the term "cable television" in this section should be consistent with the definition of "cable television service" in Tax Code, §151.0033 ("Cable Television Service"), which covers the "distribution of video programming with or without the use of wires to subscribing or paying customers." As with the definition of "cable television service" in Tax Code, §151.0033, this definition includes the transmission of programming by means of subscription television services delivered via satellite.

Paragraph (3) provides that "C.F.R." stands for the Code of Federal Regulations.

Paragraph (4) defines the term "C.F.R.-compliant digital audio broadcast equipment" by reference to digital audio broadcast stations which provide broadcast services described by 47 C.F.R. §73.403 (Digital Audio Broadcasting Service Requirements) and §73.404 (Interim Hybrid IBOC DAB Operation).

Paragraph (5) defines the term "C.F.R.-compliant digital television transmission equipment" by reference to those stations required to comply with the television transmission standards in 47 C.F.R. §73.682(d) (Digital Broadcast Television Transmission Standard).

Paragraph (6) defines the term "distribute." This definition is derived from the corresponding dictionary definition in the American Heritage College Dictionary, Fourth Edition.

Paragraph (7) defines the term "exhibit." This definition is based on the use of the term "exhibition" in the United States Copyright Act, 17 U.S.C. §101, which refers to the public performance of a copyrighted work.

Paragraph (8) defines the term "license." This definition is derived from the corresponding dictionary definition in the American Heritage College Dictionary, Fourth Edition.

Paragraph (9) defines the term "live program" to identify the productions covered by Tax Code, §151.3185(a)(1)(B) and (a)(2)(B) that are not covered by Tax Code, §151.3185(a)(1)(A) and (a)(2)(A). Because Tax Code, §151.3185(a)(1)(A) and (a)(2)(A) cover pre-recorded programs, the only additional type of program covered by Tax Code, §151.3185(a)(1)(B) and (a)(2)(B) is a "live" program.

Paragraph (10) defines the term "master recording." This term is intended to encompass the statutory concept of "a motion picture or video or audio recording, a copy of which is sold or offered for ultimate sale, licensed, distributed, broadcast, or otherwise exhibited." See Tax Code, §151.3185(a)(1)(A), (2)(A). The definition also incorporates portions of the definition of the term "broadcasting" provided in 47 U.S.C. §153(7) (Definitions). In addition, the definition includes the guidance provided in STAR Accession No. 200307027L (July 23, 2003).

Paragraph (11) defines the term "media production facility" and is assigned the same meaning as in Government Code, §485A.002(1) (Definitions).

Paragraph (12) defines the term "motion picture recording." This definition is derived from the definition of "motion picture" in the United States Copyright Act, 17 U.S.C. §101.

Paragraph (13) defines the term "moving image project" and is assigned the same meaning as in Government Code, §485A.002(3).

Paragraph (14) defines the term "producer," which is used only once in Tax Code, §151.3185(e) to identify the person eligible to claim an exemption on the sale of a motion picture, video, or audio master. Logically, the "producer" must be the original owner of the rights that can be sold.

Paragraph (15) defines the term "qualified media production location" and has the same meaning as in Government Code, §485A.002(6). Because the Office of the Governor does not currently have a Music, Film, Television, and Multimedia Office, a reference to the Texas Film Commission is used in place of that office.

Paragraph (16) defines the term "qualified person" and has the same meaning as in Government Code, §485A.002(7).

Paragraph (17) defines the term "Texas Film Commission" and is provided to reference the division of the Office of the Governor of Texas that is assigned to administer and monitor the implementation of Government Code, Chapter 485A (Media Production Development Zones).

Paragraph (18) defines the term "video game." This definition is derived from guidance provided in STAR Accession No. 201405957L (May 28, 2014).

Paragraph (19) defines the term "video recording." This definition is derived from the definition of "audiovisual works" in the United States Copyright Act, 17 U.S.C. §101.

Subsection (b) addresses the sale and license of master recordings. Paragraph (1) implements Tax Code, §151.3185(e), which exempts the sale of a master recording by its producer. Paragraph (2) addresses sales of copies of a master recording. Paragraph (3) explains that sales and use tax is not due on the sale of a license to broadcast, distribute, or exhibit a master recording.

Subsection (c) lists the exemptions from Texas sales and use tax on the purchase or use of taxable items used in the production of master recordings and live programs, which are listed in Tax Code, §151.3185(a) and (b).

Subsection (d) identifies certain items of tangible personal property and certain taxable services that do not qualify for exemption under Tax Code, §151.3185. Paragraph (1) implements Tax Code, §151.3185(c). This paragraph lists taxable items that are subject to sales and use tax even when used in the production of master recordings or live programs. Paragraph (2) provides additional examples. Paragraph (3) implements Tax Code, §151.3185(d).

Subsection (e) explains that motor vehicle and trailers are exempt from sales and use tax under Tax Code, Chapter 151 (Limited Sales, Excise, and Use Tax) because they are subject to motor vehicle tax. See Tax Code, §151.308 (Items Taxed by Other Law). Although transportation equipment is excluded from the exemption in this section, purchases and rentals of motor vehicles are not subject to the sales and use tax.

Subsection (f) establishes exemptions available for the purchase of C.F.R.-compliant digital television transmission equipment pursuant to Tax Code, §151.3185(f). The Tax Code refers to entities "to which 47 C.F.R. Section 73.624(b) applies." Because 47 C.F.R. §73.624(b) applies to digital television broadcast station licensees and permittees, that is the terminology used in subsection (f). This subsection memorializes guidance previously provided in STAR Accession No. 200212663L (December 30, 2002) (partially superseded on other grounds). Paragraph (1) specifies when C.F.R.-compliant digital television transmission equipment is exempt. Paragraph (2) explains that qualifying equipment may be used for both analog and digital television transmission. Paragraph (3) memorializes prior comptroller guidance providing that an Advanced Television Systems Committee (ATSC) encoder is exempt. Paragraph (4) explains why equipment purchased by a cable or satellite company is not exempt.

Subsection (g) establishes exemptions available to In-band On-Channel (IBOC) digital audio broadcast stations that provide broadcast services described in 47 C.F.R. §73.403 or §73.404. This subsection implements House Bill 2507, which added subsection (g) to Tax Code, §151.3185. Paragraph (1) specifies when C.F.R.-compliant digital audio broadcast equipment is exempt. Paragraph (2) specifies that equipment used to transmit both over-the-air digital audio programming at no direct charge to listeners and over-the-air digital audio programming for a fee to listeners is exempt. Broadcast stations using IBOC are required by 47 C.F.R. §73.403 to transmit at least one over-the-air digital audio programing stream at no direct charge to listeners. Paragraph (3) specifies when equipment does not qualify for the exemption.

Subsection (h) describes the exemptions available for the repair and maintenance of items purchased tax-free pursuant to the exemptions in subsections (c), (f), and (g). This subsection implements Tax Code, §151.3111 (Services on Certain Exempted Personal Property). The exemption in this section extends to the repair and maintenance of tangible personal property. Since the statute does not provide an exemption for real property, the repair and maintenance of tangible personal property incorporated into real property that has become real property is subject to sales and use tax pursuant to Tax Code, §151.0101(a)(13).

Subsection (i) addresses exemptions available for natural gas and electricity used in the production of a master recording. Paragraph (1) implements Tax Code, §151.317(a)(2). The statutory language limits the exemption to use of gas and electricity by a person processing tangible personal property for sale as tangible personal property. Consequently, it does not cover the production of live programs. Paragraph (2) addresses the use of natural gas and electricity for a purpose that is not exempt. Examples of non-exempt use are provided. Paragraph (3) explains the requirement for a predominant use study to establish eligibility for the exemption when natural gas and electricity is used in exempt and non-exempt ways and measured by a single meter.

Subsection (j) establishes exemptions available for qualified media production locations pursuant to Tax Code, §151.3415. Paragraph (1) identifies persons eligible for the exemption.

Paragraph (2) provides that a taxable item is exempt based on its purpose and use. Subparagraphs (A), (B), and (C) explain how the equipment must be used for the exemption to apply. This paragraph implements Tax Code, §151.3415(b).

Paragraph (3) addresses the taxability of repair and maintenance services performed at a media production facility located in a qualified media production location.

Paragraph (4) explains that the exemption is temporary. This paragraph implements the statement in Tax Code, §151.3415(b) that the exemption "is for a maximum of two years." As explained in subparagraph (A), the exemption begins on the date that both the qualified person and qualified media production location are certified by the Texas Film Commission, pursuant to Government Code, §485A.201. Subparagraph (B) explains that the exemption ends on the earlier of the date on which the qualified person's certification expires pursuant to Government Code, §485A.203; the qualified media production location's certification expires pursuant to Government Code, §485A.111; the qualified person's certification is revoked pursuant to Government Code, §485A.204; or the qualified media production location's certification is revoked pursuant to Government Code, §485A.112. Subparagraph (C) provides that the exemption is available for a maximum of two years from the date of certification of the qualified person or the qualified media production location.

Paragraph (5) provides that each qualified person must complete an annual report as required by Tax Code, §151.3415. Subparagraph (A) identifies the content which must be included in the report. Subparagraph (B) establishes the annual report periods. Subparagraph (C) provides a date when the reports are due to the comptroller's office. For ease of administration, it was determined that all reports due by qualified persons shall be due on the same date. September 30 was selected as a due date as according to Government Code, §485A.111(c), a media production development zone approval and qualified media production location designation, as long as it has not been previously removed by the Texas Film Commission, remains in effect until September 1 of the final year of the approval or designation.

Subsection (k) explains that a purchaser may issue an exemption certificate in lieu of paying sales tax to claim the exemption. A cross-reference to §3.287 of this title (relating to Exemption Certificates) is provided for additional information.

Subsection (l) addresses taxability of items purchased tax-free pursuant to the exemptions available in this section and used in a taxable manner. Paragraph (1) explains that sales or use tax is due when taxable items purchased tax-free under the exemptions in this section are used in a way that does not qualify for the exemption. Cross-references to §3.287 of this title and to Tax Code, §151.155 (Exemption Certificate) are provided for guidance in calculating the tax due on the non-exempt use of an item purchased tax-free. Paragraph (2) states that records must be maintained to document when an item purchased tax-free is used in a taxable manner and to document the payment of sales or use tax due on such use.

No comments were received regarding adoption of the new section.

The new section is adopted under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of provisions of Tax Code, Title 2 (State Taxes).

The new section implements Tax Code, §151.3185 (Property Used in the Production of Motion Pictures or Video or Audio Recordings and Broadcasts) and Tax Code, §151.3415 (Items Sold to or Used to Construct, Maintain, Expand, Improve, Equip, or Renovate Media Production Facilities at Media Production Locations; Report).

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on January 12, 2017.

TRD-201700154

Lita Gonzalez

General Counsel

Comptroller of Public Accounts

Effective date: February 1, 2017

Proposal publication date: November 25, 2016

For further information, please call: (512) 475-0387