July 19, 2002
FOR IMMEDIATE RELEASE
California Sales Tax Refund Opportunity; Technology Transfer Agreements.
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.
If you have any questions regarding the above information, please call Rich Carlson at 213.626.8993. You can also reach Mr. Carlson by e-mail.
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