Though the partial sales and use tax exemption on new equipment purchases made by independent postproduction and visual effects houses in California took effect Jan. 1 (SHOOT, 11/27/98, p. 1), the process of interpreting and clarifying the possible myriad applications of that new law has just begun. The ITS-which lobbied vigorously for the tax reform-and the California State Board of Equalization (SBE), the governmental body that enforces tax laws, entered into a dialogue earlier this month during a pair of informational seminars, one in San Francisco on Jan. 14, the other held five days later in Los Angeles.
The sessions kicked off what will be an ongoing exchange over the next several months, during which the post/effects industry and SBE staffers will identify and address gray areas in applying the tax exemption. While California post/effects shops can currently avail themselves of the partial five percent sales and use tax exemption on capital purchases, some questions remain as to how broad the definition of qualifying equipment extends. Clearly, well-defined hardware and software integral to the post/effects business are eligible for the exemption. But what about special air-conditioning units needed to maintain megabuck equipment? Will the SBE rule that the state sales and use tax exemption applies to tangible property necessary for equipment maintenance such as air conditioning and special electrical circuitry?
Addressing the ITS luncheon session in Los Angeles, Dennis Fox, program planning manager of the SBEs sales & use tax department, said his intent is to clarify this and other areas for buyers (facilities) and sellers (manufacturers and equipment houses) by no later than June 29. That target date coincides with when the SBE business tax committee is scheduled to formally meet to review and finalize language of the regulation designed to fairly interpret and administer the tax reform. If the committee approves the final regulation, it will be sent to the SBE itself-consisting of five elected officials-which will then vote on whether to authorize publication of the regulation. Once that authorization is given, theres a 45-day waiting period for public comment. Fox conjectured that a final official regulation could come to pass sometime in November.
Fox and other SBE staffers are slated to tour several California post/effects facilities in the coming weeks to gain firsthand insights into the postproduction and effects business, the equipment involved and how it is deployed. Furthermore, during last weeks ITS-SBE session in L.A., ITS/Southern California board member Leon Silverman, exec. VP of Hollywood-based Laser-Pacific Media, noted that ITS will form a committee to identify gray areas and bring up issues the SBE should consider in its review of the tax exemption. Fox added that individual companies are also welcome to submit written questions regarding the tax exemption and potential tax liabilities. Fox said a written reply from the SBE, specifying equipment purchases that qualify for the exemption, offers a facility legal protection should a question later arise.
Per the law itself, facilities and services that qualify for the tax exemption are identified in Code 512191 of the North American Industrial Classification System (NAICS, formerly the Standard Industry Code), used by the federal government-specifically the Census Bureau under the U.S. Department of Commerce-to categorize businesses. However, ITS board member Duane Thompson, chair of the ITS government affairs committee and president of Sacramento-area California Image Associates, told Fox that the nature of the post/effects business is constantly and rapidly changing with the advent of new digital technologies, DTV and HDTV, meaning that the scope of equipment and services can broaden dramatically in the years ahead. And, hopefully, as the NAICS Code changes to reflect that evolution, it will raise the question of whether the exemption will expand to apply to a changing set of services in the post/effects marketplace.
Responding that Thompsons point is well taken, Fox said he would have to defer to SBE legal counsel to determine if such exemption flexibility is feasible.
Fox added that, based on the informational meetings in San Francisco and Los Angeles, it is clear that the SBE and the industry need to work to define in greater detail the activities that equipment must be primarily used for in order to qualify for the tax exemption.
Also surfacing during the seminars were questions regarding leasing agreements. Fox said that for leases entered into prior to Jan. 1, the sales and/or use tax exemption would generally apply for those payments made Jan. 1 and thereafter.
For updates on the status of regulatory language, the SBE Web site is www.boe.ca.gov.
