April 27, 1990

You request a letter ruling on behalf of ("the Company") regarding the application of the Massachusetts sales tax to an independent contractor's charges for producing specially encoded television commercials from finished advertiser-owned commercials supplied by the Company. You also ask whether the sales tax applies to the Company's monthly charges to its customers for monitoring the encoded commercials.

For reasons stated below, we make the following rulings:

  1. The independent contractor's charges to the Company for producing specially encoded commercials from finished advertiser-owned television commercials are taxable sales of tangible personal property.
  2. The Company's charges to its customers for monitoring the encoded television commercials are nontaxable service transactions which involve no sale or which involve sales as inconsequential elements for which no separate charges are made.

Facts

The Company, a Delaware corporation with offices in Massachusetts, has been organized to enable television advertisers to determine more accurately and efficiently whether television commercials purchased by them have been broadcast at the time and in the form and market agreed to under contract. To do so, the Company has developed two special devices.

First, through a patent granting an exclusive right to use one of the 525 lines that appear on a television screen, the Company has developed a device which encodes onto this line a digital identification code unique to each commercial. This coded line appears above the visible portion of the television screen. The Company contracts with an independent contractor who, on the independent contractor's premises, uses the Company's equipment to do the actual encoding on the master copy of the finished commercial, at a cost of $35.00 per commercial. At all times, the Company maintains exclusive title to and ownership of the equipment used to encode each commercial.

Second, the Company has developed a device that can monitor all television broadcasts in a given market and record certain information about the encoded commercials, including whether the encoded commercials have been broadcast, when they were broadcast, and the audiovisual quality of the commercial. Once set up, the monitoring device operates automatically, without an operator on the customer's premises. The information captured by the monitoring device is coordinated by a central computer. The Company earns its revenues by charging its television advertiser customers a fee for monitoring the encoded commercials.

Discussion

1. The Independent Contractor's Charges for Producing Specially Encoded Commercials

General Laws Chapter 64H, Section 2 imposes a five percent sales tax on sales at retail of tangible personal property by any vendor, unless otherwise exempted. A sale is defined to include "[a]ny transfer of title or possession or both, exchange, barter, lease, rental, conditional or otherwise, of tangible personal property for consideration." G.L. c. 64H, § 1(12)(a). A sale is also defined as the "[p]roducing, fabricating, processing, printing or imprinting of tangible personal property for a consideration for consumers who furnish, either directly or indirectly, the materials used in the producing, fabricating, processing, printing or imprinting." G.L. c. 64H, § 1(12)(b). Based on the facts you describe, the process of encoding a unique digital identification code directly onto television commercials furnished to an independent contractor by the Company for a $35.00 fee is a taxable "sale" within the meaning of G.L. c. 64H, § 1(12)(b).

This transaction is taxable on other grounds as well. A "sale at retail" is defined as a sale of tangible personal property for any purpose other than resale in the regular course of business. G.L. c. 64H, § 1(13). Excluded from the definition of sale at retail are "professional ... or personal service transactions which involve no sale or which involve sales as inconsequential elements for which no separate charges are made." G.L. c. 64H, § 1(13)(c). The transaction you describe does not fall within this exclusion.

The Massachusetts Supreme Judicial Court, in Houghton Mifflin Company v. State Tax Commission, 373 Mass. 772, 775 (1977) (hereinafter "Houghton Mifflin I") set forth the following test to determine whether a particular transaction is a sale or a service:

[T]he test is the object of the transaction. If the buyer's fundamental object is to obtain the item of personal property transferred to it, the sale of that property cannot reasonably be considered "inconsequential" and the transaction cannot reasonably be considered one for personal service.

373 Mass. 772, 775 (1977).

The Court reiterated this standard in Commissioner of Revenue v. Houghton Mifflin Co., 396 Mass. 666 (1986) ("Houghton Mifflin II"):

[w]hether a particular transaction involving the transfer of property is a personal service transaction depends on the facts... Where the services and property are inseparable, because of the integrated nature of the transaction, the character of the transaction must be analyzed to ascertain whether the buyer's basic purpose was to acquire the property which was sold to it, or to obtain the services.

396 Mass. 666, 670 (1986), quoting Houghton Mifflin I, 373 Mass. at 774. See also Commissioner of Revenue v. Purity Supreme, Inc., 396 Mass. 287 (1985).
Here as in Houghton Mifflin I, the Company is seeking an end product, conforming to its own specifications, which will satisfy its business needs. The Company's basic purpose in transferring the commercials to the independent contractor is to obtain a specially produced product, in the form of a uniquely encoded commercial that is capable of being monitored individually. The value to the Company lies not in any creative skills that may be embodied in encoding the finished videotape, but in the tangible effects of the encoded commercial videotape itself. In fact, without the encoded commercial, the Company could not derive income from customers for its subsequent monitoring activities. Thus, the object of this transaction is to obtain the item of tangible personal property that is necessary to the performance of the Company's monitoring contract with the owner-advertisers of the commercials. For these reasons, the independent contractor's charges to the Company for producing a specially encoded television commercial are taxable sales of tangible personal property.

2. The Company's Charges for Monitoring Encoded Commercials

General Laws Chapter 64H, Section 2 imposes a five percent sales tax on retail sales of tangible personal property in Massachusetts. A sale is any transfer of title or possession of tangible personal property for consideration, including a rental or lease. G.L. c. 64H, § 1(12)(a). A "sale at retail" is defined as a sale of tangible personal property for any purpose other than resale in the regular course of business. G.L. c. 64H, § 1(13).

A sale at retail does not include professional, insurance, or personal service transactions which involve no sale or which involve sales as inconsequential elements for which no separate charges are made. Chapter 64H, § 1(13)(c). While a transfer of title or possession of tangible personal property is normally subject to sales tax, where the service and property are inseparable because of the integrated nature of the transaction, and where the buyer's basic purpose is to obtain services rather than the property, the transaction is nontaxable. Houghton Mifflin II, 396 Mass. 666 (1986).

Here, the customer's basic purpose under the facts you describe is not to acquire the monitoring equipment itself, but rather to obtain information about the commercials it has purchased for broadcast from the Company's ongoing monitoring services. The value to the owner-advertiser of the commercials is the Company's monitoring activities, which enable the customers to determine whether their commercials purchased for broadcast have been aired according to contract. For the above reasons, the Company's charges to its customers for monitoring the encoded commercials are nontaxable service transactions that involve no sale or that involve sales as inconsequential elements for which no separate charges are made.


Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
April 27, 1990
LR 90-2