June 15, 2001

You have requested a letter ruling on behalf of *************** ("Company"). In particular, you question whether the sale of the Company's video productions can be bifurcated into the taxable sale of tangible personal property and a non-taxable service transaction.

FACTS

The Company was founded in 1981 to provide businesses with quality custom communications. The Company's business has not changed significantly since its formation.

The Company's primary activity is the creation of customized "productions." Most of these productions are created for clients for internal, strictly confidential use. A typical production involves the creative realiza­tion of a client's idea into a finished performance - and may incorporate scriptwriting, acting, music, directing and producing. Each of the Company's productions typically requires the coordination of a number of profe­ssional, artistic, and technical services.

The performances created by the Company are usually recorded and transferred on magnetic media, such as videotape or computer disk. To make these recordings, the Company uses special equipment. The Company's productions are not mass-produced or prepackaged, but rather are individually prepar­ed and customized to a client's specific needs. [1]

DISCUSSION

In general, the sales tax applies to the sale of tangible personal property and not service transactions. See G.L. c. 64H, § 2. It is not relevant whether the property sold is customized at the request of the customer. For example, the sale of tangible personal property includes "a transfer for consideration of the title or possession of tangible personal property which has been produced, fabricated or printed to the special order of the customer." See G.L. c. 64H, § 1. Applying this rule, the Supreme Judicial Court ("SJC") has determined that sales tax applies to the transfer of "an end product conforming to [a customer's] specifications." See Houghton Mifflin Co. v. State Tax Commission, 373 Mass. 772, 775 (1977). In addition, the Appellate Tax Board ("A.T.B.") has concluded that the sale of a specially commissioned sculpture is taxable. See Stanley Home Products, Inc. v. Comm'r of Revenue, A.T.B. Docket No. 120842 (1986).

In general, the sale of a video production is the taxable sale of tangible personal property. See, e.g., LRs 89-3, 83-42, 82-115. Thus, for example, the sale of a motion picture film is taxable, absent a special exemption for these films when sold "for commercial exhibition." See G.L. c. 64H, §6(m). See also Pike Productions, Inc. Commissioner of Revenue, A.T.B. Docket No. F205311 (1997). We note that the sale of a video production resembles the sale of video slides or photographs. See LR 83-42. These latter transactions are also subject to tax. See The Kendall Co. v. Commissioner, A.T.B. Docket No. 129643 (1989).

The "sales price" subject to tax includes the "total amount paid by a purchaser to a vendor as consideration" for the sale, including "any amount paid for any services which are a part of the sale." See G.L. c. 64H, § 1. There is no exception for "the cost of materials used, labor or service cost." Id.

You state that the Company sells taxable tapes and disks, but inquire whether the Company's filming activity, which creates the content for these mediums, is a separate non-taxable service transaction. We have determined that the Company's filming activity is not a separate transaction since the object of the Company's activities is the sale of a completed customized video. See LR 89-3 (object of the transaction in which a customer purchases specially commissioned video productions is the sale of the tangible personal property, despite the creative services involved).

As the SJC stated in Houghton Mifflin, the "cost of labor is often a major cost of producing an object for sale." See 373 Mass. at 775. In Houghton Mifflin, the Court concluded that, even though labor costs may be a significant part of the sale transaction, they are considered part of the sales price when the labor is expended to produce the property sold. See id. [2]

CONCLUSION

We conclude that the Company's sales of video productions are subject to sales tax. In addition, we conclude that the labor costs incurred in producing these videos are to be included in the taxable sales price. [3]

Very truly yours,

/s/Bernard F. Crowley, Jr.

Bernard F. Crowley, Jr.
Acting Commissioner of Revenue

BFC:DMS:mtf

LR 01-5



[1] The Company also engages in other activity such as the production of video programs for retail distribution, broadcasting services, and video duplication and similar technical services. These activities are not at issue here.

[2] The above-stated rule applies since "the services and property were inseparable because the services created the property." See Browning-Ferris Industries, Inc. v. State Tax Comm'n, 375 Mass. 326 (1978). In contrast, when a taxpayer sells tangible personal property and also provides a separable service such as consultation or employee instruction, the service transaction is not subject to tax if separately stated. See generally 830 CMR 64H.1.1.

[3] You have also inquired whether the Company can be properly classified as a manufacturing corporation. We note that the Department does not determine manufacturing classification in the form of a letter ruling. However, we do note that machinery and materials used to produce the Company's videos may qualify for the sales tax exemption set forth in G.L. c. 64H, §§ 6(r) and (s).