page: 1 June 16, 2009 Request for Permission to Proceed with Formal Rulemaking Process on the Adoption of California Code of Regulations, Title 18, Section 25137-8, Relating to Motion Picture and Television Film Producers, Distributors, and Television Networks â Apportionment of Income. Regulation section 25137-8 was adopted in 1982 and provides special apportionment rules to ...... Read More
Request for Permission to Proceed with Formal Rulemaking Process on the Adoption of
California Code of Regulations, Title 18, Section 25137-8, Relating to Motion Picture and
Television Film Producers, Distributors, and Television Networks – Apportionment of Income.
Regulation section 25137-8 was adopted in 1982 and provides special apportionment rules
to address the unique aspects of the motion picture and television industries. Since that
time, the industry has undergone significant changes. In the television industry, technology
has changed and there are many more networks producing various types of programming
that are transmitted via digital signal to satellites, accessed by affiliates and released to
subscribers across the country. Similarly, in the motion picture industry at the time the
regulation was adopted in 1982, the focus was on major studios, and while the regulation
was subsequently enlarged to include independent television broadcasters, there was no
inclusion of independent film distributors and so they are not covered by the existing
regulation. At one time, major studios controlled all stages of production and distribution.
Now many of these functions are commonly conducted by a separate entity, whether
affiliated or independent. As a result, the existing regulation does not reflect the industry as
it exists today.
The Multistate Tax Commission (MTC) provides model regulations, statutes and guidelines,
approved and adopted by a majority of states, to promote uniformity in the states' taxation
of interstate and foreign commerce. The MTC’s model regulation for television and radio
broadcasters, Regulation IV.18(h), was last amended in 1996. The proposed amendments
to Regulation section 25137-8 include amendments to align the California regulation with
provisions contained in the MTC’s model regulation. Other amendments are made to reflect
the rules contained in existing Regulation section 25137-12, which addresses the print
media industry, as well as to reflect changes suggested by interested parties.
To provide greater clarity to the existing rules, advertising revenue is now specifically
identified as part of “gross receipts” assigned by the regulation. This amendment is in
conformity to MTC Regulation IV.18(h)(1) as well as Regulation section 25137-12 and is
consistent with the department’s view of the existing rules. As amended, regulation section
25137-8 also identifies "distributors" as a part of the industry covered by this regulation,
redefines "film" to include news or sports films produced for telecast, and identifies new
technology used by the industry since the prior regulation was adopted.
Interested Parties Meetings were held on January 8, 2008 and May 15, 2009 to solicit
public comment. Telephonic working parties meetings were held on April 9, 2008 and April
23, 2009 to permit industry representatives to discuss the proposed changes. All comments
received have been posted on the Franchise Tax Board website for public review.
The proposed amendments to Regulation section 25137-8 will become effective for taxable
years beginning on or after January 1, 2010.
Staff requests permission to begin the formal rulemaking process to adopt the proposed
amendments to this regulation.
EXPLANATION OF PROPOSED DRAFT OF REGULATION SECTION 25137‐8: MOTION PICTURE AND
TELEVISION PRODUCERS, DISTRIBUTORS, AND TELEVISION NETWORKS – APPORTIONMENT OF INCOME
This discussion of the proposed draft of Regulation section 25137‐8 attempts to take into account the
concerns of the various interested parties. Although we have attempted to note all input, this draft may
not include all parties’ recommendations. The key points of the discussion draft are set forth with
Descriptive title: While the working title of any regulation is drafted and inserted by the
publisher and is not a substantive part of the regulation, we have suggested the title be changed
to include the word “Distributors” to make it clear that they are a member of the group covered
by this regulation.
Proposed Regulation section 25137‐8(a)"In General" mirrors MTC Regulation IV.18(h)(1) as
amended April 25, 1996. This is not a substantive change. Because this MTC language has been
adopted in large part by many other states, it provides a level of uniformity. The application
years originally contained in this introductory paragraph have been removed and inserted at the
end of the regulation (see Regulation section 25137‐8(d)) in order to conform to the format set
forth in other special regulations under Revenue and Taxation Code (R&TC) section 25137.
Definitional Sections: This part of the discussion draft addresses definitions of various terms
contained in the rules to follow. This section includes definitions contained in MTC Regulation
IV.18(h)(3), existing Regulation section 25137‐12, and those suggested by interested parties.
By eliminating the former exclusionary language, proposed Regulation section 25137‐8(b)(1)
redefines “film” to include news or sports films produced for telecast. This is consistent with
the definition of “film” in MTC Regulation IV.18(h)(3)(i). The proposed change recognizes
that (1) since the inception of the existing definition of film in the 1970’s, news and sports
films have become similar to other film types already included in the existing definition, and
(2) this inclusion of news and sports film makes the definition of “film” similar to that set
forth in MTC Regulation IV.18(h)(3)(i)and thus provides a level of uniformity with other
The language “any other type of format or medium” is taken directly from the definition of
“film” in MTC Regulation IV.18(h)(3)(i), thereby updating the existing definition (1) to
include new and always changing technology, and (2) to provide the definition with a level
of uniformity with other states.
Recognizing that a “film” is deemed to be tangible personal property for purposes of this
regulation is not new language and is not a substantive change. The existing language of
Regulation section 25137‐8(b)(4) has been included verbatim in proposed Regulation
section 25137‐8(b)(1) so that all definitions of “film” are placed in the same paragraph for
Proposed Regulation section 25137‐8(b)(1) clarifies that film intended for home viewing is
“deemed to be tangible personal property” for sales factor purposes. The term "intended
for home viewing" is replaced by "sold for personal use." This is not a substantive change.
Proposed Regulation sections 25137‐8(b)(3) and 25137‐8(b)(4)have been expanded to
include additional definitions for "producer" and "distributor." The inclusion of these groups
and the clarification that “a distributor does not include theaters ” were requested by
interested parties. The proposed Regulation section 25137‐8(b)(4) does not include cable
television networks as "distributors."
Proposed Regulation section 25137‐8(b)(9) defines "telecast" by using language taken
directly from MTC Regulation IV.18(h)(3)(vii). This MTC language has been adopted in large
part by many other states and therefore provides a level of uniformity. This revision makes
no substantive change to the existing regulation.
Proposed Regulation section 25137‐8(b)(10) has been added to define “advertising revenue”
as used in this regulation. This is clarifying language requested by interested parties who
must use the term for apportionment purposes. The proposed revision makes no
substantive change to the existing regulation.
Proposed Regulation section 25137‐8(b)(11) has been added to define "cable television
services" as used in this regulation. This is clarifying language requested by interested
parties who must use the term for apportionment purposes.
Proposed Regulation section 25137‐8(c) "Apportionment of Business Income" adds
"distributors" to the list of those taxpayers covered by this regulation for purposes of
Proposed Regulation section 25137‐8(c)(3)(A) clarifies that gross receipts include those derived
from all sources within this state, including but not limited to those categories specifically
identified in the regulation. Gross receipts from advertising revenue is added to make it
congruent with both historical practice and the language set forth in MTC Regulation
IV.18(h)(4)(iv)(B)(1). This language addresses the concern expressed by some taxpayers over
categories not specifically identified. This revision makes no substantive change to the
Proposed Regulation section 25137‐8(c)(3)(A) (i), (ii), and (iii) now specifically includes
advertising revenue in gross receipts. This language is taken from existing Regulation section
25137‐12 and MTC Regulation IV.18(h)(4)(iv)(B)(1), thereby making the regulatory language in
proposed Regulation section 25137‐8 consistent with other special regulations under R&TC
section 25137 and providing uniformity with other states. This revision makes no substantive
change to the regulation.
Proposed Regulation section 25137‐8(c)(3)(A)(ii) and (iii) add "provided that the source selected
is consistently used from year to year for that purpose." This wording clarifies historical
administrative practice and provides consistency in reporting of data. This proposed language
makes no substantive change to the regulation.
Proposed Regulation section 25137‐8(3)(A)(iv) clarifies that receipts from sales and rentals also
include receipts from "licensing or other disposition" of video cassettes and discs "or any other
format or medium intended for personal use," and that these receipts shall be included in the
numerator of the sales factor. This language is taken in large part from MTC Regulation
IV.18(h)(4)(iv)(B)(4) to provide uniformity with other states. It makes no substantive change to
Proposed Regulation section 25137‐8(d) provides that this regulation will apply to taxable years
beginning on and after January 1, 2010 at the request of interested parties. While there are
substantive changes from the existing regulation (specifically identifying distributors as a part of
the industry covered by this regulation, redefining "film," and identifying new technology used
by the industry since the prior regulation was adopted), the specific identification of advertising
revenue as a gross receipt makes the regulatory language in Regulation section 25137‐8
consistent with other special regulations and provides uniformity with other states. It makes no
a substantive change to the regulation and makes no new demands upon taxpayers.
Proposed Note: The authority cited for this regulation is updated from R&TC Section 26422 to
R&TC Section 19503, since the prior section is no longer applicable as a result of the passage of
SB 3 (Stats. 1993, ch. 31). This makes no substantive change to the regulation. The reference
remains Section 25137, Revenue and Taxation Code.
Section 25137-8 is amended to read:
§ 25137-8. Motion Picture and Television Film Producers, Distributors, and Television Networks
- Apportionment of Income.
This regulation applies to motion picture and television film producers, producers of
Television commercials, and to television networks. The provisions of this regulation
shall also apply to independent television stations to the extent they are members of a
chain of commonly owned stations all of which operate as network affiliates or all of
which are unaffiliated with a network but which operate collectively in purchasing
properties for telecast or in marketing air time, or which operate as a producer. This
regulation applies to income years beginning on and after January 1, 1982.
In General. When a business entity in the business of producing or distributing motion
picture, film, or television programming, whether broadcast or telecast through the public
airwaves, by cable, direct or indirect satellite transmission, or any other means of
communication, either through a network (including owned and affiliated stations) or
through an affiliated, unaffiliated, or independent television broadcasting station has
income from sources both within and without this state, the amount of business income
from sources within this state shall be determined pursuant to this regulation. This
regulation does not apply to a business entity which earns receipts from the provision of
cable television services.
For purposes of this regulation only, the following definitions shall apply.
"Film" means the physical embodiment of a play, story, or other literary, commercial,
educational, or artistic work, produced for telecast, as a motion picture, video tape, disc,
or any other similar type of format or medium, except that it does not include news or
sports films produced for telecast. A "film" is deemed to be tangible personal property.
"Film" does not include video cassettes or discs sold for personal use. intended for home
(2) Each episode of a series of films produced for television shall constitute a separate
film notwithstanding that the series relates to the same principal subject and is produced
during one or more television seasons.
(3) A "producer" is a business entity which develops and creates motion picture,
television, or web-based content.
(4) A "distributor" is a business entity which, upon completion of production, licenses a
film for exhibition by a related or unrelated third party. The distributor may also develop
and fund the campaign to market the film. A theatre which exhibits the film is not a
distributor. A producer may also be a distributor if it licenses its own films or those of
others for exhibition.
(3)(5) "Release date" means the date on which a film is placed in service. A film is
placed in service when it is first telecast or exhibited to the primary audience for which
the film was created. Thus, a motion picture theater film is placed in service when it is
first publicly exhibited for entertainment purposes and an educational film is placed in
service when it is first exhibited for instructional purposes. Each episode of a television
series is placed in service when it is first telecast. A film is not placed in service merely
because it is completed and therefore in a condition or state of readiness and availability
for telecast or exhibition, or merely because it is telecast or exhibited to prospective
exhibitors, sponsors, or purchasers, or it is shown in a "sneak preview" before a select
(4) A "film" is deemed to be tangible personal property.
(5)(6) "Rent" shall include license fees for the exhibition or telecast of films.
(6)(7) "Tangible personal property" used in the business, whether owned or rented, shall
include but is not limited to sets, props, wardrobes, and other similar equipment.
(7)(8) A "subscriber" to a subscription television telecaster is the individual residence or
other outlet which is the ultimate recipient of the transmission.
(8)(9) "Telecast" means the transmission of an electronic signal or other signal by
radiowaves or microwaves or by wires, lines, coaxial cables, wave guides, fiber optics,
satellite transmissions directly or indirectly to viewers or subscribers, or by any other
means of communication. or other tangible conduits of communication.
(10) "Advertising revenue" includes advertising from all sources, including but not
limited to online advertisements, embedded advertisements, product placement, barter
transactions, and the sale of air time used for advertising purposes.
(11) "Cable television services" means the transmission to subscribers of video
programming or other programming service over a cable system.
(c) Apportionment of Business Income. The property, payroll, and sales factor of the
apportionment formula for motion picture and television film producers, distributors and
television networks shall be computed pursuant to Sections 25128 through 25137 of the
Revenue and Taxation Code and the regulations adopted pursuant thereto except as
provided in this regulation.
(1) Property Factor.
(i) In the case of rented studios, the net annual rental rate shall include only the
amount of the basic or flat rental charge by the studio for the use of a stage and
other permanent equipment such as sound recording equipment rented from
other sources or from the studio not covered in the basic or flat rental charge and
used for one week or longer (even though rented on a day-to-day basis) shall be
included. Lump-sum net rental payments for a period which encompasses more
than a single income year shall be assigned ratably over the rental period.
(ii) The value of the films shall:
(I) be the original cost of producing the film as determined for federal
income tax purposes, before any adjustment for federal credits which have
not been claimed for state purposes, and
(II) include talent salaries.
(iii) The value of a film shall not be included in the property factor until its
(iv) Video cassettes and discs shall be included in the property factor at their
inventory cost as shown in the taxpayer's books and records.
(i) All real property and tangible property (other than films) whether owned or
rented, which is used in the business, shall be included in the denominator.
(ii) Films, other than films the cost of which is expensed for California tax
purpose at the time or production, shall be included in the property factor at
original cost for twelve years beginning with the release date.
(iii) Films of a topical nature including news or current event programs, sporting
events or interview shows, the cost of which is expensed for California tax
purposes at the time of production, shall be included in the property factor at
original cost for one year beginning with the release date.
(iv) All other films, other than those included in the denominator under clause
(ii) or (iii) of this subparagraph, shall be aggregated and treated as a single film
property which shall be included in the property factor. Such property shall be
valued at eight times the gross receipts generated during the income year from
the theater distribution, network television, television syndication, cable or
satellite television, subscription and the marketing of video cassettes and discs
through licensing or direct selling, or similar receipts, but in no event in an
amount greater than the total original cost of such aggregated film property.
(i) If tangible personal property (other than films) is located or used in this
state for part of the income year, its value shall be determined by applying the
ratio which the number of days the property is located or used in this state bears
to the total number of days such property was owned or rented during the
(ii) The total value of films that are included in the property factor under
subparagraph (B) of paragraph (1) of this subsection shall be attributed to this
state in the same ratio in which the total California receipts from such films as
determined in subparagraphs (A), (B), and (C) of paragraph (3) of this
subsection pertaining to the sales factor bears to the total of such receipts
(2) Payroll Factor.
(i) The denominator shall include all compensation paid to employees during
the income years, including talent salaries. Residual and profit participation
payments constitute compensation paid to employees.
(ii) The amount paid to a corporation for providing the services of an actor or
director who is an employee of such corporation or for loaning the services of an
actor or director who is under contract with such corporation shall, if substantial,
be included in the producer's payroll factor as if the amount paid was
compensation paid to an employee of the producer.
Numerator. Compensation of employees in the production of a film on location
shall be attributed to the state where the services are or were performed. Compensation
of all other employees shall be governed by Regulations 25132 and 25133.
(2)(3) Sales Factor.
(A) The numerator shall include all gross receipts for derived by the taxpayer from
sources within this state including, but not limited to, the following:
(A) (i) Gross receipts, including advertising revenue, from films in release to
theaters and television stations located in this state.
(B) (ii) Gross receipts, including advertising revenue, from films in release to or
by a television network for network telecast shall be attributed to this state in
the ratio that the audience for such network stations (owned and affiliated)
located in California bears to the total audience for all such network stations
(owned and affiliated) everywhere. The audience shall be determined by rate
card values published annually in the Television & Cable Factbook, Vol. I,
"Stations Volume," Television Digest, Inc., Washington, D.C., if available, or
by other published market surveys, or if none is available, by population data
published by the U.S. Bureau of Census provided that the source selected is
consistently used from year to year for that purpose.
(C) (iii) Gross receipts, including advertising revenue, from films in release to
subscription television telecasters shall be attributed to this state in the ratio that
the subscribers for such telecaster location in California bears to the total
subscribers of such telecaster everywhere. If the number of subscribers cannot
be determined accurately from records maintained by the taxpayer, the ratio
shall be determined on the basis of the applicable year's statistics on subscribers
published in Cable Vision, International Thompson Communication Inc.,
Denver, Colorado, if available, or by other published market surveys, or, if none
is available, by population data published by the U.S. Bureau of the Census for
all states in which the telecaster has subscribers, provided that the source
selected is consistently used from year to year for that purpose.
(D) (iv) Receipts from sales and rentals, licensing or other disposition of video
cassettes and discs or any other format or medium intended for personal use
shall be included in the numerator of the sales factor as provided in Regulations
25135 and 25136.
(d) This regulation applies to taxable years beginning on and after January 1, 19822010.
Note: Authority cited: Section 2642219503, Revenue and Taxation Code.
Revenue and Taxation Code.
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