Though the state sales tax exemption on new equipment purchases made by independent postproduction and visual effects houses in California went into effect on January 1, 1999, defining the parameters of the new measure is a process that has taken most of this calendar year. The process has been a coordinated effort between the California chapters of the Association of Imaging Technology & Sound (ITS) and the California Board of Equalization (BOE), which is the state agency that over-
sees taxation matters, interprets regulations and conducts audits. Representatives of the ITS and BOE have met for informational seminars and public hearings. BOE officials even toured post facilities in Southern and Northern California to get a firsthand sense of the business.
The result of these gatherings was the BOE’s formal adoption of Regulation 1532 during a meeting in Sacramento last month. The BOE approval means that the state agency and the industry have reached an understanding concerning which equipment purchases qualify for the tax break. That mutual understanding could be the biggest California postproduction story thus far in ’99, bigger even than facilities gearing up for DTV (including high-definition television), because the state sales tax exemption makes those investments more affordable for entrepreneurial shops in the Golden State.
ITS board member Duane Thompson chairs the organization’s government affairs committee, and is also president of Sacramento area facility California Image Associates. He knows of a colleague at a Los Angeles post house who recently made a major DTV-related purchase. According to Thompson, that shop realized savings amounting to six figures as a result of the sales tax exemption. Thompson also notes that California Image Associates still has to pay a local 2.75 percent sales tax on an equipment purchase. (The local tax varies depending on the jurisdiction.) But that’s five percent less than what California Image Associates had been required to pay prior to the state tax break (7.75 percent).
The savings are designed to not only help the industry deal with the considerable expense of re-tooling for the DTV and HDTV era, but also to encourage post and visual effects facilities to set up shop in California. Tax breaks in other states and countries have started to lure companies away from California. This measure is in part intended to keep independent post and visual effects facilities in the state.
Genesis Of Reform
In late ’97-early ’98, the California chapters of the ITS targeted a state sales tax exemption as a legislative goal. Extensive research and lobbying found receptive ears in Sacramento, including those of Assemblyman Wally Knox (D-Los Angeles), who authored Assembly Bill 2427. The measure proposed the tax break as an aforementioned means to encourage business in California and to help keep the state’s facilities at the forefront of the digital television revolution.
The ITS stated its case in support of AB 2427 before Sacramento legislative committees throughout the course of the ’98 calendar year. For example, a contingent of ITS members appeared before the California State Assembly’s Revenue and Taxation Committee in April ’98 (SHOOT, 4/1/98, p. 8). This mini-delegation included Thompson; ITS government affairs committee member Will Hoover, who is also president of San Francisco-based Realtime Video; and ITS Southern California board member (now chapter president) Leon Silverman, executive VP of Hollywood-based Laser-Pacific Media. The ITS also enlisted the services of lobbying firm Carpenter Snodgrass & Associates, Sacramento and Irvine, Calif.
But an overlooked key factor in making AB 2427 viable were the numbers presented by ITS, which commissioned Scenic Wonders, a Madison, Wis.-based firm, to research and report on the economic clout of the California post community. Up until then, the BOE had pegged the independent post/effects facility industry in California as accounting for some $300 million in annual purchases. While that estimate was clearly too high, to the layman’s way of thinking, such a miscalculation might be advantageous to the facility business: The greater an industry’s economic wherewithal, the more power it would seemingly have in the legislative and political arenas.
However, an overestimate can prove detrimental to an industry—and if it hadn’t been corrected in this case, it’s unlikely the ITS could have won the California sales tax exemption. Thompson conjectures that the original $300 million figure probably lumped the facilities business in with the TV station sector and other industries. "Based on that large an estimate, the tax board and the Assembly would have probably concluded that the economic impact of a sales tax exemption for the post community was potentially too great in terms of lost [tax] revenue for the state," explains Thompson.
Instead, an accurate reflection of California’s independent post and effects company business yielded the computation that the state would incur an estimated $8 million decrease in tax revenue—making the prospect of a tax exemption more feasible.
Last year Thompson observed: "We could make a case for being able to offset that difference [$8 million] in the big picture. The exemption will enable California shops to be more competitive with facilities in other states and countries, and serves as incentive for facilities to stay in business here, generating more wages on which payroll taxes are paid and so on. … The point is that the original information the state was gathering on our industry was so skewed that consideration of a tax break made no sense at all. By providing a more accurate assessment of our purchasing power, we were able to gain a reform that means a great deal to the smaller entrepreneurial businesses which make up the ITS."
Largely on the strength of the ITS case, AB 2427 won bipartisan support from both houses of the state legislature, translating into the tax break being incorporated into the ’99 fiscal budget signed last year by then Gov. Pete Wilson (R-CA). But that was just the beginning of the roller coaster ride.
Wilson’s signature wasn’t enough to guarantee that the sales tax exemption would be enacted (SHOOT, 9/11/98, p. 1). California’s legislature indicated it could only fund either the postproduction tax measure or the then-pending Proposition 7, a ballot initiative that, if passed, would have provided a tax break to state businesses purchasing pollution abatement equipment.
On Election Day, November 3, 1998, voters defeated Proposition 7, clearing the way for the post community to gain tax relief. When Proposition 7 fell by the wayside, then ITS Southern California chapter president Fred Rheinstein, chairman/CEO of The Post Group, Hollywood and West Los Angeles, described the industry win as being "a most significant moment in our organization. We have focused and utilized our strength and resources to act effectively. … We should view this as the exciting beginning of a long series of tasks we can accomplish. … I would presume to use this analogy: We have studied and practiced hard—now we have our driver’s license. Now it’s up to us to carefully select our destinations and then drive expertly to them."
Driving Lessons
In order for the tax exemption to be properly applied once it took effect at the beginning of 1999, there was still much driving to be done. At two informational seminars, one held in San Francisco on January 14, the other held five days later in Los Angeles, the BOE and ITS representatives started a dialogue on how to fairly interpret and clarify the new law and its applications.
This exchange continued over the coming months and proved to be vital. For example, when the parameters of AB 2427 were defined, they were based on 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 for tax, regulatory and other purposes. However, when the code covering the facilities and services business was converted from Standard Industry Code to NAICS Code with the passage of the North American Free Trade Agreement (NAFTA), audio postproduction was inadvertently left out. Thus the language of AB 2427—since it was tied into the NAICS Code—didn’t encompass audio postproduction equipment.
The ITS and the BOE put audio post gear back into the tax relief equation. "We were able to sit down with the BOE and educate them about our business as they put together the language for auditors to follow," relates Thompson. In addition to explaining the post process to BOE officials, the ITS prepared an extensive flow chart detailing what happens after film or video is delivered to a post house right through to the product’s completion. BOE representatives also toured facilities in Northern and Southern California to witness what the post and visual effects processes entailed.
This educational process led to the clarification of gray areas—and in some cases, qualifying certain equipment purchases for sales tax-exempt status that might not have otherwise been included in the tax break. Thompson notes that at first, the BOE didn’t see much merit in applying the tax exemption to duplication equipment, as it envisioned mass duplication along the lines of films for home video release. The ITS then put its duplication business into perspective. "When we finish a commercial or a program, we do 20 dubs for approval that go out to the involved parties and a certain amount of our equipment is used for that," says Thompson. "Once they saw we were involved in another, smaller-scale kind of duplication, the state board [BOE] ruled that that equipment should qualify [for the state sales tax exemption]."
Similarly, the term "furniture" originally meant desks and chairs to the BOE. "But to us, it meant custom-made consoles for our equipment, racks for our equipment and other specifically designed pieces of furniture," says Thompson. "Again, we were able to get the BOE to realize that this type of furniture legitimately qualified."
The ITS collaborated with both the Motion Picture Association of America (MPAA) and the BOE to generate the draft of 1532. The BOE—consisting of four board members and a representative of the State Controller’s Office—initially approved that Regulation 1532 language during a public hearing on June 29, 1999, pending public input and feedback. After a public comment period elapsed, the BOE formally gave the go-ahead last month to put the regulation on the books.
"When it came to the final [BOE] meeting," relates Thompson, "it took about ten minutes for the board to approve the regulation and send it on its way. They were satisfied that due diligence had been done to the nth degree. And that was because of the cooperative effort established between the BOE and ITS. We took the time and put in the effort needed to go over a rather complex area."
The next step is for the ITS to make sure the industry has a clear understanding of the sales tax exemption as delineated in Regulation 1532. To that end, training sessions are scheduled in Southern and Northern California. The former is scheduled for Tuesday, November 16, ’99, as a workshop and buffet breakfast from 8 a.m.-11:30 a.m. at the Beverly Garland Hotel in North Hollywood. It will be moderated by Bob Solomon, senior VP/finance of the Burbank-headquartered Four Media Company, the publicly held parent to several post houses (i.e. Encore, Hollywood; Riot, Santa Monica; POP, Santa Monica; and Digital Magic, Santa Monica), and by Glenn Bystrom, principal of tax/accountancy firm Ernst & Young, Los Angeles. Solomon chaired the joint committee of ITS and MPAA members who helped draft Regulation 1532 in concert with the SBE. Bystrom is an ITS consultant who was formerly deputy director of the BOE.
The San Francisco seminar is slated for the afternoon of Wednesday, December 8, ’99 at a site to be determined. This session will be moderated by Dennis Fox, senior manager of state and local taxation at Ernst & Young. Fox previously served as BOE program planning manager and spoke in that capacity at the aforementioned January ’99 BOE/ITS informational seminar in Los Angeles.
Citing the efforts of Solomon, Thompson, Bystrom, ITS Pacific Region director Eileen Kramer et al, ITS Southern California chapter president Leon Silverman notes that "it is through their hard work, insight and deep commitment that the postproduction industry will benefit for many years to come." Thompson adds, "If you have ever wondered why you belong to ITS, this success, which benefits each member and the industry, is the best illustration I can present."—additional reporting by Robert Goldrich
