TIR 07-15: An Act Providing Incentives to the Motion Picture Industry

On July 20, 2007, Massachusetts enacted an Act Providing Incentives to the Motion Picture Industry (“the new Act”).  See St. 2007, c. 63.  This Act made revisions to statutory provisions enacted by a prior Act with the same title that was signed into law on November 23, 2005 (the “prior Act”).  See St. 2005, c. 158; amended by St. 2005, c. 167.  This Technical Information Release (TIR) discusses the statutory provisions as amended (collectively, the “Film Statute”), including an explanation of the provisions of the new Act and their effective dates.[1]

1.  Background

A. The Prior Act

The prior Act provided personal income tax and corporate excise credits and a general sales tax exemption as incentives to the motion picture industry.  It was effective for taxable years beginning January 1, 2006 with a sunset date of January 1, 2013.  The credits and sales tax exemption applied to qualifying motion picture production companies; the sales tax exemption also applied to qualifying film school students.  See M.G.L. c. 62, § 6(l), c. 63, § 38T and c. 64H, § 6(ww).  Where eligible, a taxpayer could take both the credits and the exemption in connection with a qualifying motion picture.  Also, an eligible taxpayer could transfer one or both credits, or a portion thereof.

Specifically, the prior Act provided a payroll credit and a production expense credit, each of which could be taken by an eligible motion picture production company (the “taxpayer,” unless the context requires differently) against either its personal income tax or corporate excise liability.  M.G.L. c. 62, § 6(l) and c. 63, § 38T.[2]  Each credit had different qualification requirements, but shared a minimum expense threshold of $250,000, required to be met in a twelve-month period.  The payroll and production expense credits could be claimed in an amount equal to 20% or 25% of a taxpayer’s qualifying payroll or production expenses, respectively; however, there was a $7,000,000 limitation on the amount of the combined credits that could be taken in connection with any one motion picture.

B.  The New Act

The new Act amends the Film Statute as set forth at M.G.L.  c. 62, § 6(l), c. 63, § 38T and c. 64H, § 6(ww).  It is effective for film credit applications that are received on or after January 1, 2007 (see the discussion of effective date issues, below).  Pursuant to the new Act, 90 per cent of any payroll and production expense credits not used in the year claimed may now be refunded to a taxpayer, at the taxpayer’s election.  In addition, the new Act effects the following changes:  the minimum expenditure threshold required to be met in a twelve-month period has been lowered from $250,000 to $50,000; the payroll credit has been increased to apply to 25% of a taxpayer’s qualifying expenditures; the $7,000,000 limitation on the amount of credits taken on any one motion picture has been eliminated; a “digital media project” is now included in the definition of a “motion picture”; and, the sunset date for the Film Statute has been extended from January 1, 2013 to January 1, 2023.

2.  Discussion

A.  General; motion picture; motion picture production company; qualification period

The credits and sales tax exemption that are available under the Film Statute relate to the making of a “motion picture.”  A “motion picture” is defined to be “a feature-length film, a video, digital media project, a television series defined as a season not to exceed 27 episodes, or a commercial made in the Commonwealth, in whole or in part, for theatrical or television viewing or as a television pilot.“  M.G.L.  c. 62, § 6(l)(1) and c. 63, § 38T(a).  The term motion picture shall not include

…a production featuring news, current events, weather and financial market reports, a talk show, a game show, sporting events, an awards show or other gala event, a production whose sole purpose is fundraising, a long-form production that primarily markets a product or service, a production containing obscene material or performances,[3] a production used for corporate training or in-house corporate advertising, or other similar-type productions.

Id.

Generally, the credits and the sales tax exemption are available to a “motion picture production company.”  A “motion picture production company” is “a company including its subsidiaries engaged in the business of producing motion pictures, videos, [or a] television series or commercials intended for a theatrical release or for television viewing.”  Id.[4]  The term “motion picture production company” shall not mean or include “any company which is more than 25 per cent owned, affiliated, or controlled by, any company or person which is in default on a loan made by the commonwealth or a loan guaranteed by the commonwealth.”  Id.  Consequently, such companies are not eligible for the credits or the sales tax exemption.

The credits and the sales tax exemption are each dependent upon a taxpayer incurring total Massachusetts production expenses of at least $50,000 ($250,000 under the prior Act) in a consecutive twelve-month period (the “qualification period”).  If the taxpayer engages in the making of more than one in-state motion picture, this requirement must be met for each motion picture.  The qualification period is the same for the payroll credit, production expense credit and the sales tax exemption.  Consequently, the choice of the qualification period may have a bearing on the taxpayer’s use of these two credits and the sales tax exemption.

Only qualifying expenditures incurred during the qualification period are eligible for the payroll or production expense credit.  If the taxpayer seeks to assert a qualification period in connection with two or more motion pictures, the common expenses, if any, must be reasonably apportioned between the pictures.  In some cases, the taxpayer may be able to choose between one or more possible qualification periods.  However, only one qualification period is allowed for each motion picture.  A taxpayer may choose to have a qualification period that is less than 12 months, but may not subsequently reopen or extend this qualification period in order to claim more qualifying expenses.[5]

Multiple episodes of a “television series” or multiple “commercials” that are created for the same client may be aggregated to qualify as a single motion picture.[6]  However, each episode of a television series may not be treated as a separate motion picture for purposes of these credits.[7]

B.  The Credits

(1)  In general

For taxable years beginning on or after January 1, 2007 and before January 1, 2023, the new Act provides that amotion picture production company that is entitled to a film credit may, upon its election, either transfer the credit or seek a refund of 90 per cent of any excess credit (i.e., credit not used in the year claimed).  When transfers are elected, credits may be transferred to and then used by any taxpayer within the meaning of chapter 62 or chapter 63, including individuals, financial institutions, utility corporations and insurance companies, and by corporations that are exempt from taxation under Internal Revenue Code (“Code”) § 501.  Insurance companies may apply the credits against the insurance premiums tax.  See M.G.L. c. 63, § 20 et. seq.  Corporations that are exempt from tax under Code § 501 may apply the credits against the tax on unrelated business income.  See M.G.L. c. 63, § 38T.  A transferee that is a flow-through entity may pass the film credits through to its partners, members or owners in proportion to their share of other tax or economic attributes of the entity, as required under federal income tax law.  The procedures for transferring the credits or seeking a refundable credit are discussed below.

(2)  Payroll Credit

Effective January 1, 2007, a taxpayer may claim the payroll credit for any in-state employment of persons in connection with the filming and production of a motion picture so long as the total production costs incurred in Massachusetts equal or exceed $50,000.  Also, effective January 1, 2007, the credit is equal to 25 per cent of the total qualifying aggregate payroll of the motion picture.  Only actual payments to employees may be used to determine the qualifying aggregate payroll, and only when the payment constitutes Massachusetts source income to the recipient.  See 830 CMR 62.5A.1(3).  Qualifying aggregate payroll may also include fringe benefits to employees to the extent such benefits constitute Massachusetts source income.  For example, the qualified transportation fringe benefit of employer-provided parking may be included in the qualifying aggregate payroll to the extent it is included in Massachusetts source income to the recipient.  See TIR 05-16.  The qualifying aggregate payroll shall not include any payments made to an employee when the total payments made to, or to be made to, such employee in connection with the motion picture are equal to or greater than $1,000,000 (“High Salary Employee”).  M.G.L. c. 62, § 6(l)(2) and c. 63, § 38T(b).  A High Salary Employee’s entire salary, and not merely the amount of such salary that is equal to or greater than $1,000,000, is excluded from the determination of the payroll credit.

A taxpayer must be registered for withholding of Massachusetts personal income tax and must withhold from its payroll expenses in order for the payments to qualify as an aggregate payroll expense.[8]  The Commissioner requires withholding whether or not the amounts paid are to “employees” or constitute “wages” as defined in M.G.L. c. 62B, § 1.[9]  To qualify as part of the aggregate payroll expense, the salary paid must be Massachusetts source income to the recipient and further must not be a payment representing the recipient’s participation in profits from the motion picture.

(3)  Production Expense Credit

If a taxpayer is eligible for the payroll credit with respect to a particular motion picture, then it may also be eligible to claim a credit equal to 25 per cent of its Massachusetts production expenses, not including the qualifying aggregate payroll expenses included in the calculation of the taxpayer’s payroll credit.  To qualify for the 25 per cent production credit, the taxpayer’s production expenses in Massachusetts must exceed 50 per cent of its total production expenses incurred in connection with the motion picture or, alternatively, at least 50 per cent of the taxpayer’s total principal photography days spent filming the motion picture must take place in Massachusetts. M.G.L.  c. 62, § 6(l)(3) and c. 63, § 38T(c). “Principal photography days” within the meaning of the Film Statute is “the phase of production during which the motion picture is actually filmed” and shall not include preproduction or postproduction.  Id.

A “Massachusetts production expense” within the meaning of the Film Statute is a production expense for a motion picture that is clearly and demonstrably incurred in the commonwealth.  M.G.L. c. 62, § 6(l)(1) and c. 63, § 38T(a).  If tangible personal property is rented or purchased for direct use in a qualified production in Massachusetts and it is not returned, disposed of or sold by the production company as of the completion of its use in the film production, only a portion of the rental or depreciation expense will be allowed.[10]In addition, if equipment is rented or purchased outside Massachusetts and is clearly and demonstrably used in Massachusetts directly in the production of a motion picture, then a portion of the equipment’s rental or depreciation expense is eligible for the credit.  See also DD 07-1.  For example, if equipment or other tangible personal property is rented at a cost of $1,500 and 60% of the property’s use by the lessee was clearly and demonstrably incurred in Massachusetts directly in the production of a motion picture, the qualifying portion of the rental cost for purposes of the production expense credit would equal $900.  A “production expense” within the meaning of the Film Statute means preproduction, production and postproduction expenditures directly incurred in the production of a motion picture.  Id.[11]

The entire salary paid to a High Salary Employee that is equal to or greater than $1,000,000 may be used in calculating the production expense credit including the portion of such salary that is less than $1,000,000 (provided that the entire salary is excluded from the payroll credit, for which it does not qualify).  However, as discussed above, a taxpayer must be registered for withholding of Massachusetts personal income tax and must actually withhold on the payments to a High Salary Employee in order for these payments to constitute a qualifying production expense.  See Fact Sheet entitled “Information on Withholding for Film Subcontractors” located on the DOR website at www.mass.gov/dor.

C.  The Sales Tax Exemption

For taxable years beginning on or after January 1, 2007 and before January 1, 2023, the Film Statute provides for a sales tax exemption that can be asserted by a qualifying motion picture production company or a qualifying film school student.  M.G.L. c. 64H, § 6(ww).  Production expenses that qualify for the sales tax exemption may also qualify for the production expense credit (see above).

(1)  Motion Picture Production Company

In order to qualify for the sales tax exemption, a motion picture production company must incur at least $50,000 in total production costs in Massachusetts during a consecutive twelve-month period and must be conditionally pre-approved as a qualifying company by the Commissioner. The twelve-month period that a taxpayer may use for purposes of the sales tax exemption is the same qualification period that applies for purposes of the payroll and production expense credits, as discussed above. The taxpayer must file with the Commissioner an estimate of expenditures to be incurred in Massachusetts in connection with the production of the motion picture prior to the commencement of the in-state filming.  M.G.L. c. 64H, § 6(ww).  Also, the taxpayer must designate a representative as a primary liaison with the Commissioner for the purpose of facilitating the proper reporting of expenditures and other information as required by the Commissioner.  Id.  The taxpayer must file the Application for Sales Tax Exemption[12] (“estimate form”) to receive conditional pre-approval by the Commissioner and thereafter may utilize the sales tax exemption for production costs incurred in the state by giving its vendors an exempt use certificate.  If the taxpayer commences filming in the state and then subsequently files the estimate form, only in-state purchases made subsequent to the conditional pre-approval of the form will qualify for the sales tax exemption.

Any taxpayer that has been conditionally pre-approved for the sales tax exemption that then fails to expend the requisite $50,000 within a consecutive twelve-month period or that fails to file the estimate form or receive approval from the Commissioner shall be liable for the sales taxes that would have been due had the conditional pre-approval not been granted.  M.G.L. c. 64H, § 6(ww).  The sales taxes will be considered due as of the date that the taxable expenditures were made.  In addition, if the taxpayer fails to reach the $50,000 threshold for the twelve-month period, it is not entitled to either the payroll or production expense credit.

Only production expenses incurred for the purchase of tangible personal property during the qualification period, including meals purchased during the film production, qualify for the sales tax exemption.  The exemption does not apply to room occupancy expenses.

(2)  FilmSchoolStudent

Accredited film school students are allowed a sales tax exemption for production expenses incurred in the state related to a school film project. Such students may utilize the sales tax exemption for production expenses incurred in the state by giving their vendors an exempt use certificate.

D.  Utilization of the Credits, Including Transfers and Refunds

A motion picture production company that is entitled to a film credit may elect either to transfer the credit or to claim a refund of credit that is not currently used, as described below.  However, while a credit may be transferred to more than one buyer, as discussed below, a motion picture production company may not seek to transfer only part of a credit and then seek a refund as to the remainder.  A taxpayer can transfer part of a credit to another taxpayer and then apply the remainder to its own tax liability and/or carry the credit forward.  Transferees, buyers or assignees of a credit are not permitted to claim a refund of credit.

(1)  Transfer, Sale or Assignment

A taxpayer subject to the personal income tax under chapter 62 or the corporate excise under chapter 63 may transfer, sell or assign either the payroll or production expense credit, in part or in whole, to one or more other taxpayers that are subject to the personal income tax under chapter 62 or taxpayers subject to the corporate excise under chapter 63.

Any holder of the credits, including a motion picture production company, transferee, buyer or assignee, that wants to make a sale, transfer or assignment of the credits (the “transferor”) shall obtain a certificate to transfer, sell or assign the credits before making a transfer to another taxpayer.[13]  The transferor must submit to the Commissioner a statement in the form prescribed by the Commissioner that details the amount of tax credit being sold, transferred or assigned and any other information required by the Commissioner.  Potential transferors that have an outstanding tax obligation with the state in connection with any motion picture for any prior taxable year are not eligible to transfer, sell or assign the credits.  Transferees that have an outstanding tax liability are subject to offsets prior to application of the credit against their current tax liability.[14]  Transferees, buyers or assignees may use and carry forward the credits to any of the five taxable years subsequent to the first taxable year the credits were allowed to the initial transferor.  Transferring, selling or assigning a credit does not extend the five-year carryforward period.

(2)  Refund

Effective January 1, 2007, the payroll and production expense credits are, at the election of the taxpayer, refundable to the extent provided for in M.G.L. c. 62, § 6(l) and c. 63, § 32E.  At the written request of the taxpayer, the Commissioner will apply the credit against the taxpayer’s liability as reported on its tax return, first reduced by any other available credits, and then refund 90 per cent of the balance of the credits to the taxpayer.  Consequently, a taxpayer that elects to receive a refund must file a tax return for the tax period at issue in order to receive a refund of the credit.[15]  If the taxpayer does not elect to claim a refund, any credit amount that exceeds the taxpayer’s tax due for a taxable year may be carried forward by the taxpayer to any of its five subsequent taxable years.  A taxpayer that elects to claim a refund of credit is not permitted to seek a partial refund and a partial transfer or carryover of the credit.[16]

(3)  Effective Date Issues

As noted above, the new Act is effective for film credit applications that are received on or after January 1, 2007.  Consequently, expenses incurred in connection with a motion picture shot in calendar year 2006 may qualify for a payroll or production expense credit under the new Act, so long as no credit application was submitted for the motion picture prior to 2007.  Expenses incurred in connection with a motion picture shot in 2007 prior to the enactment of the new Act may also qualify for a credit under the new Act.  Further, in cases in which a credit application was submitted in 2007 for a motion picture that was shot in either 2006 or 2007, the taxpayer may amend such application to take into consideration the more favorable terms of the new Act (including the lower total production expense requirement of $50,000, the increased payroll credit of 25%, and the fact that there is no longer any limitation on the amount of the credit).  The following are examples of how the effective date provisions of the new Act may potentially apply to a credit application.

Example 1:  Company A filmed a production in 2006, but did not qualify for the film credit in 2006 because it had only $155,000 in qualified expenses.  Under the new Act Company A may now file an application for the film credit.

Example 2:  Company B filmed a production in 2006 and filed a film credit application in April, 2007.  Company B may amend its previous film credit application to receive an additional film credit under the new Act because it filed its application on or after January 1, 2007, the effective date for the new Act.  However, if Company B previously transferred the credit, it may not elect to claim a refund of additional film credit to be received in connection with the production.

Example 3:  Same facts as in example 2, except that Company B has not transferred the initial film credit that it received from its April, 2007 application.  Company B files an amended application and receives additional film credit in 2007.  Company B qualifies to elect a refund of the film credit on its 2007 tax return for 90 % of any film credit it receives for this production that is not used to reduce its 2007 Massachusetts tax.  Note that Company B is not allowed to seek a partial refund and also to partially transfer or carryover the film credit.

/s/  Henry Dormitzer
Henry Dormitzer
Commissioner of Revenue

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November 21, 2007

TIR 07-15

[1]Several issues arising under the prior Act were addressed in Directive 07-1.  Those issues and their resolution remain relevant under the Film Statute, and Directive 07-1 continues to be in effect (except as modified by the New Act or by the discussion in this TIR).  Where Directive 07-1 and this TIR both address a particular issue or subject, this TIR supersedes Directive 07-1 to the extent that this TIR states or reflects any different or additional requirements or analysis.

[2]In the event that the motion picture production company is set up as a flow-through entity, such as an S corporation, partnership or LLC that does not elect to be treated as a corporation, the person eligible for the credit may be an individual shareholder, partner or member as the case may be.

[3]“Obscene” motion pictures do not qualify for the credit.  For purposes of applying the definition of “obscene,” the Commissioner will look to other provisions of Massachusetts law.  See, e.g., M.G.L. c. 272, § 31 (defining “obscene” as a matter that “(1) appeals to the prurient interest of the average person applying the contemporary standards of the county where the offense is committed; (2) depicts or describes sexual conduct in a patently offensive way; and (3) lacks serious literary, artistic, political or scientific value”).

[4]The inclusion of the term “digital media project” within the definition of a “motion picture” that is made for theatrical or television viewing is new and clarifies that the term “motion picture” includes digitally enhanced films.  This term does not reference electronic games, computer or video games, video game consoles, or other productions unrelated to commercial filmmaking.

[5]See TIR 06-1 for examples pertaining to the qualification period.

[6]Therefore, when two clients contract for separate commercials with an advertising agency the work for these two clients may not be aggregated even if the advertising agency uses a single production company to film the commercials.

[7]The definition of a “motion picture” includes a television series defined as a season not to exceed 27 episodes.  Consequently, each individual season not to exceed 27 episodes of a television series may have a separate qualification period.

[8]Other Massachusetts registrations may also be necessary depending upon the circumstances, including a registration or qualification to do business in Massachusetts.  See M.G.L. c. 156D, c. 109, and c. 156C.

[9]The withholding requirement applies to situations where a motion picture production company films a production using personnel provided through a “loan-out” corporation.  See Fact Sheet entitled “Information on Withholding for Film Subcontractors” located on the DOR website at www.mass.gov/dor. As described in this Fact Sheet, in certain circumstances a particular entity may obtain a waiver of the withholding requirement.  A “Request for Waiver of Withholding” may be obtained on the Department’s website.  An approved waiver obtained from the Department will not disqualify otherwise qualifying payments from eligibility for either the payroll credit or the production expense credit.

[10] In the case of a purchase of tangible personal property for direct use in a qualified production in Massachusetts, the allowable production expense will be the portion of the depreciation expense that reflects the extent of use in the qualified production in Massachusetts.  The allowable depreciation expense will be calculated using IRS class life categories under the federal depreciation rules as identified in IRS Revenue Procedure 87-56, including any subsequent amendment or clarification of such Revenue Procedure.  The cost of tangible personal property is divided by the applicable IRS class life to determine an annual expense.  The annual expense is then multiplied by the ratio of the number of Massachusetts days that the tangible personal property was in qualified use in the production over 365.  The resulting amount is the allowable portion of the production expense.

[11]The Act also provides that this term:

…shall include wages and salaries paid to individuals employed in the production of the motion picture; the costs of set construction and operation, editing and related services, photography, sound synchronization, lighting, wardrobe, makeup and accessories; film processing, transfer, sound mixing, special and visual effects; music; location fees and the cost of purchase or rental of facilities and equipment or any other production expense.  The term shall not include costs incurred in the marketing or advertising of a motion picture, any costs related to the transfer of tax credits or any amounts paid to persons or businesses as a result of their participation in profits from the exploitation of the production.

Id.

[12]  Available on the DOR website at www.mass.gov/dor.

[13]The transferor or transferee realizes Massachusetts gross income to the extent the transferor or transferee realizes federal gross income that derives from the transfer, sale or assignment of the credits.  See IRS Chief Counsel Advice 200211042 (February 5, 2002).

[14]Generally, the Department will not hold a transferee liable in cases in which some or all of a motion picture production company’s film credit is disqualified, except in the case where the film credit was originally obtained through the means of fraud.  See Directive 07-1.  In the case of a transfer of film credit, where an independent certified public accountant performs an audit of the film credit, in accordance with generally accepted auditing standards in the United States and renders an opinion as to the qualification of the credits, consistent with guidelines to be determined by the Department, the Department will not seek recourse against the transferee for any portion of the credit that may be subsequently disqualified.

[15]A refundable credit will only be available to taxpayers that file their tax return electronically.

[16]If the refund is not timely paid by the Department, a taxpayer is entitled to receive interest under M.G.L. c. 62C, § 40.  However, no interest will accrue on a refund before the Commissioner receives substantiation of a taxpayer’s claim for refund.  See St. 2007, c. 63, §§ 5(c), 6(c).