Michigan: Taxpayer allowed to use alternative apportionment formula

The Colorado Court of Appeals recently addressed whether a movie theater (the taxpayer) owed City of Aurora use tax on master licensing agreements (MLAs) that it entered into with film distributors.  The MLAs authorized the taxpayer to exhibit motion pictures at its theaters. Importantly, the taxpayer had historically received the motion pictures in 35 millimeter film reels, but later replaced the celluloid film with digital files received on portable hard drives. In earlier cases, the courts had ruled that a movie theater’s use of film reels received from distributors to exhibit motion pictures constituted the use of tangible personal property upon which state and city use tax was owed. Given the change in delivery method to a digital file, the taxpayer filed a claim seeking a refund of the use taxes paid on the licensing fees.  After a trial court upheld the denial of the refund claims, the taxpayer appealed.

On appeal, the taxpayer argued that the district court erred when it concluded (1) that the “true object” of the MLAs was for the taxpayer to obtain tangible personal property and (2) that the transactions were not wholesale transactions exempt from use tax. The true object of the MLAs, the taxpayer argued, was to obtain the intangible right to exhibit the films at its theaters. The court disagreed, holding that without “the transfer of the actual film, the license to exhibit it would be valueless” and therefore the data files on hard drives (tangible personal property) were not merely incidental to the licensing agreements. In the court’s view, the true object of the licensing agreements was for the taxpayer to obtain, for the designated timeframe, tangible personal property that was inseparable from its intangible attributes.

Relying on earlier cases, the court next rejected the taxpayer’s position that the MLA fees were exempt from tax because the data files were acquired for resale to movie patrons. The taxpayer, the court concluded, was the end user and consumer of the data files and used them as finished products. As such, they were not exempt from use tax. There was also no double taxation occurring when the taxpayer owed use tax and patrons paid sales tax on their theater tickets because each tax was levied upon different persons, and levied upon the exercise of different privileges arising out of separate transactions. The court further rejected the taxpayer’s argument that it used the data files as an ingredient of a manufactured or compounded product for resale because the data files were transformed, using projectors, a screen, sound systems, and other equipment to become a new product for the taxpayer’s customers. Please contact Stephen Metz at 303-382-7177 with questions on Am. Multi-Cinema, Inc. v. City of Aurora.