The New York film production tax credit is often a crucial piece of the financing for a film. But the rules governing qualification of expenses are strict. If you claim a New York tax credit for a non-qualifying expense, such as the cost of acquiring intellectual property rights, or if you fail to properly substantiate an otherwise qualified expense, your claim could be denied. That's what recently happened to the New York producer of a feature-length film adaptation of a Broadway show.

Background

NYS Tax Law §24 allows a tax credit equal to 30% of "qualified production costs" paid or incurred in the production of a "qualified film," assuming certain requirements relating to the company's level of activity in New York are satisfied. For 2015 - 2019, an additional 10% credit may be available for amounts paid to individuals for services performed on a qualified film with a minimum budget of $500,000 in certain upstate New York counties.

What are "qualified production costs"?

The New York statute defines "production costs" as "costs for tangible property used and services performed directly and predominantly in the production (including pre-production and post-production) of a qualified film," including generally "technical and crew production costs, such as expenditures for film production facilities, ... props, makeup, wardrobe, film processing, camera, sound recording, set construction, lighting, shooting, editing and meals." "Production costs," however, do not include "(i) costs for a story, script or scenario to be used for a qualified film, and (ii) wages or salaries or other compensation for writers, directors, including music directors, producers and performers (other than background actors with no scripted lines)."

The Broadway Worldwide decision

In In re Broadway Worldwide, Inc. v. N.Y.S. Dept. of Economic Development, a production company failed to establish that amounts paid to a choreographer and others involved in the design elements of a feature-length film of the Broadway musical Memphis were for services qualifying for the New York film production tax credit. The producer's contract with each of these individuals "contained some mention concerning services, in addition to provisions concerning royalties, but the contracts failed to specify what compensation related to the services," and the producer was unable to prove that these individuals even rendered the services in New York State for which they were engaged. In the absence of such evidence, the court found that the payments constituted royalties from the play that did not qualify for New York's film production tax credit. The court also affirmed that compensation paid to the director was not a qualified production expense under NYS Tax Law §24.

What this means

The Broadway Worldwide decision is significant because it is one of the few reported judicial decisions concerning New York's film production tax credit and sheds useful light on the process by which claims of entitlement to the credit may be disallowed. While application of the decision may be limited because of its particular facts - it involved the filming of a live play - it highlights the distinction between eligible services and ineligible intellectual property rights and illustrates the importance of separating the two - preferably in separate agreements. In those (albeit rare) instances where both rights and services are addressed in one agreement, the compensation payable for each must be clearly delineated and performance of the services must be properly documented.

www.fkks.com

This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.