The multi-state aspect of many companies and projects in the entertainment industry makes proactive state tax planning critical to ensure tax costs and risks are kept to a minimum.

As individuals and companies in the entertainment industry plan multi-state operations or investments, here are five things they should know to ensure compliance and effective tax planning:

 

1. LOAN-OUT ENTITIES

Above-the-line talent often use loan-out entities as a tax and risk strategy when contracting with studios and major productions. The California Employment Development Department (EDD) has recently questioned Cast & Crew and other major entertainment payroll providers about whether payments made to loan-out entities should be made directly to the individual performing the work. 

The new issues raised by the California EDD create concerns about:

  • The liability around payroll taxes if payments are reclassed to individual wages
  • The future value of operating a loan-out entity for the individual owner
  • The risk for studios to contract with loan-out entities going forward

On Sept. 30, 2024, California Governor Newsom signed SB 422 into law. The new law protects the use of loan-out entities by entertainment workers in California, which ensures their continued function in the industry in California. More specifically, SB 422 clarifies that payroll companies (e.g., Entertainment Partners, Cast & Crew) are not the employers of loan-out workers, and therefore are not required to make contributions to the state’s unemployment system for loan-out workers. Loan-out workers are employees of the respective loan-out entities pursuant to the new law.

 

2. MULTI-STATE TAX COMPLIANCE

The determination of tax filing and withholding requirements should be carefully analyzed in each case to ensure compliance with applicable state tax rules. Additionally, there are often state tax planning opportunities to support intercompany payment structures in a tax-efficient manner while ensuring tax compliance domestically. 

 

3. SOURCING OF REVENUE

An entertainment or film production company may have multiple revenue streams through licensing, distribution, merchandising, box office, etc. The sourcing of multiple revenue streams is nuanced, and rules vary from state to state. For example, certain states may require sourcing revenue based on where the benefit is received whereas other states may require sourcing revenue based on where the activity is performed. Often, these challenges present opportunities to reduce state and local tax burdens. 

 

4. STATE TAX CREDITS

Maximizing the utilization of state tax credits is a great planning tool for any company with operations in California, Georgia or other states with lucrative film tax credits. Thoughtful long-term planning will help ensure that the maximum of available state tax credits is used or, in the case of Georgia, transferred for the highest cash value. 

Two state-specific considerations:

  • Georgia recently proposed a change their credit rules limiting the transferability to a percentage of the state budget. The effort did not pass in 2024, but it may be revisited in the 2025 legislative session. 
  • California also updated their credit guidelines by expanding the credit for an additional five years through 2030-2031 under Senate Bill 132 in 2023.

 

5. AUDIT REPRESENTATION AND CONTROVERSY

State and local taxing authorities reserve the right to audit income or indirect taxes. Generally, a state audits companies to ensure that the taxes are properly paid pursuant to that state’s rules. 

While a tax audit may pose challenges, proper audit representation may reduce the risk of exposure by utilizing strategies to defend the taxpayer’s position. For example, the enactment of Assembly Bill 5 in California and corresponding adoption of the ABC worker classification test pose significant tax challenges. In addition, tax audits may result in opportunities for state refund. 

To learn more about how entertainment professionals and businesses can reduce their state and local tax liabilities, please contact GHJ’s State and Local Tax Practice. To learn more about how GHJ partners with the entertainment industry to achieve success, please contact GHJ’s Entertainment Practice.