Previously we reported on the Music Modernization Act, a bill proposed to ensure digital music services pay fair royalties to the copyright holders, and where it stands during its process to be become an enacted bill. As we are aware from the timeless SchoolHouse Rock classic “I’m Just A Bill”, in order to enact a bill it takes time and votes from different levels of Congress. The bill passed the House unanimously April 25, with a revised and amended version coming out of the Senate Judiciary Committee June 28. If the bill passes a Senate vote, it goes back to the House for a final sign off.
The bill seemed to be moving full steam ahead with no objections from any party until lobbyists discovered how much control private entities would lose to the newly formed MLC, Mechanical Licensing Collective. These offered amendments from the private sector have put the bill in danger of not passing. Technically, this copyright bill has until the end of the year to pass but legislators are targeting Oct 12 as the deadline. This date is before Congress adjourns for the midterm elections because after Congress goes on vacation, nothing new will be passed.
First the MMA received push back from The Blackstone Group, owners of SESAC and The Harry Fox Agency. They proposed an amendment that would allow the current mechanical licensing organizations to stay in control of mechanical royalties collection and administration. The Blackstone Group questioned why a government-commissioned mechanical licensing body was necessary, when these organizations already exist. After negotiations, the reps for the MMA clarified the restriction on what licenses can be administered by the MLC, which include sync, lyric and performance licenses. This allowed groups like SESAC and Harry Fox to maintain their clientele and continue business as usual, thus still allowing the MLC to collect data and administer mechanical royalties.
After putting out that fire, the MMA is now seeing restraints from another organization. SiriusXM is fighting a portion of the bill’s CLASSICS Act provision which calls for digital and satellite radio to pay royalties for playing pre-1972 master recordings, while terrestrial radio would be exempt.
The SiriusXm CEO has criticized the bill for expanding the royalty requirements for satellite radio without also expanding the requirements for terrestrial radio. Traditional radio doesn’t pay for the broadcast of any sound recordings and this bill does nothing to change that. During a period in which SiriusXM paid 2.2 billion for the use of post 1972 works, terrestrial radio paid nothing. The future of radio is digital and it would be wise for the drafters of the MMA to carve out language to fairly compensate artists in both the digital and terrestrial areas. At this point, neither side has figured out a solution and they only have a couple months left to do so.
Moving forward, the Music Modernization Act has only three paths to move through the Senate: 1. by speedy unanimous verbal consent, which would require all 100 senators to vote yes; 2. the more difficult floor process, which includes time for hearings and would require support of at least 60 Senators (46 Senators have signed on as co-sponsors); or 3. by attaching the MMA as a rider to another piece of legislation that is sure to pass.
Please continue to follow along the MMA’s progress (or lack thereof) here at L4M, @l4m, tkhlaw.com, @TrogliaKaplan or email us for more info.
Wait a second…What just happened? Did the United States government actually try to address a problem that has effected millions of Americans for years by introducing a Bill before Congress? Did those blowhards in Washington D.C. stop fighting and tweeting and actually do the job that they were sent there to do?
Here is a draft of H.R. 4706, The Music Modernization Act of 2017.
For years now the streaming revolution has completely disrupted the way consumers listen to music, the way musicians release music and the way rights holders (musicians, publishers, labels etc.) get paid. With the recent onslaught of litigation against giants like Spotify and Apple Music, lobbyists in D.C. seem to have been effective in getting our legislative branch to try to address an over decade old issue.
With the goal of ensuring that streaming platforms (a) don’t get sued, (b) mechanical royalty rates are set as independently as possible and (c) theoretically, getting money to the right people in a faster way, the MMA sets up several new processes for the music industry.
In typical Washingtonian fashion, the Bill introduces yet another bureaucratic body to oversee and administer digital licenses and pay all copyright owners (so long as your works are registered correctly). While, in theory, this sounds like an intelligent move, there are numerous questions about the efficiency of yet another “agency” involved in paying monies to the correct rights holders. We think it is definitely a move in the right direction by centralizing all digital blanket licenses and the decision makers for mechanical royalty rates (without a commission or overhead cost put on the backs of rights holders), but the move begs the question of how effective other government led regulatory bodies have been in the past (Government Shutdown ring a bell?). Lobbyists have touted this move as a departure from the tenured “judges” that rule over the PRO’s (ASCAP and BMI) and allows for a more impartial method in determining amounts paid for performance royalties to songwriters.
Since the inception of streaming services, platforms have avoided paying mechanicals because after filing the required Notice of Intent (or NOI) there is no further requirement to determine the actual right holder of a particular song. So if your information isn’t found or hasn’t been registered, Spotify, Apple, Amazon etc. haven’t had to pay you for streaming your license. The MMA attempts to do away with this giant loop hole. The new oversight/governing body will attempt to collect all data (by working with Content ID/Google and other data aggregators) and theoretically make sure that every song is registered so that every right holder is paid (some minuscule amount) for every stream.
The Bill then sets up a more “free-market” system for determining what mechanical royalty is actually paid to the rights holders (now that they will all be contained within this database). The rights holders and the platforms will have the ability to negotiate and set rates rather than relying strictly on government set rates.
The Bill was introduced to the House Judiciary Committee before the end of 2017 and there it sits. We will be watching carefully, along with millions of musicians and industry folks, to see how it progresses, what changes are made and how much pork is added to it.
Recent proposed legislation will make the illegal streaming (not downloading) of copyrights a felony rather than just a misdemeanor. Check out the proposed Senate Bill here, entitled Commercial Felony Streaming Act. This is not a surprising move as the music industry, headed up by the RIAA, has been on the warpath against illegal file sharing sites like Limewire for quite some time. The RIAA, backed by the labels, has essentially drained the pockets of Limewire (and others before that) in litigation. Now, with the deep pockets of the Hollywood lobby behind it, the government is stepping in to add an extra and potentially devastating punch not only to file sharing/downloading sites, but to those sites which illegally host streaming content.
The proposed Bill modifies the current punishment provision of Section 2319 of Title 18 (Criminal Infringment of a Copyright). What was once a misdemeanor, punishable primarily by fines, will now carry a much more severe penalty of higher fines and potential jail time. The penalties will be identical to those imposed against the file sharing/downloading sites. While the Bill is aimed at the proprietors of the sites that provide illegal content, experts expect to eventually extend to the users as well.
The Senate subcommittee on the Judiciary approved the proposed Bill and it will go before a vote of the full Senate shortly. Stay tuned for more updates.
More than three months after the House passes a version of the Tax Extender Bill of 2009 (HR 4213), the Senate got off its collective rear end and passed a modified and heavily pork filled version of the Bill today. By a vote of 62 to 36 this persistent piece of legislation made it one step closer to becoming law (remember it still needs the President’s signature). Of importance to all of us, the Extender Bill contains a one year extension of Section 181. All film makers and investors may now breathe a collective sigh of relief.
Now that the extension is a whisker away from becoming law, all you film makers can start approaching investors and their confused accountants to tout the extradorinary tax incentive that is Seciton 181. Remember the tax dedcution that 181 offers is against passive income (although there are subtle nuances that allow active investors to take the deduction against active income). Also, musicians, videographers, web casters, 181 can be used for all qualifying films; which is to say it is not just for feature length films.
We at L4M routinely work with film makers in planning and drafting their film investment documents. Now with the help from our intrepid Senators, we can once again add language to these documents regarding Section 181 (and State tax credits) that make film investment a bit more attractive.
Now that 181 has passed, stay tuned for other development in film and music law. Thanks for reading and for all of your input.
I would wager that not many film makers and musicians have the ability to quote tax law to business partners or potential investors. Understandable as most lawyers cannot do it either. However, if you are a film maker or music video producer, Internal Revenue Code Section 181 is the tax section to know, remember and love.
I have written articles and blog posts on the benefits of Section 181. (Here they are again for your perusal: Why Don’t Use It? and the Joys of Section 181). As with most of the tax code, Section 181 is not crystal clear and its drafting style leaves much to be desired. Consequently, the articles I have written and others out there in the blogosphere have sparked a lot of conversation and questions.
So in an effort to help out my readers and try to answer some questions, I went right to the source, the IRS. Out of respect to the nice and informative IRS representative that I spoke with, I am not going to reveal his/her contact info (the IRS gets enough enraged callers on a daily basis). However, rest assured that this rep is THE person in all of the IRS to talk to regarding both Section 181 and Section 199 as they relate to investments in film and the available tax credits.
The first question I asked is one that has been posed to me on several occasions: Will Section 181 be renewed at the end of 2009? The IRS answer (ALL QUOTES ARE PARAPHRASES OF OUR CONVERSATION): “We have no solid answer one way or the other; BUT, with all the stimulus packages out there and the states extending their own tax incentives, we would not be surprised if Section 181 was renewed again.” The IRS pointed to the end of the year scramble last year to get Section 181 renewed for 2009. Chances are the renewal will again be packaged with other legislation and presented to Congress near the end of the year.
Keep this in mind if you are planning to begin filming or production at the end of 2009; as long as you start principal photography and have a comprehensive budget in 2009, the credit will apply to the entire production even if it carries over to 2010. I would not recommend that you procrastinate until December 31, 2009 to start shooting, but a good fact to keep in mind.
The next question I had was another common question asked by readers: How “active” does an investor have to be to take a Section 181 tax credit against active income? The IRS answer: “It depends.” There is no cut and dry rule as to the extent that an investor must be active in the production of a film. The analysis will be fact based; common sense will apply. If you have an investor who comes on set once to puff out his chest and eat Craft Services, he likely will not qualify as an active participant under Section 181. If you simply give an investor a title like Co-Executive Producer, but she never even read the script and lives in Nova Scotia, she will not qualify as an active participant. If however, you keep your investor involved in the production and he actually has the ability to provide feedback and advice, he may qualify as an active participant in the production.
Finally, I asked the IRS: Does it matter if an entity invests in a film and applies of the credit? The IRS answer: “No.” If done correctly and with the aide of a competent accountant, an entity (limited liability company, corporation, trust, partnership) can invest in a film project and apply for the credit.
Keep in mind, an investor must actually need Section 181 for it to make sense. If there is a year where a passive (non-active) investor does not have any passive income coming in (which is probably the norm these days), the tax credit does no good. Think of it this way, if you have $0 in tax liabilities for 2008 and you invested $50,000 that year, the IRS is not going to simply write you a check for the $50,000 you invested in the film. You must actually OWE money to take the deduction.
If you are looking for more help in the area, there are some other great posts out there. Check out “Minimizing Investor Risks Through Film Subsidies” by Justin Evans.
Remember of course, that you should ALWAYS consult an attorney and accountant before offering investment opportunities to potential investors. The law in this area is confusing (obviously), so hire an expert to help you on the way.
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A while back a lot of movies were being filmed in Canada. Was it the pristine arctic air? Perhaps the free flowing Molson Lagers? No, it was for the more traditional reason of saving money. In 2004, the United States government with a lot of help from the powerful Hollywood lobby passed into law the American Jobs Creation Act of 2004. Within the Act lay the somewhat ambiguous and benign Section 181.
Section 181 was the government’s response to what had become known as Runaway Productions; American produced movies filmed on foreign soil. Section 181 allowed film makers to entice investors with incredible federal tax incentives. An investor who invested his money in a film production which was primarily (75%) filmed and produced in the United States could write off every dollar that was spent on the movie in the year in which it was spent as a tax deduction against his or her passive income. If you are still reading, several questions are probably popping up, such as: What does any of this mean? Why would a musician care? or Who has any money to invest?
Fair questions. What Section 181 means is that while the rest of the once upon a time “safe” investments, like the stocks and real estate, are hemorrhaging money, movies actually are thriving. Investors are seeing great returns on their investments. Proof, Beverly Hills Chihuahua made $29 Million last weekend. I mean come on, it wasn’t even the taco bell Chihuahua. Even if your movie investment doesn’t make money, an investor is safeguarded by the handsome tax breaks of Section 181. Meaning, the tax deduction an investor can take guarantees a certain rate of return regardless of the movies commercial success.
Why would a musician care about this? Well, as I have written in the past, Section 181, as well as the various state tax incentives, also apply to movie videos. If your band wants to make a kick ass video to air on MTV2 or to virally link to your facebook, myspace, ning, youtube, and personal webpage but don’t have the coin to pay for the crew and equipment, entice your grandfather with the benefits of 181. Seriously, if handled correctly and accounted for in the right manner, the tax benefits may cover more than 50% of the costs of the video.
Why am I writing about this now? A couple of reasons. First, Section 181 was set to expire on December 31, 2008. Consequently, if you want to capitalize on the tax breaks you need to have a film/video budget complete as well as shoot one day of principal photography by the end of the year. The second reason is that the House of Representatives in addition to trying to solve the financial crisis, recently passed H.R. 7060 which, in addition to extending a number of other tax incentives, extended Section 181 of the 2004 American Jobs Creation Act from December 31, 2008 to December 31, 2009. The bill is alas, still just a bill and must pass the house and be signed by the lame duck President to be effective, but its a positive start. Follow its progress here: http://www.govtrack.us/congress/bill.xpd?bill=h110-7060. If you don’t remember how a bill becomes a law, I’ve embedded a very helpful video at the top!
Whether it passes or not, you will need the help of a lawyer and accountant to take advantage of the tax benefits. Sounds like a pain, but not as much of a pain as shooting your video on your flip phone and using your flash light to create a mood.
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