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News and Features: Inquiries

Hollywood stars not paying taxes?

BY: Bruce Mohl
Issue: Spring 2011

Some of Hollywood's hottest stars may be shortchanging Massachusetts on their taxes.

A brief reference at the end of the state Revenue Department’s latest report on the film tax credit says the agency received no income taxes on residual payments to actors and directors who shot movies in Massachusetts between 2006 and 2009. There was no further explanation, but the implication was that actors and directors like Ben Affleck, Steve Martin, Tom Cruise, and Martin Scorcese aren’t paying all the taxes owed on money they technically earned in Massachusetts.

Robert Bliss, a spokesman for the Revenue Depart­ment, says the agency is looking into the issue. He declined to elaborate.

Residual payments are one of the quirks of the movie business. Actors and directors are typically paid salaries for their work on a movie, but many also get a cut of any revenues or profits generated after the film’s release. These residual payments often are triggered when a movie goes into DVD release or is sold to television.

Proponents of the state’s film tax credit often call the salaries of big stars the gift that keeps on giving, since big-name actors pay taxes on their initial salary for a film and are supposed to keep paying taxes to the state as income from residuals flows in. But so far tax revenue from residuals has been the gift that never arrived.

Revenue Department officials aren’t sure why they aren’t receiving tax payments on residuals. Part of the problem is they aren’t privy to deals on income derived after a movie wraps and is released. Indeed, DOR officials have had some problems even collecting taxes on the initial salaries paid to actors and directors.

 “The first priority for DOR has been to make sure that nonresident actors are paying income withholding tax on the salary paid for their work in Massachusetts at the time of production,” Bliss says.

Movie productions are fond of creating complex financial structures to reduce their tax exposure. Producers often pay stars through intermediary companies called loan-outs, an arrangement that makes it difficult to determine how much has been paid and to whom.

To end the confusion, DOR last year approved new regulations requiring movie production companies to remit withholding taxes from a star’s check before an application is submitted for the state’s film tax credit. But those regulations did nothing to address the payment of taxes on income generated after the film wraps and all the actors and directors have gone home to California.

Joe Maiella, president of the Massachusetts Pro­duc­tion Coalition, a trade group formed to boost the state’s budding film industry, often mentions taxes on residuals as a benefit of the state’s film tax credit. He says the fact that the state hasn’t received any of the tax revenue means the Revenue Depart­­ment will probably need to do some detective work to track it down.

“To accurately assess this, it would seem the DOR would have to identify every principal actor and director who has worked on a feature film, commercial, TV pilot, or PBS program since 2005, determine who of those are out-of-state residents, and determine if taxes had been paid on residual income over the last six years,” he says.

The Revenue Department’s most recent report on the film tax credit generated some concern among supporters of the credit—and provided fresh ammunition to those who oppose it. The report said the credit had spurred $319 million in new spending on movies, TV shows, and commercials in 2009, but only a third of the money went to Massa­chu­setts residents or businesses. The rest flowed out of state.

A delegation, led by Secretary of Housing and Economic Development Greg Bialecki and former actor and now ad man John Dukakis traveled to Hollywood in February seeking to reassure studios that the state’s film tax credit wasn’t going to fall victim to state budget cutbacks. No one was releasing details of the discussions with Hollywood studios, but it’s a good bet the subject of unpaid taxes by actors and directors never came up.

Homepage photo of Leonardo DiCaprio in Shutter Island, copyright Paramount Pictures, courtesy the Patriot Ledger.
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