Was artwork sent only by modem nontaxable even when the artist chose that delivery method solely to avoid sales tax?

Plain-English summary

A design business asked whether artwork delivered by modem was nontaxable when avoiding sales tax was the only reason for choosing that method.

The Legal Department said yes. Transmitting information by telecommunications did not transfer tangible personal property, so the artist's charge was nontaxable regardless of the delivery motive.

The opinion recommended noting modem delivery on the invoice and retaining a hard copy with a dated electronic-delivery notation. Federal “work made for hire” rules also did not change the sales-tax conclusion: even if the client owned copyright interests before transmission, the modem transfer still conveyed no tangible property.

Only the requester could rely on the written advice for section 6596 relief.

What this means for you

Commercial artists

Delivery method and records mattered more than the tax motive under this opinion.

Clients

Owning the copyright interest did not turn the telecommunications event into a physical-property transfer.

Accountants and tax professionals

Retain contemporaneous invoice and hard-copy evidence, and distinguish general published guidance from taxpayer-specific reliance protection.

Common questions

Q: Did a tax-avoidance motive make modem delivery taxable?

A: No.

Q: What evidence did the opinion suggest?

A: An invoice notation and a hard copy of the artwork with a dated electronic-delivery notation.

Q: Did client copyright ownership change the sales-tax result?

A: No.

Q: Could every artist rely on this letter under section 6596?

A: No. Only the requester could claim that reliance protection.

Citations and references

• California Revenue and Taxation Code § 6596
• 17 U.S.C. § 201

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0031
• Original supporting opinion: 100.0031 PDF

Original ruling text

100.0031

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

May 31, 1994

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

--- --- ----- --- ----- --- --Re:

SR -- -- - ------ - ABC Design

Dear Mr. ---:
This is in reply to your March 14, 1994 letter regarding the application of sales tax to your charges for designs when you transfer them by modem. You first asked whether you are correct in assuming that your charge for the artwork is nontaxable if you deliver it by modem and your reason for that mode of delivery is solely to avoid the sales tax. Yes, you are correct. The charge is nontaxable, because the Board's legal staff has long taken the position that a person who transfers information by telecommunications does not thereby make a transfer of tangible personal property. You asked whether other artists may depend on the information in this opinion. Revenue and Taxation Code section 6596 provides that the Board may relieve a person from the liability for sales and use tax when the person's failure to make a timely return or payment is due to the person's reasonable reliance on written advice from the Board. For purposes of the section, the Board may find the person's failure to make a timely return or payment only if the Board finds that all of the following conditions are satisfied: “(1) The person requested in writing that the board advise him or her whether a particular activity or transaction is subject to tax under this part. The specific facts and circumstances of the activity or transaction shall be fully described in the request. “(2) The board responded in writing to the person regarding the written request for advice, stating whether or not the described activity or transaction is subject to tax, or stating the conditions under which the activity or transaction is subject to tax.

Mr. --- ---

-2-

May 31, 1994
100.0031

“(3) In reasonable reliance on the board's written advice, the person did not do either of the following: (A) Charge or collect from his or her customers amounts designated as sales tax reimbursement or use tax for the described activity or transaction. (B) Pay a use tax on the storage, use, or other consumption in this state of tangible personal property. “(4) The liability for taxes applied to a particular activity or transaction which occurred before either of the following: (A) Before the board rescinded or modified the advice so given, by sending written notice to the person of the rescinded or modified advice. (B) Before a change in statutory or constitutional law, a change in the board's regulations, or a final decision of a court, which renders the board's earlier written advice no longer valid.” Section 6596 goes on to provide that only the person making the written request is entitled to rely on the board's written advice to that person. Although the information we provide you in this opinion of course is applicable to similar sales by other artists, only you may rely on this advice for purposes of Section 6596. You asked what documents an artist should retain as evidence of the transmission of the image by telecommunications. As you noted, it is easier to prove that something was delivered rather than prove that it was not delivered. You also noted that it is rare for commercial artists to obtain purchase orders for their jobs. We suggest that you note on the invoice that delivery was by modem and retain a hard copy of the artwork with a dated notation of the electronic delivery. Finally, you noted that under the “works made for hire” provisions of the federal copyright law (Title 17, U.S. Code § 201), the client is the creator of the artwork. You asked whether that fact has any bearing the taxability of the artist's charge. No, we believe that, although the client may own a copyright interest in both the image and the artwork even before the image is transmitted by modem, the artist's transmission of the image by telecommunications does not result in a transfer of tangible personal property for purposes of the Sales and Use Tax Law.

Mr. --- ---

-3-

May 31, 1994
100.0031

We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:plh
cc:

Out-of-State Sacramento District Office – OH
Mr. Glenn Bystrom - MIC:43