Was finished artwork sent by modem subject to California sales tax, and what evidence should the advertising agency retain?

Plain-English summary

An advertising agency sent preliminary and finished artwork by modem under a contract that specified electronic delivery. The recipient acknowledged whether the artwork had arrived, and the agency transferred no physical form of the artwork.

The Legal Division said remote transmission by modem was not a sale of tangible personal property. The agency's finished-art charge was therefore not subject to sales tax. The same reasoning could apply to different types of artwork, including a photographic image, rather than only an illustration.

The agency still needed evidence for audit purposes. The opinion suggested keeping the recipient's acknowledgment, noting modem delivery on the invoice, and retaining a hard copy of the artwork with a dated electronic-delivery notation.

Electronic delivery did not exempt the supplies and materials used to create the artwork. If the agency bought tangible property on its own behalf, tax applied to that purchase; if it bought as the client's agent, tax applied to the vendor's sale to the client.

What this means for you

Advertising agencies and commercial artists

Document electronic delivery at the time of the transaction and avoid transferring a physical copy if claiming the modem-delivery treatment described here.

Clients

An acknowledgment of receipt can help show that delivery occurred remotely rather than through tangible media.

Accountants and tax professionals

Separate the output transaction from the agency's input purchases. A nontaxable electronic delivery did not make production supplies tax-free.

Common questions

Q: Was finished artwork transmitted by modem taxable?

A: No, under the assumption that no physical artwork was transferred.

Q: Did the rule apply only to illustrations?

A: No. The opinion used a photographic image as another example.

Q: What evidence did the opinion suggest retaining?

A: A receipt acknowledgment, an invoice notation of modem delivery, and a hard copy with a dated electronic-delivery notation.

Q: Were the agency's supplies exempt because the final art was sent electronically?

A: No.

Citations and references

• California Revenue and Taxation Code §§ 6006(a), 6007, and 6051
• California Civil Code § 1656.1
• California Sales and Use Tax Regulations 1540(a)(1), 1540(b)(4)(A), 1540(b)(4)(B), and 1698(d)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0032.250
• Original supporting opinion: 100.0032.250 PDF

Original ruling text

100.0032.250

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 323-3787
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
____
JOHN CHIANG
Acting Member
Fourth District, Los Angeles
______

January 28, 1997

E. L. SORENSEN, JR.
Executive Director

Mr. V--- C----- --- --- Inc.
XXX --- ---, Suite XXXX
---, NY XXXXX
Re:

Unidentified Taxpayer

Dear Mr. C---:
This is in response to your letter dated December 2, 1996 to Assistant Chief Counsel Gary J. Jugum regarding the applicability of sales and use tax to charges by an advertising agency. We understand that your client is an advertising agency that transfers both preliminary and finished art by modem. You state that a contract explicitly details this method of delivery. We understand that an acknowledgment of receipt evidences the transfer of the artwork by modem, because the recipient of the artwork acknowledges the receipt or lack of receipt of the artwork by modem. We assume that the advertising agency makes no transfer of the artwork in a physical form. We understand that your inquiry is whether the charge for the transfer of finished art, which is transmitted by modem, is subject to California sales tax. You also ask whether the term “illustration,” set forth in Business Taxes Law Guide Annotation 100.0037 (3/11/94), is merely an example of the type of property that can be transferred by modem. Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. Although the sales tax is imposed on the retailer, the retailer may collect sales tax reimbursement from the purchaser if the contract of sale so provides. (Civ. Code § 1656.1.) A “sale” means any transfer of title or possession, in any manner or by any means whatsoever, of tangible personal property for a consideration. (Rev. & Tax. Code § 6006(a).) An advertising agency’s transferring title to or possession of finished art in tangible form in any manner or by any means comes within the definition of a sale. (See Id.; Reg. 1540(b)(4)(B).)

Mr. V--- C---

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January 28, 1997
100.0032.250

On the other hand, the Board of Equalization has taken the position that the transfer of information, including finished art, by remote telecommunications such as modem, is not a sale of tangible personal property. Thus, tax does not apply to charges for artwork that is transferred by modem. (BTLG Annots. 100.0031 (5/31/94), 100.0037 (3/11/94).) You are correct that an “illustration” is an example of the type of property that can be transferred by modem. For example, the advertising agency could transfer the image of a photograph by means of modem, and the transfer of that image would not be subject to sales tax, as it is also not a transfer of tangible personal property. You asked whether Regulation 1540(b)(4)(A) regarding preliminary art is applicable to finished art as well. Under Regulation 1540(b)(4)(A), if the preliminary art is prepared on data processing equipment, the advertising agency must produce a hard copy of each of the roughs, visualizations, layouts or comprehensives presented for client approval, and retain such copies in accordance with subdivision (d) of Regulation 1698. We understand that you are asking whether the advertising agency must also retain a hard copy of the finished art, when the advertising agency transmits the finished art by modem. For audit purposes, the advertising agency must retain some form of evidence to support the claim of transmittal by modem. (See BTLG Annot. 100.0031 (5/31/94).) Such evidence could include the acknowledgment of receipt indicating the recipient’s receipt of the artwork by modem. We also 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 ask: “In the event subject client engages in this type of activity i.e., the transmission via modem, would the purchase of any tangible personal property not transferred be subject to use tax?” We assume that you are asking whether the transfer of tangible personal property to the advertising agency for use in producing the preliminary or finished art, is subject to sales tax, even if the transfer of finished art is rendered a nontaxable transaction when it is transmitted by modem. The answer is yes. A “retail sale” means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property. (Rev. & Tax. Code § 6007.) To the extent that the advertising agency acts on its own behalf in acquiring the tangible personal property, it is the purchaser of the property with respect to the supplier, and tax applies to the sales of supplies to it. (Reg. 1540(a)(1).) To the extent that the advertising agency acts as an agent of its client in acquiring tangible personal property, tax applies to the vendor’s sale of the property to the client. In other words, the nontaxable nature of the transfer of finished art by modem does not render the sale of supplies and materials to either the advertising agency or its client nontaxable.

Mr. V--- C---

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Please write again if you have further questions.
Very truly yours,

Charlotte Chyr
Tax Counsel
CC:cl
cc:

Out-of-State District Administrator

January 28, 1997
100.0032.250