Was a graphic artist's charge taxable when the artist personally loaded digital artwork into the client's computer and kept the transfer disk?

Plain-English summary

A graphic artist created advertising artwork digitally and proposed taking a copy to the client's premises on removable media, personally loading the file into the client's computer, and then leaving with the original disk still in the artist's possession.

The Legal Division said this method did not transfer tangible personal property and the artist's charge was not subject to sales tax. The same was true for a transfer made only by modem.

The result changed if the artist gave the client artwork in tangible form, including paper, a diskette, or tape. In that situation, tax applied to the artwork charge.

For audit support, the opinion urged the artist to retain a purchase order describing the work and the matching invoice for every job handled through direct computer loading.

What this means for you

Graphic artists and designers

The delivery facts controlled. The artist had to operate the client's equipment, load the file into the client's computer, and remove the artist-owned transfer media.

Clients

Receiving a file in computer memory was treated differently from taking possession of the disk or another physical copy.

Accountants and tax professionals

Preserve job-level evidence showing who loaded the file, where it was loaded, and that no tangible copy was transferred.

Common questions

Q: Could the artist carry the file to the client on a removable disk?

A: Yes, under the described method, if the artist kept the disk and personally loaded the file into the client's computer.

Q: What if the artist handed the disk to the client?

A: The opinion said tax applied when artwork was transferred in tangible form.

Q: Was modem delivery taxable?

A: No, if no tangible artwork was also transferred.

Q: What documentation did the opinion recommend?

A: A purchase order describing the work and a corresponding invoice for each job.

Citations and references

• California Sales and Use Tax Regulation 1540(c), as quoted in the opinion

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0037.400
• Original supporting opinion: 100.0037.400 PDF

Original ruling text

100.0037.400

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 445-6450
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego

May 14, 1997

KATHLEEN CONNELL
Controller, Sacramento

JOHN CHIANG
Acting Member
Fourth District, Los Angeles

Mr. S--- L. J--S--- J--- C--- Services
XXX --- Avenue
--- ---, CA XXXXX

E. L. SORENSEN, JR.
Executive Director

Account No. SR -- XX-XXXXXX
Dear Mr. J---:
This is in reply to your April 14, 1997 letter regarding the application of sales tax to your charges for artwork. You have provided the following facts: “I am a graphic artist and creative services consultant, dealing mostly in advertising. “While there may be times that I will provide my clients with a printout or hand-drawn layout or design, I find that most requests these days are for computer produced design delivered as digital information.” Enclosed is a copy of Sales and Use Tax Regulation 1540, Advertising Agencies, Commercial Artists and Designers. The regulation provides at subdivision (c): “The tax applies to the entire amount charged by commercial artists or designers for items of tangible personal property such as drawings, paintings, designs or sketches transferred to the client, whether or not the property is suitable for display or is useful for actual reproduction by photo-mechanical or other processes. “Tax does not apply to separate charges for preliminary art as defined in (b)(4)(A).” Tax applies to your charges to a client for artwork whether you transfer the artwork on paper or a computer diskette or tape. If you transfer artwork to the client merely by modem, and do not transfer the artwork in any form of tangible personal property, tax does not apply to your charge for that transfer of digital information. Similarly, if you create artwork in digital form and operate the client’s

Mr. S--- L. J---

-2-

May 14, 1997
100.0037.400

computer to transfer the artwork into the memory of the client’s computer, you do not thereby transfer tangible personal property to the client. In that case, you must actually operate the customer’s computer equipment to transfer the artwork into the computer’s memory. If you transfer the artwork to the client in any tangible form such as printed copies or diskettes, tax applies to your charge. You sent a copy of a form titled “Statement of Business Protocol for Sales Tax Purposes,” which you intend to have a client complete. By signing the statement, the client would agree that you would handle your layout or design work in the following manner. Projects completed on your computer would be copied onto to a digital storage file format such as “zip, syquest, floppy disc (or via internet).” You will transfer the file to the client’s premises and transfer the file of digital information onto the client’s computer system. You would then remove the original disk, which will remain in your possession at all times. The copied file on the client’s computer would then become the client’s property which you or the client may then review, alter, or correct, if the client requests. The client may then manufacture tangible, hard copy prints of the file. If you perform the work as described above, your transfer of the digital file to the client would not be a transfer of tangible personal property, and your charge would not be subject to sales tax. For audit purposes, we urge that, for each job you perform as described, you obtain and retain a purchase order describing the work you perform and a copy of the invoice for the charges represented by the purchase order to document the nontaxable transfer of artwork to the client’s computer. We hope this answers your question; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:sr
Enc.
cc: --- --- District Administrator - --