Was an advertisement designer's sale taxable when the out-of-state client received only a proof and bill, but the final composite film went to a California magazine?

Plain-English summary

An advertisement designer received penciled outlines from clients, bought camera work and typesetting, developed the advertisement, sent proofs to the client, ordered color composite film, and delivered that final film to a California magazine. The client was outside California and received only a proof and bill directly.

Tax counsel concluded that the designer's sale was taxable. Delivery of the composite film to the California magazine on the client's behalf transferred tangible personal property in California. The client's out-of-state residence did not change that result.

The letter also limited resale purchasing. The designer could buy for resale only property acquired for incorporation into the product sold to the client before use.

Property used to manufacture the final product was instead taxable when purchased by the designer. A photograph used to create composite film was the example: transferring its image did not make the physical photograph an ingredient or component of the film.

What this means for you

Advertising designers

Track where the final tangible product is delivered, including delivery to a publisher or magazine acting for the client.

Businesses serving out-of-state clients

An out-of-state billing address does not establish an exempt interstate sale when the client's property is delivered in California.

Accountants and tax professionals

Separate items physically incorporated into the product sold from photographs, tools, and other production inputs used by the designer.

Common questions

Q: Did mailing the proof and bill out of state make the sale exempt?

A: No. The final composite film was delivered in California.

Q: Was the California magazine treated as receiving the film for the client?

A: Yes. The letter treated delivery to the magazine as a California transfer on the client's behalf.

Q: Could every design input be bought for resale?

A: No. Only property bought for incorporation into the product sold before use qualified under the letter's analysis.

Q: Did a photograph become part of the film because its image was copied?

A: No. The physical photograph did not become an ingredient or component merely because its image was transferred.

Citations and references

• California Revenue and Taxation Code § 6051
• California Sales and Use Tax Regulations 1525(a) and (b), 1525.1, 1540(d), and 1620(a)(3)(A)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0074.500
• Original supporting opinion: 100.0074.500 PDF

Original ruling text

100.0074.500

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

May 16, 1988

Ms. S--- F. L--S--- G--XXXX --- Street, Suite XXX
---, CA XXXXX
SR -- XX-XXXXXX
Dear Ms. L---:
This is reply to your March 24, 1988 letter regarding the application of sales tax to your charges for designing advertisements. You noted the following facts: “My clients send penciled outlines of what they want in their ad. I then buy camera work for line art, spec and buy typesetting, design the ad, send them federal express broofs (sic), make corrections, order and buy color composite film, and finally I send composite film to the magazine here in California. The only thing I send out of state is a proof and a bill. All items are purchased for resale and do not leave the state of California.” The California sales tax is imposed upon retailers for the privilege of making retail sales of tangible personal property in California. (Rev. & Tax. Code § 6051.) When, pursuant to a retail sale, you transfer title to or possession of tangible personal property in California, either directly to the purchaser or to the purchaser’s representative, the sale is subject to sales tax. The purchaser’s not being a resident of this state has no bearing on the application of the sales tax. (Sales and Use Tax Reg. 1620, subd. (a)(3)(A).) Therefore, when you create an advertisement for an out-of-state client and transfer the composite film final product to a magazine in California on behalf of your client, your sale is subject to sales tax. Your letter indicates that you purchase all items for resale. You may purchase for resale only the tangible personal property which you purchase for the purpose of incorporating into the product which you sell to the client prior to use. (Reg. 1525, subd. (b); Reg. 1525.1.) You may not purchaser for resale, and tax does apply to the sale to you of property you purchase for use in manufacturing the final product. (Reg. 1525, subd. (a).) For example, if you purchase a photograph and have it made into a composite film, tax applies to the sale to you of the photograph. The

Ms. S--- F. L---

-2-

May 16, 1988
100.0074.500

photograph does not become an ingredient or component part of the composite film merely because the image of the photograph is transferred to the composite film. (Reg. 1540, subd. (d).) We hope this answers your question; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Tax Counsel

RLD:sr