Which charges were taxable when a California graphic designer delivered computer-created finished art on paper or disk?

Plain-English summary

A graphic designer prepared ad layouts on a computer, printed multiple layouts for client review, revised the selected design, and ultimately delivered approved finished art on a disk.

The Legal Division said the finished art was tangible personal property when delivered in California, whether on paper or a computer disk. The designer's charge for that finished art was therefore subject to sales tax.

Separately stated preliminary-art charges could be excluded from the taxable measure even when the work was computer-created. The designer needed to make and retain hard copies of roughs, visualizations, layouts, or comprehensives presented for client approval, consistent with Regulations 1540 and 1698.

Potential preliminary-art charges included sketches, pre-approval meetings, photo-shoot time, and research. But meetings or art direction performed after approval to complete finished art were not automatically preliminary work, so records had to substantiate the timing.

What this means for you

Graphic designers

Delivery on a disk did not make finished art nontaxable under this opinion. Separate genuine preliminary work on invoices and preserve the supporting versions.

Clients buying design work

The point when you approve the designer to proceed to finished art affects which later charges can be treated as preliminary.

Accountants and tax professionals

Match invoice categories to retained work product and approval chronology. A label such as “meetings” or “art direction” does not establish that the work occurred before final-art approval.

Common questions

Q: Was finished art taxable when delivered on a computer disk?

A: Yes, just as when delivered on paper.

Q: Could computer-created preliminary art be excluded?

A: Yes, if the charge was separately stated and the required supporting records were retained.

Q: What records did the opinion call for?

A: Hard copies of the roughs, visualizations, layouts, or comprehensives presented for client approval.

Q: Were all meetings and art-direction charges nontaxable?

A: No. The designer had to substantiate that the work occurred before approval to complete finished art.

Citations and references

• California Revenue and Taxation Code § 6051
• California Sales and Use Tax Regulation 1540(b)(4)(A)
• California Sales and Use Tax Regulation 1698(d)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0118
• Original supporting opinion: 100.0118 PDF

Original ruling text

100.0118

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

June 3, 1997

KATHLEEN CONNELL
Controller, Sacramento
_______
JOHN CHIANG
Acting Member
Fourth District, Los Angeles

E. L. SORENSEN, JR.
Executive Director

Ms. C--- S--C--- S--- Design
XXXX --- Drive
--- ---, CA XXXXX
Account No. SR -- XX-XXXXXX
Dear Ms. S---:
This is in reply to your March 31, 1997 letter regarding the application of sales tax to your charges for graphic design. We understand your procedure to be as follows. You get a request for a job. You then give the client an estimate for the job, including your charge for all the time and materials you need to complete the job. As an example, you describe an ad layout. When your client approves the estimate, you prepare sketches. You do not show those sketches to the client; rather, you decide the sketches with which you will proceed. On your computer, you create a page design that is the size of the final ad, and you incorporate your ideas into two or three layouts. You laser print the two or three layouts to present to the client. The client suggests changes which you incorporate. You then work on the original idea page, since it is already the correct size, and you create the final art. You present the final art in color to the client who makes from one to six additional changes. You then provide the client the final approved art on a disk. The Sales and Use Tax Law imposes the sales tax upon all retailers at the applicable rate of the gross receipts from the retail sales of all tangible personal property in this state. (Rev.
& Tax. Code § 6051.) When you provide the final art to the client in the form of tangible personal property in this state, whether the final art is on paper or computer disk, your charge is subject to sales tax. As noted in Sales and Use Tax Regulation 1540, subdivision (b)(4)(A), you may exclude from the measure of tax your separately stated charges for preliminary art even where you prepare the art on a computer. As noted in the regulation, you should produce a hard copy of

Ms. Cheryl Sutton

-2-

June 3, 1997
100.0118

each of the roughs, visualizations, layouts, or comprehensives you present for client approval and retain the copies for audit purposes in accordance with Regulation 1698, subdivision (d). Your nontaxable preliminary art charges may include your charges for the sketches, the meetings you attend prior to obtaining approval to proceed to finished art, the time you spend on the photo shoot, and your research time. You ask whether you can break out on your billing, and consider nontaxable, “preliminary art,” “meetings,” and “art direction.” Given that you may conduct meetings with a client or perform art direction after obtaining approval for final art, you should retain records to substantiate that the meetings and art direction which you consider as nontaxable charges occur prior to your obtaining approval to complete final art. 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
Encs. Regs. 1540 & 1698
cc: --- --- District Administrator - --