Can a California designer treat computer-created preliminary art charges as nontaxable?

Plain-English summary

A designer had moved from hand-produced rough comprehensives to computer-created designs and asked how to preserve the nontaxable treatment of preliminary art.

Tax counsel said the use of a computer did not prevent preliminary-art treatment. The designer still had to prove that the client ordered—or the designer produced—the preliminary work before the contract or client approval for finished art. Purchase orders, work orders, or similar records could provide that timing evidence.

The preliminary-art charge also had to be separately stated from finished art and clearly identified on the bill. Because the work existed digitally, the designer had to print and retain a hard copy of every rough, visualization, layout, or comprehensive presented for client approval.

The method used to determine the preliminary-art charge was to remain the same as before the designer began using a computer.

What this means for you

Designers and commercial artists

The software or device used to create a concept does not replace transaction records. Keep proof showing when preliminary work was ordered or produced and what the client reviewed.

Advertising agencies

Separate preliminary and finished-art charges on the invoice. A single bundled label can make it harder to establish the exclusion described in this historical opinion.

Accountants and tax professionals

The opinion relies on sequence, separate billing, and retained approval copies. Audit support should connect the contemporaneous order, client review, invoice, and preserved version of each preliminary design.

Common questions

Q: Did computer-created preliminary art qualify for nontaxable treatment?

A: Yes, if all of the stated Regulation 1540 criteria were satisfied.

Q: What timing evidence was required?

A: Purchase orders, work orders, or similar proof that preliminary art was ordered or produced before the finished-art contract or approval.

Q: Did the charges have to be separated?

A: Yes. Preliminary art had to be separately stated from finished art and clearly identified on the billing.

Q: What had to be retained when the roughs were digital?

A: A hard copy of every rough, visualization, layout, or comprehensive presented for client approval.

Citations and references

• California Sales and Use Tax Regulation 1540(b)(4)(A)
• California Sales and Use Tax Regulation 1698

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0120
• Original supporting opinion: 100.0120 PDF

Original ruling text

100.0120

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 445-6450

May 27, 1993

Ms. M--- M--M--- M--- D--XXXX --- ----- ---, CA XXXXX
SR -- XX-XXXXXX
Dear Ms. M---:
Your October 31, 1992 letter to the State Board of Equalization has been referred to the legal staff for reply. You explained that you have begun producing designs by using a computer; accordingly, you are no longer producing rough comprehensives for client approval. You asked whether the State Board of Equalization has come up with a method for dealing with the problem of identifying nontaxable charges for preliminary art which is produced by a designer using a computer. You may continue to consider the charges for preliminary art as nontaxable provided you continue to follow the criteria of Sales and Use Tax Regulation 1540 at subdivision (b)(4)(A). In accordance with the regulation, you must retain purchase orders, work orders, or other similar proof of the client's ordering or your producing the preliminary art prior to the date of your contract for the client's approval for the finished art. Also, the charge for the preliminary art must be separately stated from the charge for the finished art and clearly identified as preliminary art on your billing. Since you prepare the art using a computer, you must produce a hard copy of each of the roughs, visualizations, layouts or comprehensives you present for the client's approval and retain the copies for audit purposes in accordance with Sales and Use Tax Regulation 1698. Your method for determining the charge for nontaxable preliminary art should continue to be the same as before you began using the computer. 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:sr
cc:
Mr. Glenn A. Bystrom - MIC:49