Could consultation billed as 'Design Time' be treated as nontaxable preliminary art without purchase orders, work orders, or clearly identified preliminary-art charges?

Plain-English summary

A commercial-art business advised clients about stationery, letterhead, business cards, and brochures. It sometimes showed layouts or roughs during one or more consultation meetings, then produced taxable mechanicals and camera-ready art. Invoices labeled the consultation stage as nontaxable “Design Time.” About 90% of the contracts were oral, and evidence could be limited to scratch notes or hand-drawn layouts.

Legal staff concluded that the design-time consultation related to the later sale of mechanicals, camera-ready art, and other taxable property. The design-time charges were therefore taxable.

Simply relabeling the charge as preliminary art would not change the result. There were no client purchase orders or artist work orders proving that preliminary art was ordered or produced before the finished-art contract or approval.

The invoice label “Design Time” also did not clearly identify the charge as preliminary art. The memorandum concluded that the entire charge was taxable.

What this means for you

Commercial artists and designers

If work truly qualifies as preliminary art, document when it was ordered and produced and identify it clearly on the invoice.

Businesses using oral contracts

Scratch notes and a generic time label may not establish the required sequence between preliminary work and approval of finished art.

Accountants and tax professionals

Review purchase orders, work orders, invoice descriptions, and the relationship between consultation and the property ultimately sold.

Common questions

Q: Was every consultation meeting automatically taxable?

A: The memorandum taxed these charges because they related to the sale of mechanicals and camera-ready art on the stated facts.

Q: Could the business rename “Design Time” as preliminary art?

A: No. A new label did not supply the missing evidence or meet the clear-identification requirement.

Q: What records were missing?

A: Client purchase orders or the artist's work orders showing preliminary art before the finished-art contract or approval.

Q: What amount was taxable?

A: The entire design-time charge.

Citations and references

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

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0130
• Original supporting opinion: 100.0130 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Francisco – Audit (LL)

From:

Headquarters – Legal (RLD)

Subject:

H---

100.0130

Date:

February 8, 1983

This is in reply to your December 18, 1982 memorandum regarding the application of tax to H---’s charges for “Design time” under the following situation: The owner of H---, Miss ---, consults with clients to advise and educate the clients; suggests what they need in the way of stationery, letterhead, business cards and brochures; and advises the clients of the costs. During this stage, she may show the clients some layouts or roughs. The consultation may take one or several meetings. H--- then produces the mechanical art and charges tax reimbursement for all the work involved with the production. You provided the following charg showing how H--- itmeizes charges on the invoice: Service Type

Billing
Description

Invoice
Computation

Tax
Treatment

Stage 1

Design Time

Hours X Hourly rate

Nontaxable

Stage 2

Mechanicals
Camera Ready Art
and others

$ Amount
$ Amount

Taxable
Taxable

You noted that approximately 90 percent of H---’s contracts are verbal and evidence of the stage 1 work may consist of scratch notes or hand drawn layouts. You asked whether tax applies to the stage 1 charges, whether H--- can relabel the charges as preliminary art, and if not, what aspects of stage 1 charges H--- may exclude to qualify the charge as being preliminary art.

San Francisco – Audit

-2-

February 8, 1983
100.0130

Sales and Use Tax Regulation 1540(b)(4)(C) provides that, effective January 1, 1975, tax applies to charges for consultation or research that relates solely to tangible personal property sold by the agency. It is our opinion that H--- charges for design time to consult with clients relates to the sale of the mechanicals, camera-ready art, and other taxable charges. Tax applies to the charges for design time. We also believe that H--- cannot escape paying tax on such charges by merely relabeling the charges as being for preliminary art. There is no evidence of purchase orders of the client or work orders of H--- to prove that H---’s clients ordered, or H--- produced, preliminary art prior to a contract or approval for the finished art. In addition, a charge on an invoice for “design time” does not clearly identify the charge as for preliminary art as required by Regulation 1540(b)(4)(A). In summary, it is our opinion that the entire charge is subject to sales tax.

RLD:jw