Could movie-poster artwork qualify as preliminary art when the buyer's standard contract claimed ownership of all vendor materials?

Plain-English summary

A motion-picture company issued separate purchase commitments for preliminary and finished poster artwork. It could ask several vendors for concepts, select one comprehensive, end the preliminary commitments, and then issue a finished-art commitment to the selected vendor.

The company's standard terms said it owned all vendor-created materials and copyrights forever. Tax counsel agreed that this language had to be amended for preliminary-art treatment because qualifying preliminary art required title to remain with the vendor.

The proposed exception said the ownership transfer did not apply to roughs, visuals, layouts, and comprehensives prepared solely to demonstrate an idea before the company committed to finished production. Counsel agreed that this exception was necessary, but warned that contract wording alone was not sufficient.

Any transfer of preliminary art to the client had to be temporary and solely for review. If the company retained possession of the roughs or other preliminary work, the artist's charge was taxable as a sale.

What this means for you

Creative vendors

Review ownership clauses before labeling work preliminary art. A blanket assignment of every created material can conflict with the requirement that title to preliminary art not pass.

Entertainment and marketing companies

Separate preliminary and finished commitments, but also return review materials. Keeping the preliminary work can turn the charge into a taxable sale under this historical opinion.

Accountants and tax professionals

Test both the written rights and actual possession. The proposed amendment was necessary, yet the letter expressly said other preliminary-art conditions still had to be met.

Common questions

Q: Why was the original ownership clause a problem?

A: It assigned all materials to the buyer, while qualifying preliminary art required title not to pass to the client.

Q: Did the proposed exception guarantee nontaxable treatment?

A: No. It was necessary, but all other regulatory criteria still applied.

Q: Could the client keep the roughs after reviewing them?

A: No, not under the treatment described. Client possession had to be temporary for review only.

Q: Did separate preliminary and finished purchase commitments matter?

A: They supported the intended sequence, but did not replace the title, possession, and other regulatory requirements.

Citations and references

• California Sales and Use Tax Regulation 1540 (preliminary-art provisions)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0161
• Original supporting opinion: 100.0161 PDF

Original ruling text

100.0161

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

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

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

November 4, 1992
BURTON W. OLIVER
Executive Director

Mr. P--- L--Senior Manager of Taxes
State and Local
P--- C--- Inc.
XXXX --- ----- ---, CA XXXXX-XXXX
Re:

P--SR -- XX-XXXXXX

Dear Mr. L---:
This is in reply to your August 5, 1992 letter regarding the application of sales tax to sales to P--- of artwork used to produce posters for upcoming motion pictures and video releases. You note the following facts: “P--- issues separate purchase commitments for preliminary art and finished art. In the preliminary art phase, purchase commitments may be issued to more than one vendor and more than one purchase commitment to each vendor. The additional commitments are contracts for additional ideas. “A single comprehensive is finally selected. The purchase commitments issued to the vendors for preliminary art are either at their conclusion or are terminated. A purchase commitment for finished art is then issued to the vendor who produced the selected comprehensive. Camera-ready artwork with new elements is produced.” You sent a sample of a purchase commitment and a proposed amendment to paragraph two of the “Additional Terms and Conditions” of the purchase commitment.

Mr. P--- L---

-2-

November 4, 1992
100.0161

Existing paragraph 2.(a), Grant of Rights, provides:
“Vendor agrees that all materials prepared pursuant hereto shall be owned exclusively and in perpetuity by P---, and Vendor hereby irrevocably assigns to P-- any and all of its right, title and interest, including copyright, in and to such materials. P--- shall have the sole and exclusive right to use all materials prepared pursuant hereto, in whole or in part, in whatever manner it may desire, including without limitation, the right to cut, edit, revise, alter and/or otherwise modify such materials and the results of Vendor's services hereunder and to freely use, perform, distribute, exhibit, televise and exploit such materials and license others to do so in any and all media now known or hereafter devised.” The proposed amendment provides: “(a) Vendor agrees that all materials prepared pursuant hereto shall be owned exclusively and in perpetuity by P---, and vendor hereby irrevocably assigns to P--- any and all of its right, title and interest, including copyright, prior to any use by vendor, in and to such materials. (i) Exception: the above does not apply to conceptual/creative art (herein referred to as 'Preliminary Art'). Preliminary Art are roughs, visuals, layouts, comps, etc., title to which does not pass to P---, but which are prepared by vendor solely to demonstrate an idea or message for acceptance by P--- before a Purchase Commitment is entered into by P--- for the production of finished art.” We agree that the amendment to the terms and conditions is necessary for the vendor of the art to comply with the preliminary art provisions of Sales and Use Tax Regulation 1540. There are, of course, other criteria which must be met before the vendor may exclude the charge for preliminary art from the taxable charge for final art. As discussed during our August 6 meeting, in order for preliminary art to be nontaxable, the transfer of possession of roughs, visualizations or other forms of preliminary art can only be temporary for review purposes only. If the client retains possession of such property, the artist's charge for the preliminary art is subject to tax as a sale.

Mr. P--- L---

-3-

November 4, 1992
100.0161

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