How were photographs, artwork, and typography treated when an advertising agency's employees incorporated them into finished mechanical art?

Plain-English summary

An advertising agency had agency agreements with its clients, bought photographs, artwork, and typography from outside vendors, and assembled those items in its own art department into paste-ups or mechanicals used for reproduction.

The memorandum said the agency was the retailer of finished art produced or fabricated by its employees. It was not the client's purchasing agent for materials physically incorporated into that employee-produced property.

A tax-paid purchased-resold credit could be allowed for items that physically became components of finished art actually used for reproduction.

The memorandum treated items not physically incorporated into the finished art differently, even when they were used in production. Under the agency treatment it described, client charges for those items and related agency fees were not part of the total charge for the finished art.

What this means for you

Advertising agencies

A general agency agreement does not necessarily cover materials your employees physically incorporate into property the agency produces and sells.

Art departments

Track which purchased photographs, artwork, typography, and other items physically become part of the finished mechanical and which remain separate production inputs.

Accountants and tax professionals

Apply the source's historical distinctions carefully: retailer status, physical incorporation, tax-paid cost credit, and documented agency acquisition were separate issues.

Common questions

Q: Was the agency the retailer of its in-house finished art?

A: Yes. The memorandum treated employee-produced mechanicals and camera-ready copy as finished art sold by the agency.

Q: Was the agency the client's agent for incorporated materials?

A: No, under the cited paragraph of Regulation 1540.

Q: Could tax paid on incorporated purchases receive credit?

A: The memorandum said a tax-paid purchased-resold credit could be allowed for items physically becoming components of finished art used for reproduction.

Q: Did production use alone make an item a component?

A: No. The memorandum distinguished items used in production from those physically incorporated into the finished art.

Citations and references

• California Sales and Use Tax Regulation 1540(a)(2)(B), (b)(2), and (b)(4)(B)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0168
• Original supporting opinion: 100.0168 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Hollywood – Auditing (JKG)

From:

Gary J. Jugum

Subject:

E---, J--- & L--- Inc.

100.0168

Date:

May 16, 1977

This is in response to your memorandum of February 14, 1977. During the course of your current audit of the subject taxpayer, a question has arisen concerning the taxability of finished art prepared in taxpayer’s own art department. Taxpayer is an advertising agency and has an agency agreement with each of its clients. Taxpayer buys from outside vendors items such as photographs, artwork, and typography. Taxpayer then assembles the components into a paste-up or mechanical for reproduction. Taxpayer bills its clients on an itemized invoice. All buy-outs except typography are purchased taxpaid. Typography and the house charge for “agency finished artwork” is taxed on the invoice. Taxpayer provides the engraver with finished art for reproduction in the form of a completed assembly or as a photostat. Regulation 1540 “Advertising Agencies, Commercial Artists and Designers” provides in paragraph (a)(2)(B) that advertising agencies are sellers of all items of tangible personal property produced or fabricated by their own employees. The regulation specifically provides that “Advertising agencies are not agents of their clients with respect to the acquisition of materials incorporated into items of tangible personal property prepared by their employees.” [Emphasis added.] One of the principles of Regulation 1540 is that advertising agencies are retailers of finished art prepared by their employees. “Finished art” as that term is defined in paragraph (b)(4)(B) means the final art used for actual reproduction and includes mechanicals and other camera-ready copy. Taxpayer is the retailer of actual finished art, and a taxpaid purchased resold credit may be allowed with respect to items physically becoming a component part of the finished art physically used for reproduction. Taxpayer should be regarded as an agent with respect to items not physically incorporated into finished art even though the items may be used in the production of finished art. As provided by paragraph (b)(2) fo the regulation, charges made to the client for such items, including agency fiees added thereto, are not taxable. Charges for “manufacturing items” purchased as agent are not a part of the “total charge” made by the agency for finished art producted by it.