Did tracing an approved pencil sketch onto separate paper make the sketch part of taxable finished art?

Plain-English summary

An illustrator created pencil sketches for client approval, then placed a separate sheet over the approved sketch and traced the final drawing in ink. She asked whether using the sketch this way made the preliminary-art charge taxable.

Tax counsel said it did not, assuming the sketch was genuine preliminary art and all regulatory conditions were met. The key physical distinction was that the artist traced onto separate paper rather than inking directly over the pencil sketch on the same sheet.

The ruling also assumed the approved sketch remained a rough or visualization and did not already contain the detail typical of finished art. Qualifying preliminary art had to be separately billed, clearly identified, supported by records showing it preceded the finished-art contract or approval, and not transferred by title to the client.

The artist could not do the substantive labor needed to produce finished art and classify all of that work as preliminary, leaving only the mechanical tracing charge taxable. Tax applied to the total finished-art charge.

What this means for you

Illustrators and designers

Using a true rough as a visual guide under a separate sheet did not physically incorporate it into the final art. Drawing the finished work directly over the rough would be different.

Businesses commissioning illustrations

Make sure approval-stage sketches are actually roughs. A highly detailed near-final drawing does not become preliminary art merely because the final line is traced later.

Accountants and tax professionals

Check the physical workflow, the artistic stage of the approved sketch, separate billing, and contemporaneous records. The conclusion depends on all of them.

Common questions

Q: Was the approved pencil sketch still nontaxable preliminary art?

A: Yes, under the stated assumptions, when the final ink drawing was traced onto separate paper.

Q: What if the artist inked directly over the pencil sketch?

A: The quoted regulation treats that as physical incorporation into finished art, making the preliminary-art charge taxable.

Q: Could a detailed finished drawing be labeled a preliminary sketch?

A: No. The letter assumed the source sketch was truly a rough or visualization without finished-art detail.

Q: Was only the labor of tracing taxable?

A: No. The artist could not perform all finished-art labor under a preliminary label; tax applied to the total finished-art charge.

Citations and references

• California Sales and Use Tax Regulation 1543(a)(6) and 1543(b)(5) (as cited in the source)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0195
• Original supporting opinion: 100.0195 PDF

Original ruling text

100.0195
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

June 30, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Ms. E--- S--P. O. Box XXXX
---, CA XXXXX
SR -- XX-XXXXXX
Dear Ms. S---:
This is in reply to your May 19, 1992 letter regarding the application of sales tax to your charges for illustrations. You asked whether you need to charge tax on preliminary art (sketches) that is approved by a client as is, and over which, on a separate piece of paper, you trace the final drawing in ink. You note that you are not inking directly on top of the pencil sketch on the same piece of paper; that is, you distinguish such tracing from the situation presented in subdivision (b)(5) of Sales and Use Tax Regulation 1543 which provides: “Tax does not apply to separate charges for preliminary art, except where the preliminary art becomes physically incorporated into the finished art, as for example, when the finished art is made by inking directly over a pencil sketch or drawing, or the approved layout is used as camera copy for reproduction. The charge for preliminary art must be billed separately to the client, either on a separate billing or separately charged for on the billing for the finished art. It must be clearly identified on the billing as roughs, visualizations, layouts, comprehensives, or other preliminary art. Proof of ordering or producing the preliminary art, prior to the date of the contract or approval for finished art, shall be evidenced by purchase orders of the buyer, or by work orders or other records of the seller. No other proof shall be required. Tax applies to the total charges made for finished art.”

Ms. E--- S---

-2-

June 30, 1992
100.0195

The term “preliminary art” is defined at subdivision (a)(6) of the regulation: “Preliminary art means roughs, visualizations, layouts and comprehensives, title to which does not pass to the client, but which are prepared solely for the purpose of demonstrating an idea or message for acceptance by the client before a contract is entered into or before approval is given for preparation of finished art to be furnished by the seller to his or her client.” We assume that your nontaxable charge for preliminary art satisfies all of the criteria provided in subdivisions (a)(6) and (b)(5) of the regulation. We also assume that the artwork from which you trace is truly preliminary art; that is, it is a rough or visualization and does not have the detail typical of finished art. In that case, we believe that your charge for the preliminary art is nontaxable regardless that you use the preliminary art by placing a separate piece of paper over it and trace the final drawing in ink. We believe that you cannot perform all of the labor to produce finished art and consider that only the charge for labor of tracing is subject to sales tax. 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