Could computer roughs qualify as preliminary art, and was a printed artwork output a nontaxable custom program?

Plain-English summary

A design business asked whether computer-generated roughs could ever qualify as nontaxable preliminary art. A prior workflow had failed because the artist kept manipulating the same storage medium until the roughs became finished art, physically incorporating the preliminary work into the final product.

Tax counsel offered a qualifying example. An artist could create five concepts on one disk, present them for approval, and then recreate the selected design on another disk. If the artist followed Regulation 1540, the preliminary-art charge could be nontaxable.

The artist had to retain the medium containing the preliminary designs for audit and keep purchase orders, work orders, or other records proving that the client ordered—or the artist produced—the roughs before the finished-art contract or approval.

The letter also rejected treating a printed artwork output as a custom computer program. The artist's programming was created for the artist's own use, while the printout transferred to the client was tangible personal property. Tax applied to the entire artwork charge, including programming performed by the retailer.

What this means for you

Digital designers

Preserve preliminary concepts separately from the finished file. Continuing to transform the same digital object into finished art can defeat the historical preliminary-art treatment described here.

Businesses buying computer-created art

A printed output is not a custom program merely because software and programming were used to make it.

Accountants and tax professionals

Follow both the file lineage and the records. The opinion required separate retained media plus proof that preliminary work preceded finished-art authorization.

Common questions

Q: Could computer-generated roughs be nontaxable preliminary art?

A: Yes, under the example where preliminary concepts remained on one disk and the chosen design was recreated on another.

Q: What records had to be retained?

A: The preliminary-design medium and purchase orders, work orders, or similar timing records.

Q: Why did manipulating the same disk cause a problem?

A: The roughs became physically incorporated into the finished art.

Q: Was the printed result a custom computer program?

A: No. The printout was taxable tangible artwork, and the entire charge—including retailer programming—was taxable.

Citations and references

• California Sales and Use Tax Regulation 1502(c)(4)
• California Sales and Use Tax Regulation 1540(b)(4)(A)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0197
• Original supporting opinion: 100.0197 PDF

Original ruling text

100.0197

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM K. 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

March 17, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. D--- H. W--D--- H. W--- E---, Inc.
XXXX --- -----, CA XXXXX
Dear Mr. W---:
Your January 29, 1992 letter to Principal Tax Auditor Glenn Bystrom has been referred to me for reply. You asked if there is a way that computerized preliminary roughs can be managed such that they can be treated as nontaxable preliminary art under Sales and Use Tax Regulation 1540. We concluded in a July 9, 1991 letter to you that, under the facts you then provided, tax applied to the charge for computer-generated roughs and visualizations. In that case, the Art Director manipulated data on a storage medium which formed the roughs or visualizations so that the roughs or visualizations became the finished art. The roughs were physically incorporated into the finished art. That is not to say that there cannot be nontaxable computer-generated preliminary art. For example, assume that an artist created five different concepts on a disk and presented the designs to a client for approval. The client chooses one design, and the artist recreates the design on another disk. If the artist follows the procedures provided at subdivision (b)(4)(A) of Regulation 1540, the artist could consider the charge for preliminary art as nontaxable. You asked, in such case, what proof would be acceptable. The artist must retain the medium containing the design for audit purposes. The artist must also retain purchase orders, work orders, or other records to prove the client ordered, or the artist produced, the preliminary art prior to the date of the contract or approval for the finished art.

Mr. D--- H. W---

-2-

March 17, 1992
100.0197

Finally, you asked whether artwork composed on a computer can be construed as a custom program when the storage media is not transferred to the purchaser. The only transfer is the printout of the results generated by the program and not the program itself. No, we would not consider the transfer of the artwork to be the transfer of a custom program. Under the facts you provide any programming would be created by the data processor for his or her own use. The transfer of the output is a sale of tangible personal property. The transaction is subject to sales tax. (See Sales and Use Tax Regulation 1502, Computers, Programs, and Data Processing, subd. (c)(4)). Tax applies to the entire charge for the artwork, including any portion of the charge attributable to programming by the retailer. 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