Could a contractor deduct preliminary design work from the taxable price of brochures written, designed, and printed for California?

Plain-English summary

A contractor agreed to write, design, and print an interpretive brochure for the California Department of Fish and Game. It asked whether the charge for preliminary work could be removed from the taxable price.

Tax counsel said the entire brochure charge was taxable. Revenue and Taxation Code section 6012 did not allow deductions for materials, labor, services, or other expenses included in a retail sale of tangible personal property.

The preliminary-art exception did not fit the facts. The contractor did not furnish finished art to the state; it used the finished art itself to produce the printed brochures. The facts also did not show that roughs, visualizations, layouts, or comprehensives were prepared before the printing contract or before approval to prepare finished art.

The source carries a later annotation note explaining that Regulation 1540 was rewritten in 2002 and the annotation's subdivision reference was revised. The historical letter's actual conclusion remains that the full brochure price was taxable.

What this means for you

Printers and design-build vendors

When you use your own design work to manufacture the printed item sold, the design charge may remain part of the taxable selling price.

Government contractors

Selling to a California agency did not create an exemption in this opinion. The contractor's full brochure charge was treated as a taxable retail sale.

Accountants and tax professionals

Do not rely on an invoice label alone. Confirm that genuine preliminary art preceded the finished-art authorization and that the transaction satisfies the current version of the applicable rule.

Common questions

Q: Was the contractor's writing and design work separately exempt?

A: No. Those costs remained in the gross receipts from the brochure sale.

Q: Why did preliminary-art treatment fail?

A: The contractor used finished art for its own printing, did not furnish finished art to the client, and did not show qualifying pre-contract roughs.

Q: Did the state customer make the sale exempt?

A: No, not under the letter's analysis.

Q: Is the regulation citation still current?

A: The source says Regulation 1540 was rewritten in 2002, so current subdivision numbering and requirements must be checked.

Citations and references

• California Revenue and Taxation Code § 6012(a)(2)
• California Sales and Use Tax Regulation 1540(b)(4)(A) (historical letter)
• California Sales and Use Tax Regulation 1540(a)(11) (later annotation note)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0250
• Original supporting opinion: 100.0250 PDF

Original ruling text

100.0250

STATE OF CALIFORNIA

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

October 21, 1991

Mr. G--- R--E--P. O. Box XXXXXX
---, CA XXXXX-XXXX
SR -- XX-XXXXXX
Dear Mr. R---:
This is reply to your September 4, 1991 letter regarding the application of sales tax to Exegetics’ sale of an interpretive brochure to the State of California. We understand that you are contracting to write, design, and print a brochure for the California Department of Fish and Game to distribute. You asked for the application of sales tax to your charge and, specifically, whether tax would apply to charges for your preliminary work. When you make a retail sale of tangible personal property in California, the entire gross receipts of the sale are subject to tax. Revenue and Taxation Code section 6012 defines “gross receipts” to mean the total amount of the sale price of the retail sales of retailers without any deduction for “the cost of the materials used, labor or service cost, interest paid, losses, or any other expense.” (Rev. & Tax Code § 6012, subd. (a)(2).) Tax applies to the entire sale price of your sale of the printed brochures with no deduction for your charge for preliminary work. Your reference to a deduction for “preliminary work” is apparently based on subdivision (b)(4)(A)* of Sales and Use Tax Regulation 1540, Advertising Agencies, Commercial Artists and Designers. That subdivision provides that, under certain circumstances specified in the regulation, separately stated charges for preliminary art are nontaxable. That provision is not applicable under the facts you state. “Preliminary art” is defined as follows: “‘Preliminary art’ means roughs, visualizations, layouts and comprehensives, title to which does not pass to the client, but which are prepared by an advertising agency, commercial artist or designer 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 agency, commercial artist or designer to its client.”

Mr. G--- R---

-2-

October 21, 1991
100.0250

Under the facts you provide, you do not furnish finished art to your client. Rather, you prepare the finished art for your own use in preparing printed materials which you furnish to the client. Further, under the facts you provide, there is no evidence that you would prepare roughs, visualizations, layouts, or comprehensives before entering into the contract or before obtaining approval for preparation of the finished art. In summary, your entire charge for the brochures is subject to sales tax. 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

• Reg. 1540 was amended effective 10/3/2002, language of former regulation was deleted and replaced in its
  entirety. Annot. revised to reflect new subdivision number (a)(11). (D. Rosenthal - 1/11/05).