How did California tax advertising artwork used for packaging, mailers, and books, and who remained liable without a resale certificate?

Plain-English summary

California tax counsel answered six questions about advertising artwork and related production charges. The common rule was that a client's seller's permit did not turn artwork into a resale purchase when the client actually used that artwork for reproduction or advertising.

Artwork sold for reproducing an image on software packaging was taxable, although the qualifying nonreturnable packaging itself was exempt. Artwork supplied for a product mailer was taxable whether the seller was a graphic artist or an advertising agency. A book layout transferred to the client was also taxable, while the bookbinder's printing could be a nontaxable sale for resale.

The result differed when the advertising agency retained the artwork for its own production use and contracted only to sell packaging. On that stated assumption, no artwork was sold to the client, and the qualifying packaging sale was exempt.

A good-faith resale certificate could protect the agency when the client claimed to buy an unusual item for resale. Without one, the retailer remained liable for sales tax even if the customer refused to reimburse it.

What this means for you

Advertising agencies and commercial artists

Ask what the client receives and how it will use it. Artwork transferred for a client's reproduction or advertising use was taxable even when it served as an intermediate production step.

Publishers and product businesses

Artwork, printing, and packaging can receive different treatment within one project. The book layout was taxable, book printing could be for resale, and qualifying nonreturnable packaging could be exempt.

Accountants and tax professionals

A seller's permit number is not the same as transaction-specific resale documentation. If property is not normally resold in the buyer's business, the letter points to a certificate stating that the specific property is bought for resale in the regular course of business.

Common questions

Q: Was artwork used to reproduce an image on packaging taxable?

A: Yes. The client used the artwork instead of reselling it before use.

Q: Were mailer artwork and book-layout artwork taxable?

A: Yes, under the facts described.

Q: Was the cost of printing the books taxable?

A: No, if it was a sale for resale supported by the client's resale certificate to the bookbinder.

Q: Who was liable when the client refused to pay tax reimbursement?

A: Without a resale certificate taken in good faith, the retailer remained liable. Whether the purchaser reimbursed the retailer was a contract issue.

Citations and references

• California Revenue and Taxation Code §§ 6051 and 6364(a)
• California Civil Code § 1656.1
• California Sales and Use Tax Regulations 1540(b)(4)(B), 1540(c), 1543(b)(3)(A), 1589(b)(1)(A), and 1668(d)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0304
• Original supporting opinion: 100.0304 PDF

Original ruling text

100.0304

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 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

May 27, 1993

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Ms. K--- V--A--- S--- Corporation
XXXX --- ----- ---, CA XXXXX
SR -- XX-XXXXXX
Dear Ms. V---:
This is in reply to your April 5, 1993 letter regarding the application of sales tax to charges by an advertising agency. You posed the following questions and asked that we assume, in each case, the client holds a valid seller's permit. “1) An ad agency develops artwork for a client that will be used to package software for resale. The client gives the artwork to the printer to produce the packaging. Is the artwork taxable? Is the packaging taxable?” The client may purchase for resale only the tangible personal property which the client sells prior to use. Since the sale of the artwork is for the client's use in reproducing the image on the packaging, the sale of the artwork is subject to sales tax. (Sales and Use Tax Reg. 1540, Advertising Agencies, Commercial Artists and Designers, subd. (b)(4)(B).) There is a specific exemption from sales tax for the sale of nonreturnable containers when sold without the contents to persons who place the contents in the container and sell the contents with the container. (Rev. & Tax. Code § 6364, subd. (a).) That would be the case with the printer's sale of the software packaging. Enclosed is a copy of Sales and Use Tax Regulation 1589, Containers and Labels, for your further information. See subdivision (b)(1)(A) of the regulation. “2) An ad agency provides artwork to the printer who produces the packaging, returns it to the agency who bills the client the total price for the packaging. What is taxable, what is not?”

Ms. K--- V---

-2-

May 27, 1993
100.0304

We assume that the advertising agency only prepares the artwork for its own use and contracts with the customer only to sell the packaging. In other words, we assume the advertising agency does not sell the artwork to the client. In that case, the agency's sale of the packaging is exempt as discussed above. “3) A graphic artist provides artwork for a mailer a client will use to advertise their product. Is the artwork taxable?” Yes, the sale of the artwork is taxable. (Sales and Use Tax Reg. 1540, subds. (c) and (b)(4)(B).) “4) An ad agency provides artwork for a mailer a client will use to advertise their product. Is the artwork taxable?” Yes, the sale of the artwork is taxable. (Sales and Use Tax. Reg. 1540, subd. (b)(4)(B).) “5) A graphic artist does the layout of a book manuscript and provides the artwork to the client who sends it to a book binder. The book will be resold. Is the artwork taxable? Is the cost of printing the book taxable?” The sale of the artwork is taxable. (Sales and Use Tax Reg. 1540, subds. (c) and (b)(4)(B); Sales and Use Tax. Reg. 1543, Publishers, subd. (b)(3)(A).) The sale of the printing of the book is a nontaxable sale for resale. The client should issue a resale certificate to the bookbinder. (Sales and Use Tax Reg. 1668, Resale Certificates). “6) A client and ad agency differ on their interpretation of the taxability of a charge. If the client provides a valid resale number, should the agency charge sales tax anyway? If the client withholds the tax payment charged by the ad agency, who is then responsible for the potential sales tax liability if the ad agency is audited?” As noted as subdivision (d) of Regulation 1668, if the client insists that it is buying for resale tangible personal property of a kind not normally resold in the client's business, the advertising agency should require the client to provide a resale certificate containing a statement that the specific property is being purchased for resale in the regular course of business. In that case, if the advertising agency takes the certificate in good faith, the certificate relieves the advertising agency from the liability for the sales tax.

Ms. K--- V---

-3-

May 27, 1993
100.0304

In the absence of a resale certificate taken in good faith from the client, the retailer remains liable for the sales tax. The sales tax is imposed upon the retailer for the privilege of selling tangible personal property at retail. (Rev. & Tax. Code § 6051.) Whether or not the retailer collects reimbursement for the tax from the purchaser is a matter of contract between the retailer and the purchaser. (Civil Code § 1656.1.) 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