When can California advertising charges labeled concept development, sketches, or copywriting be excluded from tax?

Plain-English summary

An advertising professional asked whether industry labels such as preliminary design, tissues, sketches, thumbnails, and concept development could describe nontaxable preliminary art.

Tax counsel accepted the more specific labels if the agency or designer met every requirement for preliminary art. The label "concept development" was too vague because it did not identify a tangible product. The seller needed audit evidence of tangible preliminary art prepared for the client's approval.

The letter separately addressed copywriting incorporated into tangible finished work. Under Regulation 1543, separately stated author-service charges could be excluded when the client retained the right to approve the manuscript, layout, or general specifications before authorizing camera-ready work and the seller did not transfer title or possession of the layouts except for review and approval.

If the contract did not expressly state the approval arrangement, contemporaneous records of client approval could provide the required proof. The opinion did not say that every charge called concept development or copywriting was automatically nontaxable.

The official source has an internal date conflict: its first page prints March 31, 2004, while the continuation page says March 31, 1993. The annotation itself uses March 31, 1993, and the letter says it answers a January 13, 1993 request, so this page uses the 1993 issue date while preserving the source text below.

What this means for you

Advertising agencies and designers

Use billing descriptions that identify the actual work product. A broad phrase such as concept development did not establish that tangible preliminary art existed.

Copywriters and creative firms

Separately stated author services may receive different treatment from camera-ready art, but the client-approval sequence and limits on transferring layouts must be documented.

Accountants and tax professionals

Review contracts and contemporaneous approval records together. The historical rule allowed approval notation where specific contractual language was absent, but still required the underlying service conditions to be satisfied.

Common questions

Q: Were labels such as sketches, thumbnails, or preliminary design acceptable?

A: Yes, if all preliminary-art requirements were met and the seller retained supporting evidence.

Q: Was a charge labeled concept development enough?

A: No. The letter called that term vague and required evidence of tangible preliminary art.

Q: When could author-service charges be excluded?

A: When they were separately stated and the Regulation 1543 approval and layout-possession conditions were met.

Q: What if the contract did not state the approval terms?

A: Contemporaneous notation of the client's approval could serve as proof under the quoted rule.

Citations and references

• California Sales and Use Tax Regulation 1540(b)(4)(A)
• California Sales and Use Tax Regulation 1543(b)(4)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0309
• Original supporting opinion: 100.0309 PDF

Original ruling text

100.0309

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (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 31, 2004

GRAY DAVIS
Controller, Sacramento

BURTON OLIVER
Executive Director

Mr. D--- H. W--D--- H. W--- A---, Inc.
XXXX --- -----, CA XXXXX
Dear Mr. W---:
This is in reply to your January 13, 1993 letter regarding the application of sales tax to charges for preliminary art. You asked whether the definition of “preliminary art” is limited to the words “roughs, visualizations, layouts, and comprehensives” as listed in subdivision (b) (4) (A) of Sales and Use Tax Regulation 1540. You asked whether the definition may also include other terms commonly used by the industry, such as “concept development, preliminary design, tissues, sketches, and thumbnails.” Except for the term “concept development,” we believe that a separate statement on a billing to a client for the other terms you described would be an acceptable description of preliminary art provided the agency or designer has complied with all of the requirements of subdivision (b) (4) (A) of the regulation. The term “concept development” is vague, and does not describe a tangible product. The agency must have available for audit purposes evidence of tangible “preliminary art” which was prepared for the client’s approval. Concerning charges by an agency or designer for writing copy as part of tangible personal property sold by the agency or designer, you note: “It seems clear that tax applies to charges for final copy that is incorporated into finished art that is sold by the agency. However, copy passes through several stages. It would be difficult to develop preliminary art without some idea of a copy strategy or concept. The development of the copy platform may progress to an outline of the points to be made in the final copy. The copy outline is part of the preliminary art phase of a project that must be approved before approval is given to proceed with final art.”

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

-2-

March 31, 1993
100.0309

Given this information, you asked for our confirmation that agency charges for writing copy from concept development through copy outline are part of the nontaxable charges for preliminary art and that only the agency charges for copy that is prepared by the copywriter from the copy outline after approval is received to proceed with final art, should be considered part of the taxable charge for preliminary art. We believe this question is answered by Sales and Use Tax Law Regulation 1543 which provides at subdivision (b) (4): “One person may, under a single agreement, contract both to perform author, design, or art direction services, and to produce camera-ready copy or art. If, under the terms of the agreement, the client retains the right to approve the manuscript, layout, or general specifications before authorizing preparation of camera-ready copy or art, and if the author, designer, or art director does not transfer to the client title to the layouts or possession of the layouts other than for the purpose of review and approval only, then separately stated charges for performance of the services are not taxable. In the absence of specific contractual language, proof of client approval shall be evidenced by contemporaneous notation of receipt of approval in the records of the author, designer, or art director. No other proof shall be required.” If the agency or designer follows the criteria of subdivision (b) (4), the agency or designer may exclude from the taxable measure the charge for author services. 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