Was separately stated copywriting taxable when an agency sold a mechanical but did not contract to place the advertisement in the media?

Plain-English summary

An advertising agency sold graphic-arts mechanicals and separately billed for the copywriting incorporated into them. Auditing staff asked whether the writing charge became nontaxable because the client used the mechanical in media advertising.

The legal memorandum drew a line based on the agency's contract. If the agency sold only the mechanical and did not agree to furnish the media advertising, the copy was written as part of tangible property the agency sold. The copywriting charge was included in the mechanical's taxable gross receipts even when separately stated.

The client's later delivery of the mechanical to the media did not change that result.

If the agency instead contracted to provide both the mechanical and placement of the advertisement, separately stated copywriting for media advertising could be excluded under the memorandum's other branch of analysis.

What this means for you

Advertising agencies

Document whether the contract covers only a mechanical or also the placement of advertising. The same copy can receive different treatment depending on that role.

Copywriters and designers

A separately stated writing charge was not enough to remove it from the taxable price when the writing became part of a mechanical sold by the agency.

Accountants and tax professionals

Follow the agency's contractual obligation, not merely the client's ultimate use of the mechanical in a newspaper, television, radio, or other media campaign.

Common questions

Q: Did separate invoicing make the copywriting nontaxable?

A: No, not when the agency sold only the mechanical.

Q: Did it matter that the client sent the mechanical to the media?

A: No. The memorandum said the client's later action did not change the agency's taxable sale.

Q: When could the copywriting charge be excluded?

A: When the agency contracted to furnish both the mechanical and media placement and separately stated the media-copy charge, under the facts described.

Q: Why does page two show June 5, 1970?

A: The official PDF carries that conflicting footer, while the memorandum's own first-page date is March 27, 1987. This page uses the first-page date.

Citations and references

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

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0320
• Original supporting opinion: 100.0320 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Francisco Auditing (AAV)

100.0320

Date:

March 27, 1987
4/1/87

From:

Legal (RLD)

Subject:

C--- Inc.
SR -- XX-XXXXXX

D. Cady
D. Chan
A. De Agero
B. Jones
E. Trites
--- Library
New Material Folder

This is in reply to your February 9, 1987 memorandum regarding the application of tax to charges for copy writing by C--- Inc., an advertising agency which is also the retailer of graphic arts. Specifically, you asked whether charges for copy writing are taxable when the copy is incorporated into a mechanical which is used in media advertising. The charge for the copy writing and the charge for the mechanical are separately stated on the taxpayer’s sales invoices. As you know, Sales and Use Tax Regulation 1540 provides at subdivision (b)(4)(E): “Effective January 1, 1975, tax applies to charges for writing copy written solely for use as a part of tangible personal property as to which the agency is acting as a seller. Tax does not apply to such charges in other circumstances or when the agency is acting as agent. “Tax does not apply where copy is furnished to media in manuscript form.” We have taken the position that, if an agency only sells a mechanical to a client and does not contract to furnish the media advertising, the taxable gross receipts of the sale of the mechanical include the charge for the copy writing. In such case, the agency’s charge is for “copy written solely for use as a part of tangible personal property as to which the agency is acting as a seller.” (Reg. 1540, subd. (b)(4)(E), supra.) The client’s furnishing the mechanical to the media does not make the charge for the copy nontaxable. On the other hand, as noted in Tax Counsel Donald J. Hennessy’s July 21, 1981 letter to Mr. P--- J---, charges for copy written solely for media (television, radio, newspaper, etc.)

San Francisco Auditing (AAV)

-2-

June 5, 1970
100.0320

advertising messages or for more than one purpose, one of which is for media advertising messages, are not taxable. Such charges must be separately stated from taxable charges. Therefore, if the agency contracts to furnish the client with both the mechanical and the placement of the advertising, the agency’s separately stated charge for writing the copy is excludable from the gross receipts of the sale of the mechanical. We hope this answers your question; however, if you need further information, feel free to write again.

RLD:sr

100.0320.doc