Could an advertising agency avoid tax on a printed-material sale by having an outside vendor assemble the paste-up or mechanical as the client's agent?

Plain-English summary

The requester believed an advertising agency might avoid tax on copywriting, design, consultation, production supervision, and similar charges if an outside vendor physically assembled the paste-up or mechanical for the client.

Tax counsel disagreed. The quoted rule applied tax to the total retail selling price of property, including production expenses and service costs, whether agency employees prepared the property or the agency acquired it from an outside source.

Accordingly, an agency that contracted to sell printed material could not avoid sales tax merely by arranging for an outside vendor to assemble the paste-up or mechanical as the client's agent.

Whether the property was used for reproduction or display was immaterial under the quoted provision.

What this means for you

Advertising agencies

Outsourcing a production step does not by itself convert charges tied to your printed-material sale into nontaxable services.

Creative-production vendors

Identify who contracts to sell the completed property. The physical assembler is not necessarily the only seller relevant to the tax analysis.

Accountants and tax professionals

Review the agency's entire customer contract and selling price rather than isolating the outside vendor's assembly invoice.

Common questions

Q: Did it matter that an outside vendor assembled the mechanical?

A: No. The quoted rule covered property prepared by employees or acquired from an outside source.

Q: Could the agency call the vendor the client's agent to avoid tax?

A: Not when the agency itself contracted to sell the printed material, under this letter.

Q: Were design and production-supervision charges automatically nontaxable services?

A: No. They could be part of the total taxable retail sale described in the letter.

Q: Did reproduction rather than display use change the result?

A: No. The quoted rule said that distinction was immaterial.

Citations and references

• California Sales and Use Tax Regulation 1540(b)(1)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0355
• Original supporting opinion: 100.0355 PDF

Original ruling text

100.0355

STATE OF CALIFORNIA

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

January 24, 1984

Mr. S--- T. P--XXX --- Street
--- ---, California XXXXX
Dear Mr. P---:
This is in reply to your October 28, 1983 letter regarding the application of sales tax to sales of artwork by advertising agencies. You noted your belief that the “producer” of art, for purposes of Sales and Use Tax Regulation 1540, is the person who actually assembles all the pieces together into a “finished” piece of art, mechanical, etc. You further believe that, if such is the case, then it would benefit an agency’s clients to use outside vendors for mechanical assembly, etc. where feasible in order to avoid payment of tax on charges for copywriting, production supervision, design, consultation, etc. We disagree that such charges would be nontaxable merely because the advertising agency obtained an outside vendor to perform the mechanical assembly of the components. As provided in Sales and Use Tax Regulation 1540 (b)(1): “With respect to billings issued by advertising agencies to clients, some charges may represent the sale price of tangible personal property sold to the client by the agency and compensation for expenses incurred in and service costs related to, the production of the property. Tax applies to the total amount of the retail sale of the property. Tax applies whether the property was prepared by employees of the agency or acquired from an outside source. Whether the items of property are used for reproduction or display purposes is immaterial.” (Emphasis added.)

Mr. S--- T. P---

-2-

January 24, 1984
100.0355

If an advertising agency contracts to sell printed material to a client, the agency cannot avoid paying sales tax on the sale by merely obtaining the actual assembly of the paste-up or mechanical as an agent for the client. We hope this answers your question; however, if you need further information, feel free to write again. Very truly yours,

R. L. Dick
Tax Counsel

RLD:rar