Could an advertising agency buy a temporarily licensed stock photograph for resale when its image appeared in taxable brochures sold to clients?

Plain-English summary

An advertising business temporarily obtained stock-photo transparencies and one-time reproduction rights for up to 5,000 copies inside a client brochure. The license required return of the transparencies within one month.

The Legal Department treated that temporary transfer as a lease, with use tax imposed on the advertising business as lessee and collected by the stock-photo lessor.

The agency could not buy the photograph for resale merely because its image appeared in brochures sold to the client. The photograph itself was not physically incorporated into the brochures; it was used as a production aid when the image was reproduced. Paper, ink, and brochure printing could instead qualify as resale components.

The retail sale of the brochures was taxable, and the agency could not deduct tax paid on the photo lease or other production property from its taxable brochure receipts.

What this means for you

Advertising agencies

Separate physical components incorporated into the deliverable from photographs or art used to reproduce an image.

Stock-photo licensors

A required-return transfer of physical transparencies was treated as a lease under this opinion.

Accountants and tax professionals

Analyze both the input lease and the output brochure sale; tax on one does not offset the taxable measure of the other.

Common questions

Q: Was the stock-photo transfer a sale or lease?

A: A lease, because the transparencies were transferred temporarily and had to be returned.

Q: Did the photograph become a brochure component?

A: No. Only its image was reproduced.

Q: Could paper and ink be bought for resale?

A: Yes, as property physically incorporated into the brochures.

Q: Was the client's brochure purchase taxable?

A: Yes.

Citations and references

• California Sales and Use Tax Regulations 1540(d) and 1660(c), as quoted or discussed in the opinion

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0660
• Original supporting opinion: 100.0660 PDF

Original ruling text

100.0660

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

June 16, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
────────

Ms. G--- S--S--- D--- Associates
XXX --- Street
--- ---, CA XXXXX
Re:

BURTON W. OLIVER
Executive Director

SR -- XX-XXXXXX

Dear Ms. S---:
This is in reply to your March 16, 1994 letter regarding the application of sales tax to charges to you by vendors of stock photographs. You provided the following facts: "Whether it is due to lack of time or limited budget, some of our clients may choose to use a stock image instead of hiring a photographer to create a desired image. When using a stock house, we make an initial call and they research our image requests. For example, we may be looking for an image that portrays an executive sitting in a chair holding paper work for the inside of a brochure. The stock house researches the subject matter, locates an image, and we pay reproduction rights to use it in our brochure. I have enclosed an actual invoice and license-to-use form from T--- S--- I--- in --- --- to illustrate wording, etc." The License-to-Use form grants to S--- D--- the right "For one-time reproduction rights on inside of a brochure promoting the B--- of C---. Press run up to 5K." The terms and conditions printed on the back of the License-to-Use form and the invoice require S--- D--- to return the transparencies by one month from the date of the licenses. Since T--- S--- I--- only transfers the photographs to S--- D--- for temporary use, the transaction is a lease for sales and use tax purposes. The applicable tax is the use tax which is imposed upon S--- D--- as the lessee. The lessor, T--- S--- I---, is required to collect the tax from you and report and pay it to this Board. (Sales and Use Tax Regulation 1660, Leases of Tangible Personal Property - In General, subdivision (c).) You may purchase for resale only ingredients or component parts you incorporate into the tangible personal property which you sell to your client prior to your use of the property. For example, you may purchase the paper, ink, and

Ms. G--- S---

-2-

June 16, 1994
100.0660

printing of the brochures for resale. As provided in Sales and Use Tax Regulation 1540, Advertising Agencies, Commercial Artists and Designers, at subdivision (d): "The term 'ingredient or component part of other tangible personal property' includes only those items that become physically incorporated into the property sold and not those which are merely consumed or used in the production of the property sold. A photograph, for example, does not become an ingredient or component part of property sold merely because the image of the photograph is reproduced as part of the property sold. A photograph or art is regarded as having been used when a reproduction is made from the photograph or art." You asked if you, in turn, also pay tax on your sale of the brochures to your clients. Yes, your retail sale of the brochures is subject to the sales tax. You may not deduct from the taxable gross receipts the amount of the use tax or sales tax reimbursement you pay on the lease or sale to you of tangible personal property such as the photographs which you consume in the process of producing the brochures. 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:plh
cc:

--- --- District Administrator - -R. M. Wall, Return Review Section - MIC:35