Was a mechanical paste-up taxable when the firm retained title but transferred possession so the client could use it for reproduction?

Plain-English summary

A firm asked about advertising layouts, mechanical paste-ups, and artwork supplied to clients for printing and publishing.

For layouts, the letter distinguished preliminary art from finished art. Preliminary art was nontaxable under the historical rule, while finished art used in actual reproduction was taxable. Retaining title did not prevent a sale when possession was transferred.

The annotation's main example involved mechanical paste-ups made from the firm's layout and type, sometimes with its illustration or photography. The firm wanted to retain ownership while selling the client the right to use the paste-up.

The letter said the client charge was taxable. Mechanical paste-ups were taxable whether used for reproduction or display, and transferring possession constituted a sale even though the firm kept title.

For other artwork, qualifying preliminary art received the treatment described in the letter. Finished-art charges were taxable, while materials incorporated into finished art could be purchased for resale.

What this means for you

Commercial artists and design firms

A retained-title stamp does not by itself prevent a taxable sale when the client receives and uses a physical mechanical or layout.

Printers and publishers

Ask whether the delivered item is approval-only preliminary art or finished property used in actual reproduction.

Accountants and tax professionals

Analyze title and possession separately. The historical rule treated transfer of either as sufficient for a sale in the circumstances described.

Common questions

Q: Did retaining ownership make the paste-up nontaxable?

A: No. Possession was transferred to the client for reproduction use.

Q: Did display versus reproduction use matter for the mechanical?

A: No. The letter said mechanical paste-ups were taxable in either case.

Q: Could a layout be nontaxable?

A: Yes, if it qualified as preliminary art under the rule then in effect.

Q: Could component materials for finished art be bought for resale?

A: The letter said materials becoming components of the finished art could be.

Citations and references

• California Sales and Use Tax Regulation 1540(c) and the historical preliminary-art provision then identified as subdivision (e)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0760
• Original supporting opinion: 100.0760 PDF

Original ruling text

100.0760

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

September 27, 1973

Mr. A--- H---, President
H--- & A--XXXX --- ----- ---, California XXXXX
SR -- XX-XXXXXX
Dear Mr. H---:
Please excuse the delay in replying to your letter of August 10, 1973, in which you set forth examples of jobs you perform and ask for clarification of the application of the California sales tax to each. We have summarized your examples in the following paragraphs, and added our comments regarding the application of the tax in each instance. In the first example, advertising layouts are furnished to your clients who take the layouts to printers or publishers for use in the printing of newspapers, magazines or other advertising media. In most instances, you retain title and so indicate by a stamp on the reverse side of the layout. In other instances, both title and possession of the layouts are transferred to your client. The application of tax to this example is explained in (e) of Regulation 1540, copy enclosed. If the layout is considered preliminary art, sales tax would not apply. On the other hand, if the layout is in the form of finished art and used in the actual reproduction, sales tax would apply. This is true whether or not you retain title to the layout as the transfer of either title or possession constitutes a sale under the law. The second example involves mechanical past-ups utilizing your own layout and type. Illustration or photography may or may not be done by you. You would like to sell your clients the right to use the paste-ups while retaining ownership and so indicating by a stamp on the reverse side.

Mr. A--- H---

-2-

September 27, 1973
100.0760

Under Section (c) of Regulation 1540, mechanical paste-ups are subject to tax whether they are used for reproduction or for display purposes. Accordingly, your charges to the client for these paste-ups are subject to sales tax even though your retain title, because the transfer of possession to your client again constitutes a sale under the law. In the final example, you ask if sales tax applies to sales of artwork to your client and if so should you pay tax on any of the materials. If the artwork is in the form of “preliminary art” as defined in (e) of the regulation, tax would not apply to your cost of any materials used in preparing the preliminary art. On the other hand, if the artwork is in the form of finished art, sales tax would apply to your total charge therefore to the customer and any materials used in the production which became a component of the finished art may be purchased without tax as a sale for resale. Certain revisions to Regulation 1540 are currently under consideration. A copy of the revised regulation will be mailed to your when completed and adopted by the Board of Equalization. I hope this information and the enclosure answers your questions satisfactorily. If you desire further information, please write again or feel free to contact our district office in San Luis Obispo at 940 Chorro Street, telephone 543-8376. Very truly yours,

C. L. Cordell
Supervising Auditor
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