When was advertising copywriting nontaxable, and did a computer layout sent to a typesetter qualify as preliminary art?

Plain-English summary

An advertising professional asked when copywriting was taxable. Tax counsel said writing copy was generally a nontaxable service. Copy written for printed matter obtained by the agency as the client's agent was also nontaxable.

The result changed when the agency sold tangible property. Charges for copy written solely as part of a paste-up, mechanical, camera-ready copy, or other tangible item sold at retail were included in the full taxable price. Copy furnished to media in manuscript form was nontaxable under the quoted rule.

The requester also made realistic computer layouts using low-resolution type. After client approval, the same disk went to the typesetter to drive the typesetting machine and reduce later cutting and pasting.

Counsel concluded that the layout was not prepared solely to demonstrate an idea because its data was used in producing the final work. It therefore failed preliminary-art treatment, and the entire finished-art charge was taxable.

What this means for you

Copywriters and advertising agencies

Identify whether you sell copy as a standalone service, act as the client's purchasing agent, or include the copy in tangible property you sell.

Digital designers

A client-approval file can still be production property. Reusing the same disk or data to drive final typesetting defeated the historical preliminary-art exclusion here.

Accountants and tax professionals

Review both contractual role and technical workflow. Separate service labels do not override use of the copy or file in a tangible retail sale.

Common questions

Q: Was standalone copywriting taxable?

A: Generally no, under the letter's service analysis.

Q: Was copywriting taxable when included in a sold mechanical or camera-ready item?

A: Yes. It was part of the taxable selling price.

Q: Was manuscript copy furnished to media taxable?

A: No, under the quoted regulation.

Q: Why did the computer layout fail as preliminary art?

A: The same disk data was sent to the typesetter and used in production, so it was not solely an approval demonstration.

Citations and references

• California Revenue and Taxation Code § 6012
• California Sales and Use Tax Regulations 1501, 1540(b)(4)(A), and 1540(b)(4)(E)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0900
• Original supporting opinion: 100.0900 PDF

Original ruling text

100.0900

STATE OF CALIFORNIA

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

August 24, 1990

Mr. M--- S--S--- A--XXXXX --- -----, CA XXXXX
RE:

SR -- XX-XXXXXX

Dear Mr. S---:
This is in reply to your June 14, 1990 letter regarding the application of sales tax to charges by advertising agencies. Specifically, you asked the following questions: “1. Pamphlet No. 38 states that when acting as an agent, charges for copywriting are non-taxable. I assume that this is true for all copy that I write for my clients. Is my assumption correct, or are there certain circumstances when charges for copywriting are taxable?” Generally, the writing of copy for a charge is the performance of a nontaxable service rather than the sale of tangible personal property. (Sales and Use Tax Reg. 1501, Service Enterprises Generally.) When you act as an agent on behalf of your client in obtaining tangible personal property from a vendor, you do not sell that property. Tax does not apply to your charge for writing copy for printed matter you obtain on behalf of the client. However, when you sell an item of tangible personal property at retail, the taxable gross receipts of the sale includes the total amount of the sale price, valued in money, without any deduction for the cost of the materials used, labor, or service cost, or any other expense. (Rev. & Tax. Code § 6012.) In this regard, Sales and Use Tax Regulation 1540, Advertising Agencies, Commercial Artists and Designers, provides at subdivision (b)(4)(E), Copy Writing: “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.

Mr. M--- S---

-2-

August 24, 1990
100.0900

“Tax does not apply where copy is furnished to media in manuscript form.” Therefore, when you make a retail sale of tangible personal property such as a paste-up, mechanical, or camera-ready copy, sales tax applies to the total gross receipts of your sale including your charge for copy writing. “2. With recent advancements in computer technology, I am able to produce preliminary art that is extremely close to what the finished art will look like. What makes this art so realistic is that the computer is able to produce low resolution type. While this type isn’t usable as finished art because it isn’t sharp enough, it does give the client a very good idea of what an ad or brochure will look like, before the real finished art is produced.” “Once the client approves this preliminary art, I make any necessary corrections and then send the disk from my computer to the typesetter. The typesetter uses the disk to drive the typesetting machine, instead of keying in the text by hand. “When the type comes back from the typesetter, it requires much less hand cutting and pasting to build the finished art, then would otherwise be necessary with conventional typesetting. Also, because the finished art is very close to what the client saw as preliminary art, it minimizes client revisions to the finished art. “My question is, how much of this process qualifies as preliminary art, and how much is considered finished art?” You go on to state your assumption that you may exclude from your sale for the final art the portion of your charge which you believe qualifies as a charge for nontaxable preliminary art. We disagree. Regulation 1540 defines “preliminary art” at subdivision (b)(4)(A) as “roughs, visualizations, layouts and comprehensives, title to which does not pass to the client, but which are prepared by an advertising agency, commercial artist or designer solely for the purpose of demonstrating an idea or message for acceptance by the client before a contract is entered into or before approval is given for preparation of finished art to be furnished by the agency, commercial artist or designer to its client.” As we understand the facts you provided, you enter the copy on the disk for use by the typographer. Under the circumstances, we believe that you do not prepare the layout which you present to the client for approval “solely for the purpose of demonstrating an idea or message for acceptance by the client.” We conclude that your total charge for the finished art is subject to tax.

Mr. M--- S---

-3-

August 24, 1990
100.0900

We hope this answers your question; however, if you need further information, feel free to write again. For your information, we are sending you a copy of the latest Pamphlet 38, Tax Tips for Advertising Agencies. Very truly yours,

Ronald L. Dick
Tax Counsel
RLD:sr
Enc.