When were an artist's label samples and design charges taxable, and how were separate interior-decorating fees treated?

Plain-English summary

An artist created multiple label designs so a client could decide whether to select one. Tax counsel distinguished exploratory work performed before any binding order from production work performed after the client committed to a particular label.

Charges for precontract samples and research were not taxable when the client had no obligation to accept a specific item. Once the client selected a design and contracted for delivery, all later production costs entered taxable gross receipts, including the cost of discarded versions made to meet specifications.

The artist could segregate receipts between those categories for audit adjustment. The memorandum separately treated percentage fees for consultations, room layouts, furniture and fabric coordination, color selection, and repainting supervision as nontaxable service charges rather than gross receipts from furniture sales.

Citations and references

• The official memorandum cites no statute or regulation by number.
• Discussion with Mr. S---, the artist's representative, concerning label-design receipts, segregating taxable and nontaxable charges, and interior-decorating services — date and record not provided in the official PDF
• San Francisco audit of the artist's label-design and interior-decorating accounts — audit period, findings, workpapers, and report not provided in the official PDF
• Label-design contracts, precontract samples and research, selected labels, discarded production versions, client acceptance and payment obligations, and taxable-versus-nontaxable receipt segregation — contracts, samples, designs, production records, invoices, client records, promised segregation, and accounting records not reproduced in the official PDF
• Interior-decorating and furniture sales, percentage design and consulting fee, consultations, layouts, coordination, colors, and repainting supervision — agreements, invoices, furniture sales, time records, and allocation records not reproduced in the official PDF
• June 10, 1953 Headquarters memorandum noting that the representative would submit segregation and suggesting a reaudit — no segregation, representative submission, reaudit report, adjusted amounts, taxpayer response, hearing, final Board action, payment, appeal, or later outcome supplied
• Official Annotation 295.1360's precontract-sample, binding label order, discarded-production-cost, postcontract-cost, taxable-receipts conclusions, and June 10, 1953 date — annotation omits the representative discussion, audit and promised segregation, reaudit recommendation, interior-decorating and furniture issues, account references, missing records, later outcome, and reliance status and supplies no additional proceeding record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-1360.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

295.1360

To:

San Francisco – Auditing (ESA)

June 10, 1953

From:

Headquarters – Sales Tax Counsel

Subject:

W--- L--XXX --- Street

--- - XXXXX

W--- L--- A--XXX --- Street

--- - XXXXXX

The point of difference in our viewpoint and that of Mr. S---, representing L---, appears to center on the question of whether L---’s charges for exhibiting various designs (so that the client can decide which, if any, he will take) are gross receipts from the sale of the one finally contracted for and which L--- is obligated to make and deliver. For example: If L--- contracts to make and deliver a particular label, all costs of production are part of taxable receipts, regardless of how many labels may be made and discarded before the one exactly meeting specifications is produced. On the other hand, if, before contracting to deliver a specific item and before the client becomes obligated to accept a particular item, a number of samples ar produced, in order to display to the client the type of work which can be produced, and the particular design which L---’s research shows will probably best promote sales, his charges are not taxable. Upon entering into a contract for the production of the item selected by the client all costs thereafter incurred in the course of production are not deductible from gross receipts paid or payable for the particular item which the client has obligated himself to accept and pay for. Mr. S--- informs me that Mr. L---’s receipts are capable of segregation as between the taxable and nontaxable categories, and will arrange to submit such a segregation to your office in order that appropriate adjustments to the audit may be made. L--- also does interior decorating and sells furniture and furnishings. Usually the fee for the design and consulting services in such cases is a percentage of the total charge. The fee charged for such services covers consultations, room layouts, coordination of furniture,

San Francisco – Auditing (ESA)
Account Nos. --- - XXXXX
--- - XXXXXX

-2-

June 10, 1953
295.1360

furnishings and fabrics, selection of color schemes, and supervision of the repainting of the interior. In our opinion the fee charged for the services mentioned represents a service and is not a part of gross receipts from sales. Mr. S--- will be available in San Francisco from this day forward and it is suggested that a reaudit report be prepared, giving effect to the considerations set forth herein.

E. H. Stetson
EHS:ph