How did California tax an illustrator's first-publication rights when the publisher returned the original artwork after use?

Plain-English summary

Ms. J--- began commissioned publication illustration. For a California magazine, she agreed on price, created/delivered a drawing for an article, waited months for publication, billed afterward and recovered the original because she retained ownership and sold only first-use rights.

California classified possession without title for reproduction as a lease. Because J--- created the artwork rather than leasing it in acquired tax-paid form, it was a continuing sale/purchase. She collected publisher use tax measured by rent and reported it for the period payment arrived, even when possession/use occurred earlier.

The letter asserted historical 7.25% statewide and 7.75% Sacramento rates, no Placer district and one Placer business location. Regulation 1827 required collection for districts where she derived rent from leased illustrations situated there. It said customer pickup did not add district tax for Placer/no-district residents; these rates/locations are not current guidance.

For an out-of-state magazine, counsel assumed required/actual delivery by mail or common carrier for out-of-state use. California lease use tax then did not apply. An outright sale likewise received section 6396 treatment only when the contract required and seller actually shipped out of state through allowed means.

Relinquishing all rights/title was an outright sale taxed for the sale period—not necessarily payment period. The example put a December 31 sale paid January 10 in the December 31 period. If J--- leased first and later sold, both rent and later ownership price were taxable absent an exemption.

The PDF's first page says October 5, 1993, later pages say November 2, 2006, and the live rule confirms only October 5, 1993. No source explains the later headers. No contracts, artwork, delivery/return, district, invoice or filing records are supplied.

Common questions

When was California lease tax reported?

In the reporting period when the illustrator received the rental payment, even though the magazine may have possessed and used the illustration earlier.

Did return of the original make it nontaxable?

No. Retaining title and receiving the original back supported lease treatment rather than eliminating tax.

What district rate did the letter apply?

It asserted historical 7.25% statewide/7.75% Sacramento rates and no Placer district; current rates/nexus must be checked independently.

What if the illustration was delivered outside California?

For the facts assumed, California use tax did not apply when the work was required to be and was delivered by mail or common carrier to an out-of-state customer for use there.

What if the illustrator gave up all rights?

That was an outright sale. If it followed a lease, the earlier rent and the later amount paid for ownership were both taxable unless an applicable exemption covered the sale.

Did outright-sale tax wait for payment?

No. It belonged to the sale period; the source's example reports a December 31 sale in that period despite January 10 payment.

Which issue date controls?

October 5, 1993 appears on page 1 and the live annotation. Later PDF pages print November 2, 2006 without explanatory amendment/correction, so that conflict remains disclosed.

Citations and references

• Sections 6006.3, 6006(g), 6006.1, 6010(e), 6010.1; Regulation 1660(c)(1) — art lease/rent reporting
• Regulation 1827(c)(3) — district collection for leased property situated in district
• Historical rate/location assertions — no separate rate table supplied
• Section 6396 — required/actual interstate shipment
• Sections 6006(a), 6051 — outright sale/sale-period tax
• February 2 request and commission/artwork/rights/delivery/payment/district/tax records — absent
• October 5, 1993 page 1/live date versus November 2, 2006 continuation headers — unresolved
• Pamphlets 46 and 44 — enclosures absent
• Official Annotation 330.2288 — lease/sale branches without district/interstate/date/source limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2288
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2288.pdf

Original ruling text

330.2288

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

APPEALS REVIEW SECTION (MIC:85)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-6592

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

October 5, 1993

BURTON W. OLIVER
Executive Director

Ms. G--- W. J--P.O. Box XXXX
---, CA XXXXX-XXXX
Dear Ms. J---:
Re:

Sales And Use Tax Issues
for Illustrator of Publications
SR -- XX-XXXXXX

This is in response to your letter dated February 2, 1993, which was recently received by the Legal Division wherein you requested our opinion regarding the sales and use tax consequences involving your new enterprise of doing illustrations for publication on commission. You asked our opinion regarding the three scenarios set forth below.

1. "On request, and for an agreed-upon price, I create a drawing to illustrate an
   article in a magazine which is published in California. My transactions are conducted by telephone and mail, but I deliver the piece to the editor on the agreed upon deadline date. Several months pass, the piece is finally used in the production of the magazine, and I submit a bill to the magazine. I also go get the original illustration, since I retained ownership and sold only the first rights of use for publication to the magazine. My county is Placer. The magazine's is Sacramento. So, since I have not relinquished the piece, nor title to the piece, do I charge tax? On which date? At what rate?" A transfer of possession, but not title, of artwork to another person for reproduction is a lease or rental of the artwork (see Revenue and Taxation Code Section 6006.31). Generally, a lease is a temporary transfer of the possession of tangible personal property for consideration.

1

All further section references are to the Revenue and Taxation Code.

Ms. G--- W. J---

-2-

November 2, 2006
330.2288

(See Sales and Use Tax Regulation 16602). Unless tangible personal property is leased in substantially the same form as acquired by the lessor and the lessor has paid sales tax reimbursement or has timely paid use tax measured by the purchase price, a lease of tangible personal property is a continuing sale and purchase. The lessor must collect use tax from the lessee at the time rentals are paid and pay the tax to the state. The use tax is measured by the rentals payable. Sections 6006(g), 6006.1, 6010(e), and 6010.1 and Regulation 1660(c)(1). Since you create your own illustrations, the lease is a continuing "sale" and "purchase" and use tax is required to be reported and paid based on rental receipts. You, as the lessor, are required to collect use tax on the rental receipts and report the amount collected in the period in which the rental receipts were received. In California, there is a statewide tax rate of 7.25 percent. Sacramento County has a countywide taxing district, giving a total state and local tax rate in Sacramento County of 7.75 percent. The purchaser is liable for district use tax, but the retailer (lessor) must collect the district use tax. Whether a retailer is obligated to collect from the purchaser district use tax depends upon whether the retailer is "engaged in business" in the purchaser's district, as defined in Regulation 1827. In subdivision (c)(3) the definition of retailer engaged in business in a district includes, "as respects a lease, any retailer deriving rentals from a lease of tangible personal property situated in the district." Placer County, where your business is located, has no local taxing district. I assume that you only have one place of business. If the destination county has one or more local taxing districts, then the purchaser is liable for the district use tax(es) in effect for that county. Under Regulation 1827(c) you must collect use tax for those local taxing districts where you derive rentals from the lease of the illustrations. Even if the customer picks up the illustrations at your place of business, sales or leases to Placer County residents or to residents of other counties which have no taxing districts are only subject to the statewide 7.25 percent tax rate.

2. "I have the same scenario, except that this is a magazine produced outside
   California, and all dealings are by phone, mail and fax. Do I charge California sales tax?" For out-of-state customers you indicate that you use the phone, mail and fax. We assume the illustration is delivered to the out-of-state customer by mail or common carrier to an out-ofstate location. Use tax would not apply to out-of-state leases because under Section 6010.1 and Regulation 1660(c)(1), tax applies to leases of tangible personal property in this state. Your sales of illustrations to out-of-state purchasers are exempt under Section 6396 when the illustrations, pursuant to the sales contract, are required to be shipped and are shipped to the out-of-state purchasers by your own facilities or delivery to a carrier, customs broker, or 2

All further regulation references are to Sales and Use Tax Regulations.

Ms. G--- W. J---

-3-

November 2, 2006
330.2288

forwarding agent, including the mails.

3. "If I relinquish rights to the piece, or if the publisher does not return it, do I
   then charge tax? If the publisher is in California? And what if the publisher is in another state or country?" At the time you agree to relinquish rights to an illustration to a publisher, you are making an outright sale of the property by transferring title to the publisher. The sale is subject to tax unless the interstate shipment exemption discussed above applies to the sale. (Sections 6006(a) and 6051). When property is sold outright (as opposed to being leased) sales tax is due for the period in which the sale was made. This is not always the same as when payment is made for an item. For example, if a customer purchased an illustration on December 31 and paid for it on January 10, the tax would be due for the reporting period ending December 31. Lease payments, in general, are treated on a cash basis and, thus, are different from sales transactions. If you first lease the property and then sell the property outright by relinquishing your rights to the property, both the rentals paid to you under the lease and the amount the publisher agrees to pay you for the relinquishment of your rights to the property are subject to tax. Enclosed for your information are copies of the following Board pamphlets: Tax Tips for Leasing of Tangible Personal Property in California - No. 46; and Tax Tips for District Taxes No. 44. If you need anything further, please do not hesitate to write again. Sincerely,

Carl J. Bessent
Staff Counsel
CJB/md