Were an advertising agency's typography charges taxable when reproduction proofs were incorporated into paste-ups?

Plain-English summary

An advertising agency bought reproduction proofs without tax from typographers and billed typography charges to its clients. Some proofs were incorporated into finished-art paste-ups; others were not.

California treated the proofs incorporated into paste-ups as part of taxable finished art. The entire client charge, including typography, was taxable.

Proofs not incorporated into paste-ups could qualify as preliminary art under the historical rule, but only if the agency separately billed and clearly identified them as preliminary art. Because the audited invoices did not do that, the recommendation allowed no adjustment. CDTFA separately publishes the same recommendation as support for Annotation 100.0200 with only the annotation header changed.

Common questions

Did the typographer's nontaxable transfer keep the agency's later charge nontaxable?

No. Incorporating the proof into a taxable paste-up changed the agency's client transaction.

Could unused proofs receive preliminary-art treatment?

Potentially, but the historical rule required separate billing and clear identification that were absent here.

Citations and references

• Historical California Sales and Use Tax Ruling 2

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/430-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/430-0500.pdf

Original ruling text

STATE OF CALIFORNIA

430.0500

STATE BOARD OF EQUALIZATION
December 21, 1965
Gentlemen:
This is to advise you of our recommendation concerning your petition for redetermination of sales tax. We regret we must recommend the tax be redetermined without adjustment. The issue involved in this case centered around typography charges billed to your clients. The audit determined that other items of tangible personal property which were incorporated into finished art work were purchased tax paid. No markups were charged to your clients and, accordingly, no further tax was due on these other items. Typography charges, however, are not taxable to the typographer and, accordingly, no tax was paid at the time you acquired the reproduction proofs. The reproduction proofs, however, are incorporated into finished art work which, under Ruling 2 (copy enclosed) were subject to tax to the advertising agency. We realize that you are not a member of “W”, but rather a member of the “A”. Nevertheless, the analysis made up by the first mentioned organization is the best statement of the application of sales tax to advertising agencies available. We enclose a copy for your perusal. You will note that question 4 involves typography. The answer states: “When acting as a true agent, if the agency separates the charges clearly as typography on the invoice, it is not taxable unless typography is used by the agency to produce a ‘paste-up’ in which case the entire charges including cost of typography are subject to tax.” It was determined at the hearing that typography was not always incorporated into the paste-up. Where it is not it constitutes preliminary art under paragraph (d) of Ruling 2. Paragraph (d) provides, however, that the “charge for preliminary art must be billed separately to the client, either on a separate billing or separately charged for on the billing as preliminary art. It must be clearly identified on the billing as preliminary art, of one or more of the types mentioned in the preceding paragraph.” Since the reproduction proofs used as preliminary art were not separately billed to the client, we can allow no adjustment on that basis. In the future, however, you may wish to make a separate billing and thus avoid sales tax for reproduction proofs not used in paste-ups. Our recommendations will be presented to the Board for their consideration. You will be advised of their action in due course. John H. Knowles Associate Tax Counsel JHK:ls [1b]