When an advertising agency and printer billed separately, which sale could qualify as printed sales messages, and were photography and art used for color separation taxable?

Plain-English summary

A company asked about separately contracting with an advertising agency for mechanical and color-separation work and with a printer for printing, with each vendor billing separately.

The Board said the agency's mechanical sale would not qualify as a sale of printed sales messages. Only the printer's sale of the finished printed matter could qualify under section 6379.5 if all of that exemption's other conditions were met.

The company also posed a different arrangement in which it contracted only with the agency for the finished printed matter. The agency bought photography, art, and other inputs for resale, passed title to the company, used the property in California to produce a color separation, then sent the work through additional production and an out-of-state printer for delivery to California newspapers.

Photography and art did not become ingredients or components of the color separation; their images were reproduced, making the originals printing aids. Because the agency used those aids in California after a California sale, tax applied to the agency's sale of them. That remained true even if the color separation qualified as an interstate-commerce sale and the finished matter qualified either as printed sales messages or as a newspaper component.

What this means for you

Advertising agencies, prepress vendors, printers, and tax professionals

Map each contract, invoice, title transfer, and physical use. An exemption for finished printed matter does not automatically reach separately sold mechanical work or photography and art consumed as printing aids during California prepress production.

Common questions

Q: Did separate agency and printer billing prevent all exemption?

A: No. It meant the agency's mechanical sale did not qualify, while the printer's finished printed matter still could if every other condition was satisfied.

Q: Did photography and art become components of the color separation?

A: No. The opinion treated them as printing aids because their images were reproduced rather than physically incorporated.

Q: Did an exemption for later production make the printing aids exempt?

A: No. The opinion taxed their California sale and use even if the color separation or finished printed matter qualified under separate exemptions.

Citations and references

• California Revenue and Taxation Code §§ 6362, 6379.5, and 6396
• California Sales and Use Tax Regulation 1541(e)(2)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 432.0072.200
• Original supporting opinion: 432.0072.200 PDF

Original ruling text

432.0072.200

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-6450

January 9, 1989

Mr. J--- H. M--M--- C--- C---, Inc.
XXX --- -----, CA XXXXX
Dear Mr. M---:
This is in reply to your November 11, 1988 letter regarding the application of tax to charges for printed sales messages. Specifically, you asked the following questions: “Specific Reference to (d)(5) Question: Would the transaction still qualify as a tax exempt transaction assuming it met all the other requirements if the company contracted separately with an agency to do the mechanical through the color separation process and the printed doing the printing with each company billing separately or does there have to be one billing either from the printer for the entire job or the agency for the entire job.” Sales and Use Tax Regulation 1541.5 is based on Revenue and Taxation Code section 6379.5, which provides: “There are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of catalogs, letters, circulars, brochures, and pamphlets consisting substantially of printed sales messages for goods and services printed to the special order of the purchaser and mailed or delivered by the seller, the seller’s agent, or a mailing house, acting as the agent for the purchaser, through the United States Postal Service or by common carrier to any other person at no cost to that person who becomes the owner thereof.”

Mr. J--- H. M---

-2-

January 9, 1989
432.0072.200

Under the facts you gave, if the company contracted to buy a mechanical from an advertising agency, the sale by the advertising agency would not qualify as a sale of printed sales messages. Rather, only the printer’s sale of the printed matter could qualify as exempt under section 6379.5. You then asked for our opinion as to the application of tax to the following hypothetical: “Agency purchases for resale photography, art and other products or services that become a component part of the finished product, passes title to company prior to any use by Agency. Agency partially develops product in one geographical area, ships it to another geographical area, both in California, for completion by another contractor working for agency who, in turn, ships to an out-of-state printer who prints the insert and ships it directly to California newspapers for distribution with an exempt certificate from the customer. Customer is billed for mechanical/color separation separately from the printing.” We assume that, in this case, the company is contracting only with the advertising agency for the purchase of the printed matter. Under the facts you provide, the application of tax to the advertising agency’s charge for the photography, art, and other property it purchases for resale depends upon whether the advertising agency makes any use of the property in California prior to shipping it out of state. For example, if the advertising agency produces, or has the subcontractor produce, a color separation in California, the photography and art do not become an ingredient or component part of the color separation. The image embodied in the photograph or art is only reproduced in the color separation, and the photograph or art is used as a printing aid in producing the color separation. Since the advertising agency sells the photograph and art prior to such use, and the sale is in California, sales tax applies to the advertising agency’s sale of the printing aids. This is true regardless that the sale of the color separation may be exempt from sales tax as a sale in interstate commerce (Rev. & Tax. Code § 6396) and that the sale or use of the printed matter may qualify for exemption under either section 6379.5 as a sale or use of a printed sales message, or section 6362 as a sale or use of a component part of a newspaper. See Sales and Use Tax Regulation 1541, Printing and Related Arts, at subdivision (e)(2). We hope this answers your question; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Tax Counsel
RLD:sr