How were editorial-production charges taxed when manufacturing aids passed to the client before use, in-state proof copies were delivered, and final film negatives went to an out-of-state printer?

Plain-English summary

An editorial-production provider received a paper manuscript and word-processing files, coordinated editing and approval, entered corrections, created digital layouts and illustrations, circulated laser proofs, and sent files to a local service bureau for lithographic film negatives. It inspected and packaged the film, then sent the film and final proofs to an out-of-state printer.

The provider's quote said title to tangible manufacturing aids passed to the client before the provider used them. Under that clause, the provider made taxable California sales of those aids even though the final product later went out of state. The opinion gave subcontracted data conversion from IBM to Macintosh-compatible format as an example.

The provider was also the retailer of tangible property it had to deliver for the client's benefit. Photocopy proof sets delivered to the proofreader, publisher, author, or indexer in California were taxable.

The final lithographic negatives received different treatment. Assuming the provider bought them for resale, did not act merely as the client's purchasing agent, made no intervening use, and shipped them to an out-of-state point for the client's use, the provider's sale was exempt. Inspecting and packaging the film did not defeat that result.

What this means for you

Editorial vendors, prepress shops, publishers, and tax professionals

Review title-passage clauses, each interim proof or file conversion, the producer's use of final film, and the shipment destination. A single publishing project can contain taxable California transfers and an exempt out-of-state final shipment.

Common questions

Q: Did out-of-state shipment make every charge exempt?

A: No. Manufacturing aids sold to the client before California use and proof copies delivered in California remained taxable.

Q: Were photocopies sent for editing taxable?

A: Yes, when delivered to the identified participants in California.

Q: Why were the film negatives exempt?

A: The opinion assumed they were bought for resale, not used by the provider, and shipped out of state for the client's use.

Q: Did inspection and packaging count as intervening use?

A: No under the opinion's stated conclusion.

Citations and references

• California Sales and Use Tax Regulation 1541(e)(2)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 442.0810
• Original supporting opinion: 442.0810 PDF

Original ruling text

442.0810

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

October 19, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

REDACTED TEXT

Re:

REDACTED TEXT

Dear REDACTED TEXT,
This is in reply to your August 22, 1994 letter regarding the application of sales tax charges by REDACTED TEXT for editorial and production work you perform for REDACTED TEXT. You provided the following facts: "The publisher sends me an author's paper manuscript and word processing disk files. I have the paper manuscript edited and sent to the author for approval. We enter the corrections to the original computer disk files, then import the text files into a digital page layout program. We computer-generate any illustrations that are required and combine them with the text in the page layout program. We print laserprinted proofs of the pages and send photocopies to a proofreader, the publisher, the author, and an indexer. Corrections are returned to us, we change the computer files as necessary, and print new proofs for confirmation. The disk files are sent via modem to a local service bureau for output as lithographic film negatives. The film is returned to REDACTED TEXT for inspection and packaging. The film and the final laserprinted proofs are shipped to an out-of-state printer, as REDACTED TEXT required by the client. The disk files are archived at REDACTED TEXT for possible future editions. We first note that, under the "Terms and Conditions" section of your form, Price Quote, you have a title passage clause which provides that title to all tangible personal property you purchase as manufacturing aids passes to REDACTED TEXT prior to your use. In such case, sales tax applies to your sale in this state of the tangible personal property to REDACTED TEXT regardless that you may ship the final product to a point outside this state. (Cf. Sales and Use Tax Regulation 1541, Printing and Related Arts, subdivision (e) (2).) For example, your Price Quote includes a charge for data translation; that is, conversion of text and graphics from IBM to Macintosh-compatible format. If you have subcontracted that work, your charge to the customer for the conversion is a sale of tangible personal property in this state and subject to sales tax. As to the products you produce in fulfilling your contract, you are the retailer of tangible personal property you are required to deliver to your client or to other persons for the benefit of your client. For example, under the Production Requirements section of Price Quote, you are

REDACTED TEXT

-2-

October 19, 1994
442.0810

required to send the four sets of photocopies for positive editing by the proofreader, publisher, author, and indexer. If those photocopies are shipped to those persons in this state, your sale of the photocopies is subject to sales tax. We note that, under your purchase order, your final product is single page negatives. We assume that those negatives are the lithographic film negatives that you state you purchase from the "local service bureau". We also assume that you purchase the negatives for resale to REDACTED TEXT and make no intervening use of them, that is, you do not purchase them as an agent on behalf of REDACTED TEXT. In such case, the sale to you is a nontaxable sale for resale, and your sale to REDACTED TEXT is exempt from tax when you ship the negatives to REDACTED TEXT to an out-of-state point for REDACTED TEXT’s use outside of this state. That is true regardless that you inspect and package the film for shipment. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:plh
cc:

Santa Rosa District Office – JH