Were charges to develop a training course taxable when the designer delivered one participant guide, leader guide, text transparencies, and video script?

Plain-English summary

An instructional-design firm supplied a team to analyze a corporation's training needs, select appropriate formats, and develop a software-metrics course. It created participant and leader guides, text transparencies, and a dialogue script, while the client produced the actual instructional video.

California found that the client's true object was development of the course, not purchase of the physical deliverables. One copy of each guide, the transparencies, and the script were incidental to that service, so the firm's charge to the client was not taxable.

The firm was the consumer of the paper, transparencies, and other property used to perform the service. Tax applied to its purchases of those materials.

The opinion assumed that the client would duplicate the guides in-house and that the firm did not deliver a paste-up, mechanical, assembly, camera-ready copy, or reproduction of those production materials.

What this means for you

Instructional designers

The result was tied to custom course development and limited incidental originals, not mass production or delivery of reproduction-ready property.

Accountants and tax professionals

Review copy count, production readiness, who duplicates the materials, physical versus digital delivery, and tax on the provider's inputs.

Common questions

Q: Was the course-development charge taxable?

A: No.

Q: Were the single guides, transparencies, and script taxable to the client?

A: No. They were incidental to the service.

Q: Who owed tax on materials used to create them?

A: The instructional-design firm as consumer.

Citations and references

• California Sales and Use Tax Regulations 1501 and 1541(f)(5)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0068
• Original supporting opinion: 515.0068 PDF

Original ruling text

515.0068

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-6450

December 8, 1989

B--- M--Bookkeeper
D--- L. S--- & A---, Inc.
XXXX W. --- ---, Suite XXX
--- ---, CA XXXXX
Dear Ms. M---:
This is in reply to your October 18, 1989 letter regarding the application of sales tax to charges by D--- L. S--- & A---, Inc. (DSA), to H--- Corporation (H---) for developing a software metrics course of instruction. You sent a copy of the proposal which you sent to H--- in response to H---’s request for proposal (RFP). We understand that DSA provides a team of its personnel to consult with H--- to analyze the instruction needed and identify the appropriate formats for instructional materials. The team then develops the materials which consist mainly of a participant’s guide and a leader’s guide. DSA helps H--- in writing a script for an instructional videotape of the course; however, H--- actually produces the videotape. We understand that the items of tangible personal property which you deliver to H--- are one copy each of the participant’s and leader’s guides, some transparencies of a type which are used to display text by means of an overhead projector, and a script of dialogue for the videotaped production. Although H--- will duplicate the guides in-house to distribute to the participants of the classes, we assume that H--- does not transfer the pamphlets in the form of a paste-up, mechanical, assembly, or camera-ready copy or in the form of a flat or photoreproduction of such properties. (Cf. Sales and Use Tax Reg. 1541, Printing and Related Arts, subd. (f)(5).) We believe that the true object of DSA’s contract with H--- is the performance of a service; that is, the development of a course of instruction, rather than a sale of tangible personal property. We conclude that, DSA’s transfer of the script of the videotape, the participant’s and leaders guides, and the transparencies, is incidental to the performance of the service. DSA is the consumer of such tangible personal property, and tax applies to the sale to DSA of the materials used to produce the property. Tax does not apply to DSA’s charge to H---.

Ms. B--- M---

-2-

December 8, 1989
515.0068

We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Tax Counsel

RLD:sr