Were physical designs supplied to tee-shirt and belt-buckle manufacturers taxable even when the artist retained title or the customer scanned them?

Plain-English summary

An artist supplied designs to manufacturers of silk-screen tee shirts and belt buckles. Tee-shirt customers copied or scanned the designs to make master stencils. Belt-buckle customers sent designs to carvers, who created wax impressions and molds for manufacturing.

California treated the physical designs as taxable tangible personal property used as manufacturing aids. It did not matter that the artist retained title, granted only design-use rights, the customer did not physically handle the design itself, or the customer scanned the design into a computer.

The later sale of the manufactured tee shirts outside California did not determine tax on the artist's design sale. A design transfer could qualify for the interstate-commerce exemption only if the artist's contract required shipment outside California and the artist actually shipped it there under section 6396.

What this means for you

Commercial artists

Physical designs delivered for manufacturing were taxable even when compensation included fees or royalties and title remained with the artist.

Product manufacturers

Using a design as visual guidance, a scan source, or a model for molds made it a manufacturing aid under this opinion.

Accountants and tax professionals

Trace the design's delivery location and contract-required shipment separately from where the resulting products are sold.

Common questions

Q: Were the tee-shirt and belt-buckle designs taxable?

A: Yes. They were physical manufacturing aids.

Q: Did the artist's title retention make the transfer nontaxable?

A: No.

Q: Did scanning a design convert it into nontaxable design data?

A: No. The source treated the transferred physical design as taxable.

Q: Did selling finished products outside California exempt the design?

A: Not by itself. The design sale could be exempt only if the contract required the design to be shipped out of state and it was shipped accordingly.

Citations and references

• California Revenue and Taxation Code § 6396
• California Sales and Use Tax Regulation 1540(c)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0445
• Original supporting opinion: 515.0445 PDF

Original ruling text

515.0445

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

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

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

October 6, 1994

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Mr. R--- H. D--XXXX --- Avenue
--- ---, CA XXXXX
Re:

K--- C-SR -- XX-XXXXXX

Dear Mr. D---:
Your July 28, 1994 letter to Senior Tax Representative, T. F. Blue of the State Board of Equalization's Return Review Section has been referred to the Board's legal staff for reply. Your letter asks for the application of sales tax to charges by K--- C--- for designs. You provided the following facts: "Ms. C--- creates artistic designs for tee shirts and for belt buckles. She has a contract for artist's services with a company that makes silk screen tee shirts and she has a design license contract with another company that makes belt buckles. The tee shirt contract provides that 'in consideration for the services to be performed' she is to be paid $200 for each design used and in addition a commission of 5% of tee shirts sold. The belt buckle contract provides for fees of
$50 or $75 per design.
"She had no sales or income from the tee shirts or belt buckle designs in 1992 from the second quarter to the end. In 1993 she had total receipts of $2,825 of which $800 was from tee shirt designs in California, $350 for designs used and sold outside California, and $1,675 from belt buckle designs. She had no receipts from these activities during the first quarter of 1994." You note that, under Ms. C---' contract for the belt buckle designs, she provides her client "a right for using designs for producing belt buckles for resale"; however, she retains title to the designs. The client does not make a physical use of the designs but provides them to carvers

Mr. R--- H. D---

-2-

October 6, 1994
515.0445

who look at the designs and carve wax impressions of the three dimensional buckles. The client then uses the impressions to make molds from which to fabricate the buckle. As to the tee shirt designs, Ms. C---' customer either copies the designs or scans them into a computer to produce master stencils. You believe that, under those circumstances, Ms. C---' charge is nontaxable, because her transfer is akin to a nontaxable transfer of an author's original manuscript to a publisher. You also believe that, when Ms. C---' customers scan a tee shirt design into a computer, Ms. C---' transfer of the design is a transfer of "design data" and is nontaxable. As to the belt buckle designs, you believe the designs merely furnish "visual guidance" to the carvers in the way that a manuscript furnishes "verbal guidance" to editors and typesetters. We disagree. As you note, Sales and Use Tax Regulation 1540, Advertising Agencies, Commercial Artists and Designers, provides at subdivision (c): "The tax applies to the entire amount charged by commercial artists or designers for items of tangible personal property such as drawings, paintings, designs or sketches transferred to the client, whether or not the property is suitable for display or is useful for actual reproduction by photo-mechanical or other processes." The State Board of Equalization has long taken the position that the true object of the contract for a design is the tangible personal property produced by the designer to embody the design.. (Bus. Tax. Law Guide Annos. 100.0040, 100.0100.) The application of tax to transfers of designs does not depend on whether the customer or client handles the design. Designs are often transferred for the purpose of examination by a manufacturer or construction contractor. Tax applies to charges for such designs except when they are provided incidental to nontaxable professional services provided by licensed architects or engineers. (Cf. Bus. Tax. Law Guide Anno. 515.0380.) Ms. C--- may put a great deal of time and effort into developing and producing a design; however, the true object of her contract with the manufacturer is the tangible personal property which embodies that design and which the manufacturer uses as a manufacturing aid to produce and sell the tee shirts or belt buckles. We note that some of Ms. C---' sales of tee shirt designs are for designs "used and sold" outside California. Of course, the sale of the tee shirt outside California would have no bearing on the application of tax to Ms. C---' sale of designs. However, her sale of a design may be exempt from tax under Revenue and Taxation Code section 6396 if she is required pursuant to her contract of sale to ship the design to a point outside this state and does so ship the design in accordance with Section 6396.

Mr. R--- H. D---

-3-

October 6, 1994
515.0445

To receive a decision on your request to have Ms. C--- placed on an annual reporting basis, please contact the San Francisco District office located at 50 Fremont Street, Suite 1400, San Francisco, CA 94105-2234, Telephone: (415) 396-9800. 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:

San Francisco District Administrator - BH
Theresa Blue - MIC:35