When were package-design charges nontaxable, and when did delivery of a complete model usable as a die pattern become a taxable sale?

Plain-English summary

California said package-design charges were nontaxable when tangible property was transferred only as a necessary means of expressing an idea. Plans and blueprints fit that description.

A complete model capable of use as a pattern for making a die went beyond communicating the design. It was a usable product and its transfer was taxable.

The source saw no relevant distinction between those models and finished artwork, which the taxpayer already accepted as taxable. The submitted purchase orders also appeared to call for tangible property.

Audit staff was instructed to remove receipts from transactions that did not involve model sales, but the opinion anticipated denial of the petition for the remaining taxable measure.

What this means for you

Package designers and manufacturers

The model's independent production use, not just the designer's creative effort, drove taxable-product treatment.

Accountants and tax professionals

Document every deliverable, whether it merely communicates an idea, whether it can serve as tooling or a pattern, purchase-order language, and separate charges.

Common questions

Q: Were package-design plans or blueprints taxable?

A: No, when used only to express the design idea.

Q: Was a complete model usable as a die pattern taxable?

A: Yes.

Citations and references

• California Sales and Use Tax Regulation 1501.01 (as printed in the source's 2003 editorial note)
• California Sales and Use Tax Regulation 1540

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0580
• Original supporting opinion: 515.0580 PDF

Original ruling text

515.0580

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

February 9, 1962

Mr. H--- B--H--- B--- and Associates
P.O. Box XXXX
---, California

-- - XXXXX
SR -- XX-XXXXXX

Dear Mr. B---:
We regret the delay in informing you of our conclusions on your petition for redetermination. Please be assured the delay was not intentional. After careful consideration of your contention regarding the taxability of your charges for the designing of packages, we have concluded said charges should be exempt only when they do not involve the transfer of tangible personal property except as a means of expressing an idea. We are of the opinion that the production of a plan or blueprint is necessary for the expression of your ideas. However, we also believe the manufacture of a model which is complete in all respects and capable of use as a pattern in the making of a die goes beyond the exempt expression of ideas. It is a taxable sale of a usable product. We cannot see a distinction between these models and finished art work, which you concede to be subject to tax. Even the typical purchase orders you submitted appear to call for the delivery of tangible personal property. In line with the above comments, we have requested our audit staff to review your records so as to be sure that the measure of tax does not include any gross receipts from transactions not involving sales of models. Upon receipt of a report from our district office, we will recommend denial of your petition as regards the measure of tax finally established. Enclosed are the sample models and purchase orders you presented during our meeting in Long Beach. Very truly yours,

J. J. Delaney
Associate Tax Counsel

JJD:ml
Enc.

See also Reg. 1501.01 and
Reg. 1540. SPJ 10/6/03.