Does a graphics design firm have to collect sales tax on the brochures, logos, and marketing materials it designs and delivers to clients on a computer disk?

Plain-English summary

A CPA firm asked on behalf of a graphics design client whether the client's design business must collect sales tax on its work. The graphics firm designs brochures, logos, marketing literature, and occasional advertisements; it pays sales tax on its own supplies (typesetting, photography); and it gives customers a computer disk with the finished design. In most cases (about 75% of billings) its invoices state "Reproduction rights only, ownership of mechanical belong to Graphics firm." In another 10% of billings, it releases the design without any reproduction-rights statement. In the remaining 15%, it bills a flat monthly fee for a set number of months.

Under 20 NYCRR § 526.7(f), granting someone a right to reproduce an original artistic work (like a design) isn't a taxable sale as long as the payment is really a royalty for the reproduction right, and mere temporary possession of the disk to make copies doesn't convert that royalty into a taxable license to use. So, where the graphics firm's invoice and agreement clearly limit the client to reproduction rights only (and the disk is used solely to make copies), the transfer isn't a taxable sale of tangible personal property -- though the firm's own supply purchases (typesetting, photography) remain taxable since they aren't purchased for resale.

But that protection has real limits. If the invoice doesn't include the reproduction-rights-only language, transferring the disk is a taxable sale of tangible personal property. And even when the reproduction-rights language IS used, designing a logo or corporate identity system is treated differently: because a client typically ends up with complete rights to its own logo (more than a mere reproduction right), that transfer is a taxable sale regardless of the invoice wording. If the firm does make a taxable sale, it must register as a sales tax vendor. Delivery of the disk outside New York, or a sale to a Section 1116(a) exempt organization, escapes tax; and some of the firm's own supply purchases (like disks that become a resold component) can qualify for the resale exclusion, or for the production exemption if used directly and predominantly to produce tangible personal property for sale (with a timely resale or exempt-use certificate).

What this means for you

Graphic designers, ad agencies, and creative firms

Your invoice and client agreement language matters enormously here. Consistently and clearly state when you're only granting reproduction rights (not selling the underlying artwork/disk) if you want that transaction to escape sales tax -- but understand that designing something the client will fully own and control, like a logo or corporate identity, is taxable even with reproduction-rights language, because the client isn't really just getting a reproduction right in that case.

Businesses buying design services

Ask your designer how the engagement is billed and documented -- whether you're buying a reproduction right only, or full ownership of the design -- since that affects whether you'll be charged sales tax, and logo/identity work should generally be expected to carry tax.

Accountants and tax professionals

This opinion is a useful checklist for classifying creative-services transactions: reproduction-rights-only language plus disk use limited to reproduction purposes avoids tax on the transfer (though not on the firm's own supply purchases), while a logo/identity design is taxable regardless, and out-of-state delivery or sales to exempt organizations remain untaxed.

Common questions

Q: If the graphics firm doesn't mention reproduction rights at all, is the sale taxable?
A: Yes -- without a clear reproduction-rights-only statement in the invoice and agreement, transferring the disk for consideration is treated as a taxable sale of tangible personal property.

Q: Is a logo design ever exempt as a reproduction-rights transfer?
A: No, according to this opinion -- because a client generally acquires complete rights to its own logo or corporate identity system, that transfer is considered a taxable sale of tangible personal property even if reproduction-rights language is used.

Q: What about the firm's own purchases of typesetting and photography?
A: Those remain taxable unless purchased for resale as a physical component of tangible personal property being resold, or unless they qualify for the production exemption (used directly and predominantly in producing tangible personal property for sale) with a timely resale or exempt-use certificate.

Q: Can another design firm rely on this ruling?
A: No. This advisory opinion binds the Department only with respect to the specific petitioner and the exact billing practices described.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c) (tax on enumerated services)
• Tax Law § 1101(b)(8)(i)(A) (definition of vendor)
• Tax Law § 1101(b)(4)(i) (resale exclusion)
• Tax Law § 1105-B, § 1115(a)(12) (production exemption)
• Tax Law § 1132(c) (exemption/resale certificate requirements)
• 20 NYCRR § 526.7(e), (f) (out-of-state delivery; reproduction rights)
• 20 NYCRR § 526.8 (definition of tangible personal property)
• 20 NYCRR § 528.13 (production exemption regulation)
• 20 NYCRR § 532.4 (exemption/resale certificate requirements)

Prior rulings and cases referenced:

• Vignelli Associates, Ltd., and Massimo Vignelli and Elena Vignelli, Individually and as Officers, Dec St Tx Comm, February 11, 1981, TSB-H-81(26)S
• Howitt v. Street and Smith Publications, Inc., 276 N.Y. 345
• Matter of Frissell v. McGoldrick, 300 N.Y. 370

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_91s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (91) S
Sales Tax
December 27, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S960319B

On March 19, 1996, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Gentile, Wiener, Penta & Co. CPA's PC, 42 Memorial Plaza, Pleasantville, NY.
The issues raised by Petitioner, Gentile, Wiener, Penta & Co. CPA's PC, are:
1.

Whether a graphics firm must collect sales tax on any or all of its design services.

2.

Whether a graphics firm must register as a vendor for sales tax purposes.

3.

Whether a graphics firm must pay sales tax on its purchases of materials used in its
design service.

Petitioner submits the following facts as the basis for this Advisory Opinion. A graphics firm
designs brochures, logos, marketing literature and, occasionally, advertisements. The graphics firm
pays sales tax on the purchase of its supplies, including typesetting and photography. The graphics
firm gives its customers a computer disk containing the designed item. In most cases, the customers
then contract with a printer to print the designed item and pay the printer directly.
The graphics firm bills its customers in one of three ways. In the first case (used for about
75% of the billings) the graphics firm includes a statement which reads "Reproduction rights only,
ownership of mechanical belong to Graphics firm." In the second case (used for about 10% of the
billings) the graphics firm releases the logo or other design to the customer and does not make a
statement regarding reproduction rights or ownership. In the third case (used for about 15% of the
billings) the customer is billed a predetermined monthly amount for a predetermined amount of
months.
Section l105(a) of the Tax Law imposes sales tax upon "It]he receipts from every retail sale
of tangible personal property . . . ."
Section 1105(c) of the Tax Law imposes sales tax upon the receipts from every sale, except
for resale, of certain enumerated services.
Section ll01(b)(8)(i)(A) of the Tax Law defines the term "vendor" as "A person making sales
of tangible personal property or services, the receipts from which are taxed by this article."

-2­
TSB-A-96 (91) S
Sales Tax
December 27, 1996

Section 526.7(f) of the Sales and Use Tax Regulations provides, in part:
Reproduction rights. (1) The granting of a right to reproduce an original
painting, illustration, photograph, sculpture, manuscript or other similar work is not
a license to use or a sale, and is not taxable, where the payment made for such right
is in the nature of a royalty to the grantor under the laws relating to artistic and
literary property.
(2) Mere temporary possession or custody for the purpose of making the
reproduction is not deemed to be a transfer of possession which would convert the
reproduction right into a license to use. (See Howitt v. Street and Smith Publications.
Inc., 276 N.Y. 345 and Matter of Frissell v. McGoldrick, 300 N.Y. 370.)
(3) Where some use other than reproduction is made of the original work,
such as retouching or exhibiting a photograph, the transaction is a license to use,
which is taxable.
Example 1: A person contracts with an artist for a right to reproduce one of
the artist's paintings on a book cover. No other right is given by the artist for the use
of his painting. The person who obtains the reproduction right to the painting may
have copies made and returns the painting to the artist without alteration, change or
correction, and without having destroyed or publicly exhibited the painting. The
transfer is not held to be a transaction subject to the sales tax, as a rental, lease or
license to use.
Section 526.8 of the Sales and Use Tax Regulations provides, in part:
Reg. Sec. 526.8. Tangible personal property.--(Tax Law, Sec. l101(b)(6)). (a)
Definition. The term "tangible personal property" means corporeal personal property
of any nature having a material existence and perceptibility to the human senses.
Tangible personal property includes without limitation:
*

*

*

(3) artistic items such as sketches, paintings, photographs, moving picture
films and recordings;
The sale by the graphics firm of a right to reproduce a design where the payment by the client
is in the nature of a royalty is not subject to tax. The transfer of a computer disk in conjunction with
the sale of a reproduction right, for the sole purpose of making the reproduction, is also not subject
to tax. See Section 526.7(f) of the Sales and Use Tax Regulations. If the client's use of the computer
disk is not limited to reproduction purposes, then the transfer of the disk to the client for a
consideration will be considered a sale of tangible personal property that may be subject to tax under
Section l105(a) of the Tax Law.

-3­
TSB-A-96 (91) S
Sales Tax
December 27, 1996

In this case, a graphics firm designs brochures, logos, marketing literature and
advertisements. The graphics firm pays sales tax on the purchase of its supplies, including
typesetting and photography. The graphics firm gives its customers a computer disk containing the
design. Unless the agreement with a client and the invoice clearly indicate that only design
reproduction rights are being sold to the client and the computer disk is being transferred for
reproduction purposes only, the graphics firm in this case will be considered to be making sales of
tangible personal property that may be subject to sales or compensating use tax. See Vignelli
Associates. Ltd.. and Massimo Vignelli and Elena Vignelli. Individually and as Officers, Dec St Tx
Comm, February 11, 1981, TSB-H-81(26)S.
In situations where the graphics firm transfers a computer disk containing a designed item
to its customer and includes on its invoices a statement that the graphics firm only grants to the
customer reproduction rights and that ownership of the mechanicals remains with the graphics firm,
pursuant to Section 526.7(f) of the Sales and Use Tax Regulations the transfer of the computer disk
containing the design does not constitute the sale of tangible personal property and is, therefore, not
subject to sales and use taxes, provided that the agreement with the customer also clearly provides
that the customer is only receiving reproduction rights and may only use the disk for reproduction
purposes. However, in this case purchases by the graphics firm of supplies, including typography and
photography, are subject to sales tax since the supplies are not purchased for resale as such or as a
physical component part of tangible personal property to which title is being transferred.
It should be noted that if a logo or corporate identity system is designed in the transaction
described in the preceding paragraph, the transaction is considered a sale of tangible personal
property that may be subject to sales or compensating use tax. Generally, a client has complete
rights to its own logo or corporate identity system. The graphics firm in this case is selling more
than a reproduction right to this design. The transfer of the computer disk for a consideration in this
case is, therefore, a sale of tangible personal property.
In instances where the graphics firm transfers a computer disk containing a designed item and
does not include on its invoice, or in the customer agreement, a statement that the graphics firm only
grants to the customer reproduction rights and that ownership of the mechanicals remains with the
graphics firm, the transfer of the computer disk for a consideration constitutes the sale of tangible
personal property that may be subject to sales tax.
If the graphics firm makes taxable sales of tangible personal property, the design firm is a
vendor and must register with the Department of Taxation and Finance for the collection of sales tax.
See Sections ll01(b)(8)(i)(A) and 1134 of the Tax Law.
The sale of the computer disk may be exempt from tax if the disk is used by a customer
directly and predominantly in the production of tangible personal property for sale. See Section
1115(a)(12) of the Tax Law. However, if the computer disk is not used to produce tangible personal
property for sale, the sale of the computer disk is not exempt.

-4­
TSB-A-96 (91) S
Sales Tax
December 27, 1996

If a computer disk is delivered to a customer, or to a customer's printer or fabricator, outside
of New York State, the sale of the computer disk is not subject to sales tax. See Section 526.7(e)
of the Sales and Use Tax Regulation. If a computer disk is sold to an organization that is exempt
from tax under Section ll16(a) of the Tax Law, the sale is not subject to sales tax.
Since the graphics firm, in some instances, is considered to be selling tangible personal
property, some of its purchases, e.g., computer disks, may qualify for the resale exclusion from sales
tax. See Section ll01(b)(4)(i) of the Tax Law. In addition, the graphics firm's purchases of pens,
paper and other art materials may be exempt from State and local sales and compensating use taxes
if the property purchased is used directly and predominantly in the production of tangible personal
property for sale. See Sections l105-B and 1115(a)(12) of the Tax Law, and Section 528.13 of the
Sales and Use Tax Regulations. In order to make exempt purchases of tangible personal property,
the graphics firm must give its suppliers a properly completed resale certificate (Form ST-120) or
exempt use certificate (Form ST-121) within 90 days after the date of delivery. See Section 1132(c)
of the Tax Law and Section 532.4 of the Sales and Use Tax Regulations.

DATED: December 27, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.