When were artists' sketches, layouts, consulting design, creative time, and supplies taxable as finished art rather than nontaxable preliminary work?

Plain-English summary

Sketches or layouts were nontaxable preliminary art when they were not the final product delivered to the customer. This covered rejected billboard concepts and initial brochure or magazine-ad sketches. The artist paid tax on supplies used for that preliminary work.

Other layouts were taxable finished art when delivering them completed the artist's contract, even if another party later changed them or discarded them. That included coupon-design proposals and a freelance layout sold to another artist. A reseller could provide a resale certificate and then collect tax from its own client.

The letter also treated a consulting designer's work and magazine layouts as taxable; layouts were finished art rather than preliminary art. Separately stated “design time” was nontaxable only when it was not attributable to the final design. Charges attributable to producing the final design were taxable.

Items incorporated into the final product could be bought for resale. Supplies used only for initial sketches, templates, brushes, or other nontransferred work were taxable to the artist.

Common questions

Were rejected billboard sketches taxable? No, when they were not the final product.

Were completed coupon or freelance layouts taxable? Yes.

Was consulting design work taxable? Yes under the stated magazine engagement.

Could separate creative-thinking time be nontaxable? Yes, if unrelated to the final design and separately stated.

Which supplies could be bought for resale? Items incorporated into the final product.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8605L0809C07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller May 29, 1986

Dear ***:

Thank you for your letter concerning tax on artwork and design
services.

1. I am enclosing a copy of a sketch for a billboard idea that was
   presented to a client to look at. Several variations were also pre-
   sented at the same time. The final billboard ended up looking en-
   tirely different from this or from any of the other sketches and NO
   PART of any of the sketches were PHYSICALLY incorporated into the
   finished 20'X40' billboard. Should sales tax have been charged on
   the ideas presented to the client?

Response: If these sketches are not the final product you provide your
customer then, they fall within the definition of preliminary art and
the charge to your client is not taxable. You should pay tax on the
supplies used.

2. Recently one of us worked as a "Consulting Designer" for a new maga-
   zine, at the magazine's office. Some preliminary page layouts were
   done, a lot of talk about how the magazine should "look", some sorting
   of pictures and general tossing around of ideas. Should the designer
   have charges sales tax on this creative time. No finished art or
   production art was done by the artist. Should tax have been charged
   on this time or not?

Response: The charge for working as a consulting designer is taxable.
The magazine may provide the consultant a resale certificate in lieu of
tax on the consultant design services. Layouts are not considered
preliminary art, but finished art.

3. One of us does layouts, or preliminary sketches, for a company that
   mails coupons to residences from local merchants. This artist never sees
   the layouts again. The client shows them to the merchant and he, then
   decides what he wants to advertise and what he wants his coupon to say.
   The final, printed coupon in most instances doesn't look much like the
   original preliminary sketch. Should the artist charge tax on this
   service?

Response: When the artist draws up several design proposals for the
mall coupon company, he has completed his contract with the coupon
company and he has provided the coupon company with several pieces of
finished art. He should charge the mail coupon company tax on the
artwork.

4. Artists also free-lance for each other. In one instance, I will do
   a layout for my fellow artist friend, she then hands it to her client
   who then takes it and shows it to his clients in this case, lumber and
   hardware stores. The merchants fill in the blanks with what they want
   to advertise and then it is sent to the production people who set the
   type, paste-up pictures of the merchandise on a board and this then
   goes to the printer and becomes the finished newspaper tabloid. By
   this time, the original layout has always changed and in no way, is any
   part of the initial sketch PHYSICALLY incorporated into the finished
   product. Should a tax be charged on the initial layout? The original
   sketch ends up in the wastepaper basket.

Response: When you finish the layout for your friend, you have sold
your friend finished art. Your friend may give you a resale certificate
in lieu of tax if your friend is gong to resale the layout to her client.
She will then charge her client tax.

5. What about initial sketches or layouts for brochures or magazine ads?
   The original sketch is always tossed out, it does not PHYSICALLY become
   part of the final fabricated art. Should a sales tax be charged on the
   idea?

Response: If the initial sketches or layouts are not the final product
you provide your customer, then tax is not due on the amount your charge
your customer for the sketches. You should pay tax on all supplies used
to make the initial layouts or sketches.

6. Should we be charging a tax for creative "thinking" time? We charge by
   the hour for "design time", the amount of time that is spent "doodling
   around with ideas". Is this time taxable?

Response: If the "design time" is not attributable to the final design
you provide your customer, and if it is separately stated from the amount
charged for the final design, then no tax is due on the charge for design
time. Basically, you should charge tax on the total amount attributable
the production of the final design you provide your client.

You may give a resale certificate in lieu of tax on any items
incorporated into the final product, e.g. paper, ink, paint, etc. You
should pay tax on any items not incorporated into the final product,
e.g. paper, ink, etc. used to produce initial sketches, templates, paint
brushes, etc.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

If you have any questions or need more information,, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
Adina Whittemore
Tax Policy Section
Tax Administration Division