Did using personal computers and diskettes change whether an advertising agency's preliminary and finished artwork was taxable?

Plain-English summary

An advertising agency planned to use personal computers instead of its traditional production method. The Comptroller said a computer did not automatically turn a task into taxable data processing, and a diskette did not change preliminary art into finished art. The work itself—not whether it moved on a tissue rough, layout board, or diskette—controlled.

Work done before the client approved the advertising concept or message was nontaxable preliminary art. Once the client approved a diskette for delivery to a third-party printer, it contained or became taxable finished art. The agency needed task-specific time and expense records; without them, the entire service charge could be treated as finished art.

The identified board-mounting steps were taxable finished art and employee fabrication. Based only on the stated facts, and without reviewing contracts, the Comptroller accepted the agency's client-agent role for third-party printing. PCs did not change that relationship if Rule 3.321 was met.

What this means for you

Client approval, the nature of the work, and documentation separated preliminary from finished art. The production tool and transfer medium were not decisive.

Common questions

Did a PC automatically create taxable data processing? No.

When was art preliminary? Before client approval of the concept or message.

When did the diskette become finished art? When approved for delivery to the printer.

Why did documentation matter? Without it, the entire service charge could be treated as finished art.

Did PCs destroy the agency relationship? No, if Rule 3.321 was met; the answer was based only on the agency's assertions.

Citations and references

• 34 Tex. Admin. Code § 3.330 (data processing services)
• 34 Tex. Admin. Code § 3.321 (advertising agencies)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9102L1074E08

Original ruling text

February 13, 1991

Dear ***:

Your letter, addressed to Lucy Glover, was assigned to me for response.
You requested a sales and use tax ruling for an advertising agency changing
from the "traditional method" to a "new method" utilizing personal computers to
provide services for its clients.

As you know, your letter contained extensive discussion of the two
methods, exhibits showing a synopsis of each method and invoices for each
method, as well as your sales and use tax analysis of each method. Your
primary concern appears to focus on what effect the use of personal computers
(PCs) will have on the sales and use tax responsibilities of an advertising
agency maintaining an agent/principal relationship with its clients and
operating strictly under the comptroller's rules applicable to such
relationships. In my response, I will not take the space to restate your
information; I will state your question and provide a response.

QUESTIONS

1. Is the Agency correct in its position that the creative work done on
   the PCs will be non-taxable as "nontangible services" or "preliminary art"?

Response: The use of a computer or personal computer does not automatically
cause a specific task to become taxable as a data processing service. Please
refer to Rule 3.330, enclosed for clarification of the previous statement.
Likewise, the use of a diskette to transfer the product to
the customer does not change the status of "preliminary art" or "finished art."
The medium of transfer ("tissue rough," "layout board," or diskette) does not
necessarily control the taxability, but rather the work itself controls the
taxability.

Preliminary art is work done prior to the client's approval of the advertising
concept or message. The diskette will contain preliminary art when it contains
work done prior to the client's approval. The diskette will contain/becomes
finished art when the client approves the diskette to be sent to the
third-party printer.

Charges for preliminary art are not taxed; charges for finished art are taxed.
The use of the PC will necessitate more careful documentation of time and expense
attributable to specific tasks. Without such documentation, it is possible that
the entire charge for the service will be considered a charge for finished art.

2. Is the Agency correct in its position that any "preliminary art" prepared
   by the Agency will not become physically incorporated into any "finished art"?

Response: According to Exhibit C, any "preliminary art" that is mounted
on the board whether produced by the Agency or purchased from the
third-party vendor becomes "finished art" and all charges associated with
step 8 and step 9 are taxable.

3. Is the Agency correct in its position that it will not be engaged in
   any taxable "employee fabrication"?

Response: No, as previously discussed, at least steps 8 and 9 of Exhibit
C are "employee fabrication."

4. Is the Agency correct in its position that it will be acting as the
   agent of its client for purposes of the Comptroller's Rules, including
   specifically Rule 3.321, in obtaining the services of the third-party
   printing firm to produce the client's newsletter or brochure.

Response: Yes, based solely upon the assertions in your letter. However,
I have not reviewed contracts or other documents pertinent to this issue.

5. If the answer to Question No. 4 is negative, what must the Agency do
   or not do to maintain its agent status and still continue to do the design work
   for newsletters and brochures using PCs and still continue to be the purchasing
   agent to get the newsletter or brochure produced by third parties?

Response: The use of PCs does not affect the agency relationship, as
long as the requirements of Rule 3.321 are met. The agency must document all
time and expense as stated above.

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

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division