Is graphic design artwork (camera-ready art) subject to Utah sales tax, and does it matter whether the designer also does the printing or bills the art separately?

Plain-English summary

A graphic design studio owner, negotiating to acquire a printing company, asked the Commission to sort out conflicting advice he'd gotten from three other design-plus-printing firms about how to handle sales tax on "camera-ready art" -- creative work (hand-drawn or computer-generated) that a printer then copies onto plates to print business cards, brochures, etc.

The Commission's guidance, illustrated with a printer ("A") who buys artwork from a designer ("B") to produce brochures for a client ("C"):

• General rule: sales of artwork or printed material are taxable, and all services (including design and binding) performed in connection with selling the printed material are taxable too.
• Scenario 1 -- printer keeps the art as a production master: If A buys artwork from B and uses it only as a master to print a thousand brochures for C (not reselling the master itself), A is the final consumer of the artwork and must pay sales tax on the purchase from B.
• Scenario 2 -- printer resells the master along with the printed pieces: If A instead sells the master copy of the art along with the printed brochures to C, A may buy the artwork tax-free for resale, but must collect sales tax from C on the entire charge for both the brochures and the artwork.
• Scenario 3 -- client buys the art directly, then hands it to the printer: If C buys artwork from B and separately gives it to A to print, B must collect sales tax from C on the artwork sale. A never purchased the artwork, so A has no tax liability on it -- A just collects sales tax from C on the printing charge.
• Format is irrelevant: whether the artwork is delivered on paper or floppy disk doesn't change the taxability analysis.
• Bottom line for the requester: if his combined company produces both the art and the final printed product, the entire charge to the client -- including design services -- is taxable. If a client separately buys design services and printing from the two segments of the business, the client owes tax on both transactions (absent some other exemption).

What this means for you

Graphic designers and print shops (especially combined design+print businesses)

If you do both the design and the printing for a client, don't try to carve the design fee out as nontaxable -- the entire charge, including creative/design services, is taxable when you're delivering a final printed product. See Utah Administrative Rules R865-19S-75 and R865-19S-80 for the underlying rules.

Printers buying artwork from independent designers

Your tax treatment on that purchase depends on what you do with the art afterward: consume it as a production master (you owe tax on the purchase) versus resell the master to your client along with the finished product (you can buy it tax-free but must tax the whole combined sale to your client).

Independent graphic designers selling art to clients who print elsewhere

If your client buys the artwork from you directly and takes it to a separate printer, you're the one who must collect sales tax on the artwork sale -- the printer isn't involved in that leg of the transaction at all.

Common questions

Q: Is graphic design/artwork taxable in Utah?
A: Yes, per this ruling -- sales of artwork or printed material, including associated design and binding services, are taxable.

Q: If I'm a printer and I buy art from a designer just to make plates, do I owe tax on that purchase?
A: Yes, per this ruling, if you keep/consume the master and don't resell it -- you're the final consumer of the artwork.

Q: Can I buy artwork tax-free if I'm going to resell it to my client along with the printed product?
A: Yes, per this ruling -- but then you must charge your client sales tax on the entire combined charge for the art and the printing.

Q: Does it matter if the art is delivered on paper versus a computer file?
A: No, per this ruling -- the delivery format doesn't affect taxability.

Q: Can I rely on this ruling for my own design/print business structure?
A: Not automatically -- it addresses the specific three scenarios presented. Your actual contractual and delivery arrangement would need its own analysis against Rules R865-19S-75 and R865-19S-80.

Citations and references

Rules:

• Utah Administrative Rule R865-19S-75
• Utah Administrative Rule R865-19S-80

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-163.pdf

Original ruling text

96-163

Response November 6, 1996

Request

27 September 1996

State Tax Commission

Sales Tax Division

210 North 1950 West

Salt Lake City, Utah 84134

REQUEST FOR ADVISORY OPINION

Dear Sirs,

This is a request for an advisory opinion on a sales
tax matter. Here are the specifics:

I currently own and operate a graphic design studio
company. Some of the work is done by hand using pencil, pen, knife, T-square,
triangle, etc. and some is done using computer drawing/layout programs. The
typical result of our creative activity is "camera-ready-art" on
paper or computer disk. This art is then taken to a printer by our clients.
Printers copy our work onto printing plates and print business cards,
brochures, etc. When we set up the business years ago we were told by a
representative of the Utah State Tax Commission that this creative work was not
subject to sales tax, so we do not charge sales tax to our clients, and we pay
sales tax on all of the materials we purchase to produce this work (like
pencils, pens, papers, diskettes etc.).

I am now negotiating to acquire a printing company,
and I have talked to three similar firms (firms that do both design and
printing) in Salt Lake City to determine how I should handle sales tax. I have
received three different answers, each of which has a logical basis. Here are
the three different ways that the process is being handled by the firms I contacted:

A. One owner said that he was told by the State Tax
Commission that since the artwork was an integral part of the finished, printed
product, he must charge sales tax on the whole job including the art. So that
is what he does.

B. Another owner said that he was told by a Tax
Commission representative that he could send an invoice to his client for just
the art portion of the job without sales tax, and then later when the printing
was completed he could send another invoice for the printing which would
include sales tax. So that is what he does.

C. The third owner was advised by the Tax Commission
that the procedure outlined in "B" above was not allowed because the
Tax Commission would consider the art to be an integral part of the finished
product whether it was billed separately or not. So he owns and operates two
separate companies. The first company creates the art and bills it without
sales tax. The second company prints jobs and bills it to its clients including
sales tax.

So here are the questions that I would like your
ADVISORY OPINIONS on:

1. Where a graphic design studio company produces
   creative designs either by hand using traditional tools, or by computer using
   design/layout pro-grams, and the client receives "camera-ready-art"
   on paper and/or on floppy disk; is that work subject to sales tax?

The following two questions only make sense if your
answer to question "1" is that such artwork is not subject to sales
tax.

2. Where the same company both creates the camera-ready-art
   and then copies that artwork onto printing plates and prints the final items on
   a printing press, is the camera-ready-art subject to sales tax if it is
   delivered and billed to the
   client separately from the printed pieces?

3. Where Company A creates camera-ready-art,
   delivers it to the client and bills it, and Company B (owned by the same person
   who owns the first company, or owned by company A) then copies that
   camera-ready-art onto printing plates and prints it on a printing press; is company
   A's camera-ready-art subject to sales tax?

Thank you for your attention to this matter. It will
help me in properly setting up my proposed printing company and to properly
comply with state law.

Sincerely,

XXXXX

XXXXX

Advisory opinion - sales tax on artwork

Dear XXXXX

We
have received your request for tax advice pertaining to the artwork that you
produce. The type of transactions that
you are asking about are confusing because your product may be considered
either a component part of the final taxable item or it may be the final
taxable item itself. We offer the
following guidance:

Sales
of artwork or printed material are taxable.
All services, such as binding, performed in connection with the sale of
the printed material are also taxable.
Therefore, if you are selling graphic artwork or a final printed product
to your client, the entire charge -- including the charge for design services
-- is taxable. With regard to the artwork used to produce the final printed
product, the following examples should be helpful.

For
purposes of illustration, assume that a printer ("A") purchases artwork from a
graphic designer ("B") to produce brochures for a client. "A" uses the artwork as a master, and the
master is used to print a thousand brochures for sale to a client ("C"). Although "A" may purchase tax free items
that are resold or that actually become component parts of the final product,
that is not the case with the artwork in this example. Here the
master itself is not resold, nor does it actually become a component
part of the final product. Instead "A" retains the master or consumes it in the
process of printing the brochures. "A,"
as the final consumer of the artwork, must pay sales tax on his purchase of the
artwork from "B."

For
the next example, assume the same facts except that "A" sells the master copy
of the artwork along with the printed brochures to "C." In this case, "A" is entitled to purchase the artwork tax free for resale, but "A" must
collect sales tax from "C" on the entire charge for the brochures and artwork.

If
"C" purchases artwork from "B," then gives that artwork to "A" to use in
printing the brochures, "B" must collect sales tax from "C" on the sale of the
artwork. "A" does not purchase the
artwork, so "A" has no liability for sales tax with regard to it. Instead, "A" collects sales tax from "C" on
the sale of the brochures.

Turning
to your situation, if your company produces both the artwork and the final
printed product, the entire charge to your client for the final printed product
is taxable. If your client purchases
artwork from the design segment of your company, then separately purchases
printed materials from the printing segment of your company, the client must
pay sales tax on both transactions unless some other exemption applies. (See
Utah Administrative Rules R865-19S-75 and R865-19S-80 (enclosed)).

Your
company is liable for tax on items that it purchases and either retains title
to or consumes in the process of producing the client's finished product. You may only purchase tax free those items
that will actually be resold to your client.

You
asked whether the form in which you deliver the artwork to the customer
determines its taxability. It does not. Computer generated artwork is treated the
same as artwork developed by other methods.
Taxability is determined by whether the person purchasing it is entitled
to claim an exemption.

Please
let us know if you have other questions.

For
the Commission,

Joe
B. Pacheco,

Commissioner