Non-taxable graphic design and direct mail in California sales tax law
PRELIMINARY/ CONCEPTUAL Layouts are Tax exempt
“Conceptual services” are services performed to convey ideas, concepts, messages, etc., prior to entering into a contract or obtaining approval for finished art, that generally result in the creation and development of preliminary designs (preliminary art). Preliminary art is tangible personal property prepared solely for the purpose of demonstrating an idea, concept, look, or message for acceptance by the client prior to the preparation of finished art. Examples of preliminary art include roughs, visualizations, drawings, sketches, renderings, illustrations, layouts, comprehensives, photographs, negatives, transparencies, prints, copies, chromatics, stats, logotypes, scans, lasergraphics, visual prototypes, and electronic imagery. Preliminary art does not include items used to produce finished art (i.e., intermediate production aids).
Charges for conceptual services should be identified as “design charges,” “preliminary art,” “concept development,” or another designation that clearly indicates that the charges are for the development and creation of preliminary designs, not finished art.
Note: If conceptual services are provided in connection with the production, distribution, or exploitation of a qualified motion picture, see Section 1105.10 pertaining to “creative art services.”
Tax does not apply to charges for conceptual services/preliminary art unless:
- The master agreement or other contract provides that the advertising agency or commercial artist will pass title or the right to permanent possession of the preliminary designs (artwork) in tangible form;
- Permanent possession of the artwork in tangible form is actually transferred to the client. Permanent possession
does not include temporary transfers to the client for review and approval purposes.
When charges for conceptual services/preliminary art are not subject to tax, the taxpayer must pay tax measured by the purchase price of the tangible personal property developed and used to produce the preliminary designs. This includes preliminary production aids used in the creation of the designs such as artwork, illustrations, photographic images, photo engravings, and other similar materials purchased from third parties and used to produce preliminary art. Aids used in the production of preliminary art are not presumed sold to the client prior to use, contrary to the presumption with intermediate production aids. If the advertising agency or commercial artist chooses to sell the preliminary production aids to the client prior to use, the contract or sales agreement must include a specific title transfer clause transferring title to the aids to the client prior to use. When this is the case, the advertising agency or commercial artist should separately itemize the taxable, retail sale of the preliminary production aids from their charges for the nontaxable conceptual services.
Copywriting and CONsultation SERVICES are exempt
Certain fees and commissions that are excluded from the measure of tax when such fees and commissions are separately stated.
EXCLUDED items include:
- Media commissions or fees for placement of advertising whether paid by the medium, by another advertising agency, or
by the client.
- Supplier commissions or fees paid to the advertising agency, such as those paid by premium manufacturers or direct
- Consultation and concept development fees related to client discussion, development of ideas, and other services.
If the advertising agency transfers tangible personal property to the client as a result of these services, the transfer
is incidental to the advertising agency’s providing of the service and is not a sale of tangible personal property.
The advertising agency is the consumer of tangible personal property transferred to the client incidental to the providing
of the service. However, when the fees are associated with conceptual services and the transfer of tangible personal property
(i.e., preliminary designs), in tangible form, is other than on a temporary basis (i.e., for review and approval purposes),
the transfer of the property is not considered incidental to the providing of a service.
- Research and account coordination fees.
- Fees for quality control supervision that entails the proofing and review of printing and other products provided by
- Charges for the formulation and writing of copy.
PRINTED SALES MESSAGES are exempt when sent
Directly from the printer to the mail house.
Printed sales messages are materials printed for the principal purpose of advertising or promoting goods or services. Printed sales messages include
brochures, catalogs, circulars, coupon books, letters, and pamphlets, including three-dimensional items such as standees and danglers. In order for sales of printed messages to be exempt from tax, they need to satisfy the following conditions:
- Printed to the special order or specific request of the purchaser;
- Mailed or delivered by the seller, the seller’s agent or mailing house acting as the agent for the purchaser, through the U.S. Postal Service or by common carrier;
- Received by a person who becomes the owner of the printed sales messages at no cost to that person.
If all of the above conditions are not met, tax applies to the charges for the printed sales messages to the same extent as sales of other printed matter.
Printed sales messages do NOT include campaign literature and other fund-raising materials, stationery, sales invoices, containers for sample merchandise, newspapers or periodicals, calendars, notepads, cash register tapes, or directories unless they meet the principal purpose of advertising or promoting goods or services.
Printed sales messages also do not include reply envelopes and order forms unless these items are inserted in, stapled, glued, or otherwise affixed to the printed sales messages to become a component or integral part and are sold together with the printed sales messages.
Printed sales messages are generally encountered in the audits of printers and publishers.
When testing claimed deductions for printed sales messages, auditors need to examine:
- Sales invoices;
- Samples of the printed sales messages;
- Exemption certificates issued for the printed sales message;
- Shipping documents (U.S. postal receipts or bills of lading) to determine who received the printed sales messages.
- Any agency agreement for the purchase of envelopes and other printed matter as described in Regulation 1541.5(b)(10).
If any portion of the printed sales messages is shipped to the California address of the purchaser or delivered to sales representatives of the purchaser, that portion of the selling price of the printed sales messages is includable in gross receipts and subject to tax.
Auditors should review the job/customer folders to examine a sample of the printed material and the exemption certificate issued for that job. When reviewing the sample of the printed sales message, auditors should verify that the printed matter is in fact advertising or promoting a good or service. If the printed material contains both promotional and informational material, more than 50% of the printed material must be promotional in order to be considered a printed sales message. If the promotional material is less than 50%, the printed material will not qualify as a printed sales message even when there is a timely exemption certificate on file that identifies the printed material as a printed sales message. Purchase orders containing the information required on exemption certificates will be considered adequate documentation in place of the exemption certificate.
Website Design is not taxable
An advertising agency or commercial artist who designs, edits or hosts an electronic website is performing a service, the charge for which is not subject to tax provided the advertising agency or commercial artist does not transfer any tangible personal property to the client or other person on the client’s behalf. Similarly, the posting of artwork on a website is not subject to tax if the posting does not involve the transfer of tangible personal property.
If the advertising agency or commercial artist also transferred tangible personal property, such as a backup disk, the provisions of Regulation 1540 for transfers of finished art would apply.
Photoshop work is exempt
Digital pre-press instruction is a custom computer program the sale of which is NOT subject to tax, provided it is prepared to the special order of the customer.
Digital pre-press instruction involves the following processes:
- Image Capture — This is the process of capturing in digital form, the images needed to produce the job. Often
the customer provides these components (e.g., electronic design files, hand artwork, and photos) to the printer or service
provider. Artwork provided in hard copy is scanned to capture the image.
Programs used to perform this step are usually tied to the hardware used in capturing the image. Examples may include Agfa Fotolook, Epson LaserSoft Silverfast Ai, Heidelberg LinoColor, or Creo’s EverSmart oXYgen.
- Image Manipulation — Once the image is captured, it must be reviewed and adjusted for the desired results when output. With photographs, the process of image manipulation is accomplished with software termed as paint software because of its ability to alter the pixels in a photo. Adobe’s PhotoShop is a standard program used for image manipulation. Although many things can be altered with this software, the main objective that printers or service providers accomplish is matching the color desired by the client.
The sale or distribution of newspapers and periodicals by a nonprofit organization is not subject to tax.
Graphic Design is Taxable in california when tangible
Charges for the electronic or manual preparation of finished art transferred in tangible form for reproduction, display, or other such purposes are subject to tax. For example, finished art transferred on canvas or paper is transferred on hard copy while a transfer of finished art in digital format on compact or floppy disc is not regarded as a transfer on hard copy. There has been some discussion on line that you may need to pay sales tax if you send a file digitally, but later send a hard-copy proof. This has not been verified.
Tax by percentage: 75% /25%
An alternative reporting method is allowed. It is presumed that 75 percent of the total charge is for nontaxable conceptual services and the remaining 25 percent is the measure of tax on the retail sale of finished art.