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Business Taxes Law Guide—Revision 2024
Sales And Use Tax Regulations
Title 18. Public Revenues
Division 2. California Department of Tax and Fee Administration — Business Taxes (State Board of Equalization — Business Taxes — See Chapters 6 and 9.9)
Chapter 4. Sales and Use Tax
Article 4. Graphic Arts and Related Enterprises
- 1540 Advertising Agencies and Commercial Artists
- 1541 Printing and Related Arts
- 1541.5 Printed Sales Messages
- 1542 Signs, Show Cards, and Posters [Repealed.]
- 1543 Publishers
Regulation 1540. Advertising Agencies and Commercial Artists.
Reference: Sections 6006, 6010.3, 6010.30, and 6015, Revenue and Taxation Code.
Preston v. State Board of Equalization (2001) 25 Cal. 4th 197, 105 Cal. Rptr. 2nd 407.
(a) Definitions.
(1) Advertising. Advertising is commercial communication utilizing one or more forms of communication (such as television, print, billboards, or the Internet) from or on behalf of an identified person to an intended target audience.
(2) Advertising Agencies. Advertising agencies design and implement advertising campaigns for purposes of advertising the goods, services, or ideas of their clients. As part of that primary function, advertising agencies provide their clients with services (such as consultation, consumer research, media planning and placement, public relations, and other marketing activities), and may also provide tangible personal property (such as print advertisements, finished art, and video and audio productions).
(3) Commercial Artists. Commercial artists, who may characterize themselves as commercial artists, commercial photographers, or designers, provide services and tangible personal property to their clients for use in their clients' advertising campaigns, or for their clients' other commercial endeavors such as sales of copies of finished art (including, e.g., photographic images) provided by a commercial artist. Services they provide to their clients include the creation and development of ideas, concepts, looks, or messages. Electronic artwork they provide may be transferred through remote telecommunications such as by modem or over the Internet, or by tangible means through electronic media such as compact or floppy disc. Tangible personal property they provide may include electronic media on which electronic artwork is transferred to the client, hard copies of the electronic artwork, hard copies of finished art (which may consist of photographic images).
(4) Contract of Sale. An agreement to transfer tangible personal property for consideration is a contract of sale. The client may, for example, issue a purchase order for the purchase of tangible personal property. The contract of sale for that tangible personal property consists of the terms of the purchase order together with the relevant terms of the master agreement (defined in subdivision (a)(10)).
(5) Digital Pre-press Instruction. Digital pre-press instruction is the creation of original information in electronic form by combining more than one computer program into specific instructions or information necessary to prepare and link files for electronic transmission for output to film, plate, or direct to press, which is then transferred on electronic media such as tape or compact disc.
(6) Electronic Artwork. Electronic artwork is artwork created through the use of computer hardware and software processes which results in artwork in a digital format that can be transmitted to others via electronic means (that is, transmitted through remote telecommunications such as by modem or over the Internet, or by electronic media such as compact or floppy disc). Elements of the process include the creation of original artwork or photographic images, scanning of artwork or photographic images, composition and design of text, insertion and manipulation of scanned and original electronic artwork, photographic images, and text. Electronic artwork does not include artwork that is transferred to clients in a tangible form, other than on electronic media, even where such artwork may have been manufactured or produced in whole or in part by computer hardware and software processes.
(7) Finished Art. Finished art is the final artwork used for actual reproduction by photomechanical or other processes, or used for display. It includes electronic artwork, illustrations (e.g. drawings, diagrams, halftones, or color images), photographic images, sculptures, paintings, and handlettering. Blueprints, diagrams, and instructions for signage furnished to a client as the result of environmental graphic design services are not finished art.
(8) Hard Copies. An item is transferred on hard copy when it is transferred on any tangible personal property other than in digital format on electronic media. 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.
(9) Intermediate Production Aids. Intermediate production aids include items such as artwork, illustrations, photograph images, photo engravings, and other similar materials which are used to produce special printing aids or finished art.
(10) Master Agreement. A master agreement is a contract, however characterized (such as "agency-client agreement"), entered into between an advertising agency or commercial artist and its client which specifies the obligations of each party to the master agreement with respect to their relationship, whether for a specified time or advertising campaign or until one of the parties terminates the agreement. A master agreement between an advertising agency and its client may specify the obligations of each with respect to the design of an advertising campaign for the client, the placement of the advertising with print and television media, and for the sale and purchase of tangible personal property related to the advertising campaign. There may then be additional terms for the purchase of specific tangible personal property during the advertising campaign, such as in a purchase order, which identifies the specific property that will be purchased and sold and the sales price for that property.
(11) Preliminary Art. Preliminary art is tangible personal property which is prepared solely for the purpose of demonstrating an idea or message for acceptance by the client before a contract is entered into, or before approval is given, for preparation of finished art provided neither title to, nor permanent possession of, such tangible personal property passes to the client. Examples of preliminary art include roughs, visualizations, layouts, comprehensives, and instant photos.
(12) Special Printing Aids. Special printing aids are reusable manufacturing aids which are used by a printer during the printing process and are of unique utility to a particular client. Special printing aids include electrotypes, stereotypes, photoengravings, silk screens, steel dies, cutting dies, lithographic plates, film, single or multi color separation negatives, and flats.
(13) Third Parties. A reference in this regulation to a transfer to a client also includes a transfer to a third party on the client's behalf. For example, the discussion in subdivision (b)(2)(B) for transfers of finished art by loading into the client's computer also includes transfers of the finished art by loading it into a third party's computer at the instruction of the client.
(b)Application of Tax to Activities of Advertising Agencies and Commercial Artists.
(1) Services.
(A) General.
1. Services performed to convey ideas, concepts, looks, or messages to a client may result in a transfer, enhancement, or revision of either electronic artwork, hard copies of electronic artwork, or copies of manually prepared artwork. If charges for such services are separately stated as "design charges," "preliminary art," "concept development," or any other designation that clearly indicates that the charges are for such services and not for finished art, they are nontaxable; however, tax applies if: (a) the master agreement or other contract provides that the advertising agency or commercial artist will pass to the client title or the right to permanent possession of the artwork in tangible form, such as on electronic media or hard copy, or (b) permanent possession of the artwork in tangible form is transferred to the client. If the master agreement provides that the client owns the concepts embodied in tangible personal property that is owned and possessed by the advertising agency or commercial artist (e.g., so that such concepts cannot be used on behalf of any other person), that contract provision does not constitute the passage of title to tangible personal property to the client. A requirement that an advertising agency or commercial artist retain permanent possession of the artwork in tangible form does not itself constitute a sale of that property to the client in the absence of a provision passing title to such property to the client.
2. Tangible personal property developed and used during services performed to convey ideas, concepts, looks, or messages is consumed in the performance of those services. Unless, prior to any use, the advertising agency or commercial artist passes title to such property to the client as discussed in the previous paragraph, the advertising agency or commercial artist is the consumer of such tangible personal property used and tax applies to the sale of property to, or to the use of the property by, the advertising agency or commercial artist. If the advertising agency or commercial artist passes title to, or permanent possession of, such tangible personal property to its client, tax applies to the sale of the tangible personal property by the advertising agency or commercial artist to the client.
(B) Digital Pre-Press Instruction. Digital pre-press instruction is a custom computer program under section 6010.9 of the Revenue and Taxation Code, the sale of which is not subject to tax, provided the digital pre-press instruction is prepared to the special order of the purchaser. Digital pre-press instruction shall not, however, be regarded as a custom computer program if it is a "canned" or prewritten computer program which is held or existing for general or repeated sale or lease, even if the digital pre-press instruction was initially developed on a custom basis or for in-house use. The sale of such canned or prewritten digital pre-press instruction in tangible form is a sale of tangible personal property, the retail sale of which is subject to tax.
(C) Retouching Photographic Images. Retouching a photographic image for the purpose of repairing or restoring the photograph to its original condition is a repair, the charge for which is not taxable.
(D) Signage. The creation and providing of single copies of blueprints, diagrams, and instructions for signage as a result of environmental graphic design is a service the charge for which is not taxable. Charges for additional copies are taxable.
(E) Websites. The design, editing, or hosting of an electronic website in which no tangible personal property is transferred to the client is a service, the charge for which is not subject to tax.
(F) Specific Nontaxable Charges. The following and similar fees and commissions are not taxable when they are separately stated. Whether separately stated or not, these fees and commissions are not included in the calculation of "direct labor" for purposes of subdivision (b)(3).
1. Media commissions or fees received for placement of advertising whether paid by the medium, by another advertising agency, or by the client.
2. Commissions or fees paid to advertising agencies by suppliers. Examples of such commissions are those paid to an advertising agency by a premium manufacturer (or distributor) or a direct-by-mail supplier.
3. Consultation and concept development fees related to client discussion, development of ideas, and other services. If the advertising agency transfers to the client tangible personal property produced 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 that tangible personal property; the advertising agency is the consumer of tangible personal property transferred to the client incidental to the providing of a service.
4. Fees for research or account planning that entail consumer research and the application of that research to the client's business or industry.
5. Fees for quality control supervision that entails the proofing and review of printing and other products provided by outside suppliers.
6. Charges for the formulation and writing of copy.
(G) Example. A designer contracts to create and sell printed brochures to a law firm. The contract separately states a charge for design, for art direction, for preliminary art, and for the printed brochures. The designer's design and art direction services culminate in the creation of preliminary art that the designer uses to show the designer's concepts to the law firm. After the law firm approves the concepts, the designer finalizes the design of the brochure and contracts with a printer to print the brochures. The printer sells the printed brochures to the designer for resale, and the designer resells the printed brochures to the law firm. The only tangible personal property that will be transferred to the law firm (or to anyone on behalf of the law firm) are the printed brochures. The law firm will not obtain title to, or the right to possession of, any finished art or any other tangible personal property. Tax does not apply to the designer's separately stated charges for design, art direction, and preliminary art. Tax applies to the designer's separately stated charge to the law firm for the printed brochures.
(2) Finished Art.
(A) Use of Aids in Creation of Finished Art. If the advertising agency or commercial artist uses any intermediate production aids or special printing aids in the creation of the finished art, the presumptions with respect to passage of title and the calculation of the measure of tax on the sale of such aids by the advertising agency or commercial artist, is governed by the provisions of Regulation 1541 applicable to special printing aids.
(B) Transfers of Electronic Artwork. A transfer of electronic artwork in tangible form is a sale. However, a transfer of electronic artwork from an advertising agency or commercial artist to the client or to a third party on the client's behalf that is not in tangible form is not a sale of tangible personal property, and the charges for the transfer are not subject to tax. A transfer of electronic artwork is not in tangible form if the file containing the electronic artwork is transferred through remote telecommunications (such as by modem or over the Internet), or if the file is loaded into the client's computer by the advertising agency or commercial artist, and the client does not obtain title to or possession of any tangible personal property, such as electronic media or hard copy. If the transfer is not a transfer in tangible form because it is loaded onto the client's computer, the advertising agency or commercial artist should document that transfer by a written statement signed at the time of loading by the client and by the person who loaded the electronic artwork into the client's computer with the following or similar language: "This electronic artwork was loaded into the computer of [client's name] by [advertising agency's or commercial artist's name], and [advertising agency's or commercial artist's name] did not transfer any tangible personal property containing the artwork, such as electronic media or hard copies, to [client's name]." When such a statement is signed at the time the file is loaded, it will be rebuttably presumed that the transfer of electronic artwork was not transferred in tangible form. If there is no such timely completed statement, the advertising agency or commercial artist may provide other substantive evidence establishing that the artwork was not transferred in tangible form.
(C) Transfers of Finished Art in Tangible Form. The electronic or manual preparation of finished art for use in reproduction or display is not a service. Unless the transfer is not in tangible form as explained in subdivision (b)(2)(B), the transfer of finished art is a sale of tangible personal property and tax applies to charges for that finished art, including all charges for any rights sold with the finished art, such as copyrights or distribution and production rights, except as provided in subdivision (b)(2)(D)2.
1. Combined Charge for Finished Art and Conceptual Services. If charges for finished art are combined into a single charge that also includes nontaxable charges for conceptual services described in subdivision (b)(1)(A), the advertising agency or commercial artist may report the measure of tax on the retail sale of the finished art as specified in subdivision (b)(3), provided that the reported measure of tax must also include the value of reproduction rights included with the transfer except those that are not taxable as provided in subdivision (b)(2)(D)2.
2. Lump Sum Billing—75/25 Presumption. If tax is not reported as provided in the previous paragraph, it will be rebuttably presumed that 75 percent of the combined charge for the finished art and conceptual services is for the nontaxable services and that 25 percent of the combined charge is the measure of tax on the retail sale of the finished art. However, if the sales price to the advertising agency or commercial artist of the finished art (or component parts) and any intermediate production aids or special printing aids sold to the client for that combined charge is more than 25 percent of the combined charge to the client, the measure of tax is the sales price of the tangible personal property to the advertising agency or commercial artist.
(D) Reproduction Rights Transferred With Finished Art.
1. Charges for the transfer of possession in tangible form to the client or to anyone else on the client's behalf of finished art for purposes of reproduction are included in the measure of tax on that sale, including all charges for the right to use that property, even though there is no transfer of title to the person reproducing the finished art, except as provided in subdivision (b)(2)(D)2.
2. Any agreement evidenced by a writing (such as a contract, invoice, or purchase order) that assigns or licenses a copyright interest in finished art for the purpose of reproducing and selling other property subject to the copyright interest is a technology transfer agreement, as explained further in Regulation 1507. Tax applies to amounts received for any tangible personal property transferred as part of a technology transfer agreement. Notwithstanding subdivision (b)(2)(C), tax does not apply to temporary transfers of computer storage media containing finished art transferred as part of a technology transfer agreement. Tax does not apply to amounts received for the assignment or licensing of a copyright interest as part of a technology transfer agreement. The measure of tax on the sale of finished art transferred by an advertising agency or commercial artist as part of a technology transfer agreement shall be:
a. The separately stated sales price if the finished art is permanently transferred, or the separately stated lease price if the finished art is temporarily transferred; provided that the separately stated price is reasonable;
b. Where there is no such separately stated price, the separate price at which the person holding the copyright interest in the finished art has sold or leased that finished art or like finished art to an unrelated third party where: 1) the finished art was sold or leased without also transferring an interest in the copyright; or 2) the finished art was sold or leased in another transaction at a stated price satisfying the requirements of subdivisions (b)(2)(D)2.a.; or
c. If there is no such separately stated price under subdivision (b)(2)(D)2.a., nor a separate price under subdivision (b)(2)(D)2.b., 200 percent of the combined cost of materials and labor used to produce or acquire the finished art. "Cost of materials" consists of the costs of those materials used or incorporated into the finished art, or any tangible personal property transferred as part of the technology transfer agreement. "Labor" means any charges for labor used to create such tangible personal property where the advertising agency or commercial artist purchases such labor from a third party, or the work is performed by an employee of the advertising agency or commercial artist.
(3) Sales of Other Tangible Personal Property by Advertising Agency or Commercial Artist. Tax applies to the total charge for the retail sale of tangible personal property by an advertising agency or commercial artist. If an advertising agency or commercial artist combines charges for nontaxable services as defined in subdivision (b)(1)(F), such as media placement, with charges for tangible personal property for which the advertising agency or commercial artist is the retailer, the measure of tax on that retail sale of property includes the total of: direct labor; the cost of purchased items that become an ingredient or component part of the tangible personal property; the cost of any intermediate production aids or special printing aids; and a reasonable markup. Commissions, fees, and other charges exclusively related to the production or fabrication of tangible personal properly are part of direct labor and are thus included in the measure of tax. Such charges include retouching of photographic images or other artwork for reproduction, provided the retouching is intended to improve the quality of the reproduction. An advertising agency or commercial artist must keep sufficient records to document the basis for the reported measure of tax.
(4) Items Purchased by an Advertising Agency or Commercial Artist. Except when property is resold prior to any use, an advertising agency or commercial artist is the consumer of tangible personal property used in the operation of its business. Tax applies to the sale of such property to, or to the use of such property by, the advertising agency or commercial artist.
(c) Situations Specific to Advertising Agencies.
(1) Advertising Agency Acting as an Agent for Its Client. An agent is one who represents another, called the principal, in dealings with third persons. (Civil Code section 2295.) To the extent that an advertising agency acts as the agent of its client when acquiring tangible personal property, it is neither a purchaser of the property with respect to the supplier nor a seller of the property with respect to its principal (that is, its client). Because of the unique relationship between advertising agencies and their clients, unless an advertising agency elects non-agent status under subdivision (c)(2)(A) or is otherwise the retailer of the property under subdivision (c)(2)(B) or (c)(2)(C), it is rebuttably presumed that the advertising agency acts as the agent of its client when acquiring tangible personal property on its client's behalf.
(A) A supplier of tangible personal property to an advertising agency is presumed to have made a retail sale of that property unless the supplier takes a timely and valid resale certificate in good faith from the advertising agency. Otherwise, the supplier has the burden of establishing that the advertising agency elected non-agent status under subdivision (c)(2)(A) and resold the property or that the advertising agency resold the property as the retailer under subdivision (c)(2)(B) or (c)(2)(C).
(B) When an advertising agency is the agent of its client for the purchase of tangible personal property under subdivision (c)(1), sales or use tax is due on the purchase price from the supplier to the advertising agency. Tax does not apply to the charge made by an advertising agency to its client for reimbursement, including tax reimbursement, for the amount charged by a supplier, nor does tax apply to the advertising agency's separately stated charges for its services directly related to its acquisition of such tangible personal property (e.g., when the advertising agency makes a separately itemized charge for reimbursement of the amount paid to the supplier of the property, tax does not apply to a separately itemized "agency fee"). When the applicable tax is use tax and the advertising agency does not pay that use tax to the supplier on the client's behalf, the advertising agency is liable for the use tax and must report and pay the use tax to the Board. The advertising agency's liability for that use tax is not extinguished unless the client has self-reported and paid the tax to the Board.
(C) An advertising agency may not issue a resale certificate when purchasing tangible personal property as the agent of its client. An advertising agency who issues a resale certificate to a supplier is presumed to be purchasing tangible personal property from that supplier on its own behalf for resale and not to be acting as an agent of its client. However, the advertising agency may provide evidence to prove that its issuance of the resale certificate was erroneous and that the advertising agency was acting as an agent of its client, provided the advertising agency has not treated the transaction as its own sale of tangible personal property to its client, collecting tax or tax reimbursement from its client on that sale. If the resale certificate was issued in error, the advertising agency is liable for use tax on the cost of tangible personal property purchased under the certificate unless the advertising agency has already paid that tax to the supplier or to the Board, or the client has self-reported and paid the tax to the Board.
(2) Advertising Agency Acting as a Retailer. An advertising agency that acts as a retailer of tangible personal property may issue a resale certificate for such tangible personal property if the property will be resold prior to any use. Absent an agreement that the property will be sold prior to use, tax is due on the purchase price of tangible personal property that is used prior to being resold to the client and, in addition, tax is also due on the sales price of the tangible personal property to the client.
(A) Election of Non-Agent Status. An advertising agency may elect non-agent status with respect to sales of tangible personal property to its client. This election must be supported by a specific written statement in its master agreement with the client. Alternatively, a statement may be included on an advertising agency's job order or invoice to its client. Statements should include the following or similar language: "(Advertising Agency's name) will not be acting as an agent of (client's name) for purposes of this transaction."
An advertising agency that elects non-agent status is a retailer with respect to tangible personal property sold to its clients. The measure of tax on the advertising agency's retail sale is the separately stated charge for the tangible personal property. If there is no such separately stated charge, the measure of tax is calculated as provided in subdivision (b).
(B) Items Produced or Fabricated by an Advertising Agency In-House. Advertising agencies are retailers of tangible personal property they produce or fabricate, e.g., by their own employees. Advertising agencies are not agents of their clients with respect to the acquisition of materials incorporated into such items of tangible personal property they produce or fabricate, but instead are the retailers of such property. The measure of tax on their retail sale of that property is the separately stated charge for the property sold. If there is no such separately stated charge, the measure of tax is calculated as provided in subdivision (b).
(C) Invoice to Client for More Than Cost of Tangible Personal Property to Advertising Agency. When an advertising agency invoices its client for tangible personal property provided by the advertising agency without separately stating the amount paid to the supplier for that property, the advertising agency is the retailer of the tangible personal property to its client. For example, when the advertising agency invoices a single charge to its client for tangible personal property that includes the amount paid to the supplier for the tangible personal property together with a markup, the advertising agency is the retailer of that tangible personal property and tax applies to that separately stated charge. If the advertising agency makes a combined charge to its client that includes the charge for the tangible personal property as well as the charge for any nontaxable services or reproduction rights under subdivision (b), the advertising agency is the retailer of the tangible personal property provided and the measure of tax on the sale of that tangible personal property is calculated as provided in subdivision (b).
(d) Transfers by an Artist at a Social Gathering. The transfer of original drawings, sketches, illustrations, or paintings by an artist at a social gathering for entertainment purposes is not a sale or use or purchase of tangible personal property, and the artist is the consumer of any property so transferred, when all the following requirements are satisfied:
(1) Eighty percent or more of the drawings, sketches, illustrations, or paintings are delivered by the artist to a person or persons other than the purchaser;
(2) Eighty percent or more of all of the drawings, sketches, illustrations, or paintings are received by a person or persons, other than the purchaser, at no cost to the person or persons who become the owner of the drawings, sketches, illustrations, or paintings;
(3) The charge for the drawings, sketches, illustrations, or paintings is based on a preset fee; and
(4) The preset fee charged for the drawings, sketches, illustrations, or paintings is contingent upon a minimum number of at least three drawings, sketches, illustrations, or paintings to be produced by the artist at the social gathering.
(e) Charges and Transactions Governed by Other Regulations.
(1) Audio Productions. Tax applies to charges for an audio production obtained or furnished by an advertising agency to its client as provided in Regulation 1527.
(2) Photography. Tax applies to charges for photography as provided in Regulation 1528 except when the photographic image is furnished by a commercial artist as defined in subdivision (a)(3).
(3) Printed Sales Messages. Qualifying sales of printed sales messages may qualify for exemption, as explained in Regulation 1541.5.
(4) Typography. Tax applies to charges for typography or composed type obtained from outside suppliers as provided in Regulation 1541.
(5) Video or Film Productions. When a video or film production obtained or furnished by an advertising agency to its client constitutes qualified production services as defined in Regulation 1529, tax applies to the charges for such qualified production services as provided in Regulation 1529.
History—Amended December 14, 1949.
Amended September 13, 1961.
Amended June 20, 1967.
Amended October 8, 1968.
Amended by renumbering November 3, 1971, effective December 3, 1971.
Amended November 14, 1974, effective December 22, 1974. Rewrote regulation, added section on agency status of ad agencies, detailed taxable status of specific services and expenses, changed taxable status of "copy writing," and defined "fee."
Amended March 9, 1976, effective April 18, 1976. Defined when use of photographs is a product ingredient.
Amended June 22, 1983, effective October 6, 1983. In subsection (a)(2)(A) added last two sentences to second paragraph. In subsections (b)(1) and (b)(2), added cross reference to subsection (a)(2) and deleted former last sentence of subsection (b)(2) relating to resale certificates.
Amended February 2, 1994, effective June 22, 1994. Added clarifying language to accommodate tax application to preliminary art prepared on data processing equipment.
Amended January 5, 2000, effective April 23, 2000. Subdivision (a): In the title the word "Agency" changed to "Agencies," and phrase "as Agent of … Non Agent" deleted. Subdivision (a)(1): former language deleted and new language "Advertising … nontaxable" added; also language of first un-numbered paragraph deleted and replaced with phrase "Application … client." Subdivision (a)(2) former title "Determination of Status" deleted and new title "Specific Situations" added. Subdivision (a)(2)(A) former title "Items Acquired from Outside Sources" deleted and new title "Electronic or Digital Artwork" added; also former language deleted and new language "Electronic … text" added; language of former first un-numbered paragraph deleted and replaced with "A transfer … is nontaxable;" and language of former second un-numbered paragraph deleted and replaced with "A transfer … in subdivision (d)(2)." Subdivision (a)(2)(B) former title "Items Prepared by Agency" deleted and new title "Agency Acting as an Agent for Its Client" added; also former language deleted and replaced with "As agent … its client;" and two new un-numbered paragraphs added. New Subdivision (a)(3) titled "Advertising Agencies Acting as Retailers" added. Subdivision (b) former title deleted and new title "Lump-Sum Sales of Tangible Personal Property" added. Subdivision (b)(1) former language deleted and replaced with "An agency that … to a supplier;" also former language of first un-numbered paragraph deleted and replaced with "On sales … nontaxable services;" and former third and fourth un-numbered paragraphs deleted.
Subdivision (b)(2) former title "Agency Acting as Agent" deleted and new title "Taxable Selling Price" added; also former language deleted and replaced with "If advertising … selling price;" and first un-numbered paragraph deleted. Subdivision (b)(3) former title "Services and Expenses—When Nontaxable" deleted and new title "Specific Nontaxable Charges" added. Also former language deleted and replaced with "The following … in subdivision (b)(2)" added. New Subdivisions (b)(3)(A) through (b)(3)(G) added. Subdivision (b)(4) former title "Specific Applications" deleted and new title "Taxable Charges for Agencies Acting as Retailers" added; also new language "All other … not taxable" added. Former subdivisions (b)(4)(A) through (b)(4)(l) deleted. New subdivision (b)(5) added. Subdivision (c) former language deleted; also replaced the language of first un-numbered paragraph with "General. … \[singlequote]finished art';" and new second un-numbered paragraph added. Subdivision (d) former title "Items Purchased by Agency or by Artist or Designer" deleted and new title "Application of Tax to Commercial Artists, Designers and Advertising Agencies" added; also former language deleted. New Subdivisions (d)(1) to (d)(5) added. New Subdivision (e) added.
Amended May 29, 2002, effective October 3, 2002. Language of former regulation deleted and replaced in its entirety.
Regulation 1541. Printing and Related Arts.
Reference: Sections 6006–6012, Revenue and Taxation Code.
(a) Definitions.
(1) Clip Art. Clip art is prepackaged art (including photographic images) which is not produced to the special order of the customer and which is commercially available on CD ROM, other electronic media, or by computer program for use in digital page layout. Images that are enlarged, reduced, or rotated are not considered "produced to the special order of the customer."
(2) Color Separator. A color separator is a person who engages in the process of color separation. The process of color separation divides a full color photographic image into four separate components, corresponding to the four primary colors used in process color printing. The color separator may accomplish this photographically or electronically, and the products of this process may be either a negative or positive film separation or a separated printing plate.
(3) Color Separation Working Products. Color separation working products consist of property such as photographic film for making transparencies, masks, internegatives, interpositives, halftone negatives, composite color separation negatives, goldenrod paper and mylar plastic used in making flats, tape used in stripping negatives into flats, developing chemicals which become a component part of negatives and positives, proofing material and ink used in making final proofs, progressive proofs, and similar items, which are similar in function to special printing aids as defined in subdivision (a)(12).
(4) Digital Pre-press Instruction. Digital pre-press instruction is the creation of original information in electronic form by combining more than one computer program into specific instructions or information necessary to prepare and link files for electronic transmission for output to film, plate, or direct to press, which is then transferred on electronic media such as tape or compact disc.
(5) Finished Art. Finished art is the final artwork used for actual reproduction by photomechanical or other processes, or used for display. It includes electronic artwork, illustrations (e.g. drawings, diagrams, halftones, or color images), photographic images, sculptures, paintings, and handlettering.
(6) Intermediate Production Aids. Intermediate production aids include items such as artwork, illustrations, photographic images, photo engravings, and other similar materials which are used to produce special printing aids or finished art.
(7) Mechanical or Paste-up. A mechanical or paste-up (also called camera-ready art or camera-ready copy) is produced by preparing copy to make it camera-ready with all type and design elements, and then pasting the prepared copy on artboard or illustration board in exact position along with instructions, either in the margins or on an overlay, for the platemaker.
(8) Print Broker. A print broker is a person who contracts to sell printed matter, but who does not actually engage in the printing process to produce the printed matter to be sold, instead purchasing the printed matter from a printer or from another print broker for resale to the print broker's customer. A person who sells printed matter for which that person did not engage in the printing process is acting as a print broker even if that person engages in the print process for other contracts.
(9) Printer. A printer is a person engaged in the printing process.
(10) Printing Process. The printing process involves activities related to the production of printed matter such as letterpress, flexography, gravure, offset lithography, reprography, screen printing, steel-die engraving, thermography, laser printing, inkjet printing, and photocopying.
(11) Reproduction Proof. A reproduction proof is used exclusively for reproduction. It consists of either a direct impression of composed type forms containing type matter only or type matter combined with clip art, or a copy of that direct impression made by any method, including the diffusion transfer method.
(12) Special Printing Aids. Special printing aids are reusable manufacturing aids which are used by a printer during the printing process and are of unique utility to a particular customer. Special printing aids include electrotypes, stereotypes, photoengravings, silk screens, steel dies, cutting dies, lithographic plates, film, single color or multicolor separation negatives, and flats. For purposes of this regulation, special printing aids includes items defined by subdivision (a)(6) as intermediate production aids.
(b) Application of Tax.
(1) Sales by Printers. The production of printed matter for a consumer is a sale of tangible personal property whether the materials incorporated into the printed matter are furnished by the consumer or the printer. Unless that sale is exempt from tax, tax applies to the total gross receipts or sales price of the sale with no deduction on account of; the cost of the raw materials or other components; labor or service costs of any step in the process of producing, fabricating, processing, printing, or imprinting the tangible personal property; or any other expenses or services that are a part of the sale. Services that are a part of the sale of tangible personal property to consumers include charges for overtime, set-up, die cutting, embossing, folding (except as provided in subdivision (h)), and other binding operations. Printers may not deduct from the gross receipts or sales price from their sales of printed matter charges related to their typography work or the cost of typography or typesetting to them, nor can they deduct the costs of special printing aids for which they are consumers under subdivision (c)(1)(A), whether or not a separate charge is made to the customer for the special printing aids. Receipts attributable to such costs are includable in the measure of tax.
Tax applies to a printer's sale of special printing aids as provided in subdivision (c).
(2) Purchases by Printers. Printers are consumers of tangible personal property which is not sold prior to use or physically incorporated into the article to be sold. Tax applies to the sale of such property to, or to the use of the property by, a printer and also to any sale subsequent to its use by the printer. Property ordinarily consumed by a printer includes machinery (e.g., printing presses, cameras, digital pre-press equipment, and plate makers), office equipment, and printing aids. Printers, however, may purchase special printing aids for resale as explained in subdivision (c).
(c) Special Printing Aids. In recognition of the unique utility that special printing aids have to the production of printed matter, the practices of the industry, and the need to avoid burdening businesses with unnecessary paperwork, the presumptions and rules set forth in this subdivision apply to a printer's purchase and sale of special printing aids used to produce printed matter sold by the printer.
(1) Printer's Purchase of Special Printing Aids.
(A) When a printer who uses special printing aids to produce printed matter does not wish to sell those special printing aids in connection with the printer's sale of the printed matter so produced, the printer shall include the following or substantially similar statement in the contract or the sales invoice: "Special printing aids are not being sold to the customer as part of the sale of the printed matter, and the selling price of the printed matter does not include the transfer of title to the special printing aids." When this statement, or a substantially similar statement, is included in the contract or sales invoice, the printer retains title to the special printing aids and is the consumer thereof, without regard to whether the printer separately itemizes a charge for the special printing aids. Accordingly, the printer may not issue a resale certificate to purchase such special printing aids for resale, and tax applies to the cost to the printer of those special printing aids.
(B) Unless the printer includes a statement in the contract or sales invoice retaining title to the special printing aids, as described in subdivision (c)(1)(A), it shall be irrebuttably presumed that the printer resold to the customer the special printing aids purchased or produced by the printer for use on the customer's job, prior to any use, along with the printed matter produced with the special printing aids, without regard to whether the printer separately itemizes a charge for the special printing aids. Accordingly, unless the printer includes a statement in the contract or sales invoice retaining title, the printer may issue a resale certificate when purchasing such special printing aids or their components. If the vendor of the special printing aids to the printer does not take a valid and timely resale certificate from the printer stating that the special printing aids are for resale, the vendor has the burden of showing that the printer actually resold the special printing aids prior to use as provided in this subdivision.
(2) Printer's Sale of Special Printing Aids. When the printer is regarded as purchasing the special printing aids for resale under subdivision (c)(1)(B), the following rules apply to determine the application of tax to the printer's sale of those special printing aids along with the printed matter produced with the special printing aids.
(A) Retail Sales of Special Printing Aids.
1. Sales to the United States Government. When a printer makes a retail sale of special printing aids along with the printed matter produced with those special printing aids to the United States Government, the sale of the printed matter and the special printing aids to the United States Government is exempt from tax as provided in Regulation 1614.
2. With nontaxable sale of printed matter. When a printer makes a retail sale of special printing aids to anyone other than the United States Government along with a nontaxable sale of printed matter (such as an exempt sale in interstate commerce, an exempt sale of qualifying newspapers, periodicals, or printed sales messages, or a nontaxable sale for resale), the printer's sale of the special printing aids is subject to sales tax. The printer's taxable gross receipts or sales price from the sale of the special printing aids is deemed to be the sale price of the special printing aids, or their components, to the printer without regard to whether the printer separately states a charge for the special printing aids or, if the printer does so, without regard to the amount of that separately stated charge, and tax is due measured by that sale price. If the printer has paid California sales tax reimbursement or use tax on the sale price of the special printing aids or their components to the printer, no additional tax is due.
3. With taxable sale of printed matter. When a printer makes a retail sale of special printing aids along with the taxable retail sale of printed matter, tax applies to the entire charge for the printed matter and special printing aids, without regard to whether the charge for the special printing aids is separately stated. If the printer does not make a separate charge for the special printing aids, the charge for the printed matter is deemed to include the taxable charge for the special printing aids, and no further tax is due on account of the sale of those special printing aids.
(B) Nontaxable Sales of Special Printing Aids for Resale. A person purchasing printed matter for resale may also purchase the special printing aids used to produce the printed matter for resale if that person will, in fact, resell the special printing aids prior to any use. A printer will not be regarded as selling special printing aids for resale unless: 1) the printer separately states the sale price of the special printing aids in an amount not less than the sale price of the special printing aids, or their components, to the printer; and 2) the printer accepts a timely and valid resale certificate in good faith from the printer's customer stating that the special printing aids are purchased for resale. The term "special printing aids" on a resale certificate shall be sufficient to cover all special printing aids as defined in subdivision (a)(12), and a printer accepting such a resale certificate in good faith will be regarded as selling the special printing aids for resale provided the printer includes the required separately stated price for them. Otherwise, the printer will be regarded as selling the special printing aids at retail, and will owe tax on that retail sale accordingly. A printer might sell special printing aids for resale along with printed matter under circumstances where the sale of the printed matter is for resale and also qualifies for exemption, such as a sale in interstate commerce where the purchaser will then resell the printed matter prior to use. However, since a purchaser of special printing aids from a printer would not be regarded as purchasing them for resale unless reselling them as part of the sale of the printed matter produced with those special printing aids, a printer claiming its sale of special printing aids is for resale should take a resale certificate for its sale of the printed matter as well, even if the sale of that printed matter would also qualify for exemption.
1. Sales of printed matter to multiple purchasers. A person is not purchasing special printing aids for resale when title to the special printing aids does not pass to that person's customer prior to any use. If that person's customer does not obtain the right to exercise dominion and control over the special printing aids, the person will not be selling the special printing aids to its customer and cannot purchase the special printing aids for resale. A person does not purchase special printing aids for resale when the printed matter produced with those special printing aids is sold to several purchasers. For example, a person purchasing newspapers for individual sale cannot purchase special printing aids for resale because the individual purchasers of the newspaper are not also purchasing the special printing aids. A person purchasing posters for sale to the general public is not purchasing special printing aids for resale to the general public. A person purchasing printed cartons to pack items for individual sale is not purchasing the special printing aids used to produce the cartons for resale to the ultimate purchasers of the contents of the carton. In addition to the fact that the multiple purchasers in each of these cases could not at any time be regarded as purchasing the special printing aids, the retail purchaser of the end product is not known at the time the special printing aids are used, meaning that the special printing aids could not in any event be resold to those purchasers prior to use.
2. Existing obligation to resell special printing aids. A person cannot purchase special printing aids for resale when that person does not have an existing obligation to resell those particular special printing aids since, if the purchaser does not have such an existing obligation to resell the special printing aids, the printer will use them on the purchaser's behalf before they could be resold by the purchaser. An existing obligation may be represented by a purchase order, invoice, or other existing agreement, whether oral or in writing. If the existing obligation is an oral agreement, the person purchasing the special printing aids for resale must have some means to establish that the agreement was in existence no later than the time the special printing aids were used in the printing process.
(C) Split Sales. A printer may use special printing aids to produce printed matter where a portion of the sale is taxable and a portion of the sale is not taxable, such as the sale of printed sales messages some of which are delivered as required for exemption by Regulation 1541.5 and some of which are delivered directly to the purchaser. If a printer makes a sale of printed matter where a portion of the sale is taxable and a portion is not taxable along with a retail sale of the special printing aids used to produce that printed matter, tax is due on the full sale price of the special printing aids. If the printer separately states a charge for the special printing aids in an amount not less than the sale price of the special printing aids or their components to the printer, tax applies to that separate charge. In the absence of such a separate charge, the taxable portion of the sale of printed matter will be regarded as including the sale of the special printing aids provided that the measure of tax on that sale is at least equal to the sale price of the special printing aids or their components to the printer. If so, no further tax is due for the printer's sale of the special printing aids. If the measure of tax on the sale of the printed matter is less than the sale price of the special printing aids or their components to the printer, then the printer owes tax on the difference.
(3) Purchases and Sales of Special Printing Aids by Print Brokers.
(A) Print Broker's Purchase of Special Printing Aids for Resale. A person who purchases special printing aids for resale with printed matter but who will not itself use those special printing aids in the printing process is a print broker for that purchase and resale. A print broker who will acquire title to special printing aids from a printer or other print broker will be irrebuttably presumed to have resold the special printing aids to the customer, prior to any use, along with the printed matter produced with the special printing aids provided the print broker has, at the time of acquisition of the special printing aids, an existing obligation with a customer for the sale of printed matter and the print broker does not include a statement in the contract or sales invoice retaining title to the special printing aids, as described in subdivision (c)(1)(A). Accordingly, unless the print broker includes a statement in the contract or sales invoice retaining title, the print broker may purchase such special printing aids for resale pursuant to its existing obligation and issue a resale certificate for both the special printing aids and the printed matter. However, without regard to the taking of a resale certificate, a printer or print broker is regarded as making a retail sale of the special printing aids, and not a sale for resale, unless the printer or print broker separately states the charge for those special printing aids, which charge cannot be less than the sale price of such printing aids, or their components, to the printer.
(B) Print Broker Issuing Resale Certificate. A print broker who issues a resale certificate for the purchase of special printing aids is liable for tax on the print broker's sale price of the special printing aids, even if the print broker's sale of the printed material produced with the special printing aids is not subject to tax (such as an exempt sale in interstate commerce, an exempt sale of qualifying newspapers, periodicals, or printed sales messages, or a nontaxable sale for resale), unless the print broker sells the special printing aids to the United States Government or to another print broker who issues a timely and valid resale certificate in good faith as provided in this subdivision (c).
(C) Print Broker's Retail Sales of Special Printing Aids.
1. Sales to the United States Government. When a print broker who purchases special printing aids under a resale certificate sells those special printing aids along with the printed matter produced with those special printing aids to the United States Government, the sale of the special printing aids to the United States Government is exempt from tax as provided in Regulation 1614.
2. With nontaxable sale of printed matter. When a print broker who purchases special printing aids under a resale certificate makes a retail sale of special printing aids to anyone other than the United States Government along with a sale of printed matter that is not taxable (such as an exempt sale in interstate commerce, an exempt sale of qualifying newspapers, periodicals, or printed sales messages, or a nontaxable sale for resale), that sale of the special printing aids is subject to tax. If the print broker separately states a charge for the special printing aids that is not less than the printer's separately stated sale price for the special printing aids to the print broker, then tax applies to that separately stated sale price. Otherwise, tax applies to the the print broker's sale of the special printing aids measured by the printer's separately stated sale price to the print broker.
3. With taxable sale of printed matter. When a print broker who purchases special printing aids under a resale certificate makes a retail sale of those special printing aids along with the taxable retail sale of printed matter, tax applies to the entire charge for the printed matter and special printing aids, without regard to whether the charge for the special printing aids is separately stated. If the print broker does not make a separate charge for the special printing aids, the charge for the printed matter is deemed to include the taxable charge for the special printing aids, and no further tax is due on account of those special printing aids.
4. Split Sales. A print broker may sell special printing aids to produce printed matter the sale of which is partially exempt and partially subject to tax, such as the sale of printed sales messages some of which are delivered as required for exemption by Regulation 1541.5 and some of which are delivered directly to the purchaser. If a print broker makes a sale of printed matter where a portion of the sale is taxable and a portion is not taxable along with a retail sale of the special printing aids used to produce that printed matter, tax is due on the full sale price of the special printing aids. If the print broker separately states a charge for the special printing aids in an amount not less than the printer's separately stated sale price of the special printing aids to the print broker, tax applies to that separate charge. In the absence of such a separate charge, the taxable portion of the sale of printed matter will be regarded as including the sale of the special printing aids provided that the measure of tax on that sale is at least equal to the printer's separately stated sale price of the special printing aids to the print broker; if so, no further tax is due for the print broker's sale of the special printing aids, but if the measure of tax on the sale of the printed matter is less than the printer's separately stated sale price of the special printing aids to the print broker, then the print broker owes tax on the difference.
(d) Conceptual Services.
(1) When the printer makes a lump sum charge for a taxable sale of printed matter, the full lump sum charge is subject to tax with no deduction on account of any conceptual or other services performed to produce that printed matter. When the printer itemizes its charges for a taxable sale of printed matter, tax applies to the printer's entire charge except as provided below.
(2) As part of its contract to produce and sell printed matter, a printer may also agree to acquire finished art for use in producing the printed matter, and the acquisition of that finished art may involve the providing of services to convey ideas, concepts, looks, or messages to a printer's customer which result in a transfer, enhancement, or revision of either electronic artwork, hard copies of electronic artwork, or copies of manually prepared artwork. If the printer states a separate charge for such services which are itemized as "design charges," "preliminary art," "concept development," or any other designation that clearly indicates that the charges are for such services and not for finished art, they are nontaxable unless the contract of sale provides that the printer will pass to its customer title or the right to permanent possession of the artwork in tangible form, such as on electronic media or hard copy, or permanent possession of the artwork in tangible form is, in fact, transferred to the client. The remainder of the printer's charge is subject to tax.
(3) If a printer separately itemizes charges for finished art that also include charges for conceptual services described in subdivision (d)(2), it will be rebuttably presumed that 75 percent of the combined charge for the finished art and conceptual services is for the nontaxable services. If, however, the printer acquires the finished art and conceptual services from a commercial artist (rather than producing the finished art itself) and the commercial artist itemizes a separate charge for conceptual services that is less than 75 percent of the commercial artist's combined charge for conceptual services and finished art, that lesser percentage shall be applied to the printer's combined charge for final art and conceptual services to determine the total nontaxable charges for conceptual services. Tax applies to the remaining portion of the combined charge for final art and conceptual services unless: 1) the printer passes title to the final art to its customer; and 2) that transfer qualifies a technology transfer agreement under subdivision (b)(2)(D)2 of Regulation 1540, in which case tax applies to the charge for finished art in accordance with that provision. A separately itemized charge for special printing aids is not a separately itemized charge for finished art and conceptual services, and no portion of that charge is excluded from tax as a charge for nontaxable conceptual services.
(e) Color Separators. The application of tax to printers as explained in this regulation also applies to color separators. Color separators are consumers and not retailers of tangible personal property which is not sold prior to use or physically incorporated into the article to be sold. Tax applies to the sale of such property to, or to the use of such property by, the color separator. Examples of such property include filters and screens, trial proofing materials, disposable lithographic plates, and developing chemicals which do not become incorporated into the article sold. Color separator working products are special printing aids for purposes of this regulation, and the provisions of subdivision (c) apply to their purchase and sale. Color separators, and persons such as printers when acting as color separators, may purchase color separator working products for resale when title to such property passes to the customer prior to use by the color separator as described in subdivision (c). The term "color separator working products" or "special printing aids" on a resale certificate shall be sufficient to cover all such products.
Charges for alterations of film work for $100 or less shall be considered charges for restoring property to its original condition and not subject to tax. Charges greater than $100 shall be considered charges for fabrication labor and subject to tax.
(f) Composed Type.
(1) In General. Tax does not apply to the fabrication or transfer by a typographer or typesetter of composed type, or reproduction proofs of such composed type to printers to use in the preparation of printed matter. The composition of type is the performance of a service, and tax does not apply to charges for such service, unless that service is a part of the sale of printed matter. Tax applies to the gross receipts from the sale of printed matter without any deduction for the charge for typography. Tax applies to charges for transfers of composed type combined with artwork as provided in subdivision (f)(3).
Typographers and typesetters are the consumers and not retailers of materials, such as typesetting machinery, metal forms, galleys, proofing paper, and cleaners which are used in the performance of their service and are consumers of materials transferred to their customers incidental to the performance of nontaxable typography or typesetting services, such as clip art that is combined with text on the same page.
Composed type includes type together with lined borders and plain, straight, fancy, or curved lines. Composed type also includes charts, tables, graphs, and similar methods of providing information.
(2) Photocomposition (Including Phototypesetting and Computer Typesetting). Tax does not apply to the composing of type regardless of whether the type is composed by means of such simplified methods as standard typewriter, desktop publishing, Varityper or Justowriter; by means of photolettering or headlining machines; or by means of a photocomposition (including computer photocomposition) method. Tax does not apply to the transfer, whether temporary or permanent, of the direct product of the type composition service or copy thereof (e.g., typeset matter direct from the typesetting machine ready to be cut and pasted up for reproduction or computer generated type), if that product contains text only or text combined with clip art, whether that product is a paper or film (negative or positive) product, provided the product or copy is to be used exclusively for reproduction.
The transfer of camera-ready copy containing text only or text and clip art in the form of a paste-up, mechanical, or assembly, or a camera-ready reproduction of such, is the transfer of composed type and the charge made by the typographer or typesetter to his or her customer is not subject to tax. Tax does not apply to the transfer of a direct photoreproduction of type composed by means of a photolettering or headlining machine or other similar device.
Camera-ready copy which is produced through the use of desktop publishing software and a personal computer is nontaxable composed type provided it does not contain artwork other than clip art.
Transfers of plates and mats for use in the printing process which are produced using composed type are subject to tax, and tax applies to the entire charge made to the customer including any portion of the charge attributable to the type composition service, whether that charge is separately stated or not. Transfers of engraved printing plates and duplicate plates such as electrotypes, plastic plates, rubber plates, and other plates used in letterpress printing are subject to tax. Similarly, transfers of exposed presensitized, wipe-on, deep-etch, bi-metal and other plates used in offset lithography or of exposed plates produced by a photo-direct method, do not qualify as transfers of reproduction proofs of composed type and are subject to tax. A transfer of gelatin coated film to be transferred to fine mesh silk in the silk-screening process is subject to tax.
(3) Artwork. Artwork, other than clip art combined with composed type on the same page, is not composed type. The term "artwork" includes illustrations (e.g., drawings, diagrams, halftones, or color images), photographic images, drawings, paintings, handlettering, and computer generated artwork. If the basis for billing is on a per page basis, the charge for any page with artwork is subject to sales tax and the charge for any page with only text, or text and clip art, is not subject to tax. If the basis for billing is lump sum, the ratio of pages containing artwork to the total number of pages, applied to the lump sum charge, represents the retail sale price of the artwork and is subject to tax, but in no event shall the retail sale price of the artwork be less than the sale price of the artwork, or its components, to the typographer.
However, if ten percent or fewer of the pages contain artwork, the true object of the sale shall be deemed to be a sale of typography services with an incidental transfer of artwork, and the typographer is the consumer of that artwork. Tax applies to the sale price of the artwork, or its components, to the typographer. Tax does not apply to the sale of the typography service as explained in subdivision (f)(1).
(4) Reproduction Rights. Notwithstanding subdivision (f)(3), if the transfer of artwork qualifies as a technology transfer agreement under subdivision (b)(2)(D)2. of Regulation 1540, tax applies to the transfer of the artwork in accordance with that provision.
(g) Digital Pre-press Instruction.
Digital pre-press instruction is a custom computer program under section 6010.9 of the Revenue and Taxation Code, the sale of which is not subject to tax, provided the digital pre-press instruction is prepared to the special order of the purchaser. Digital pre-press instruction shall not, however, be regarded as a custom computer program if it is a "canned" or prewritten computer program which is held or existing for general or repeated sale or lease, even if the digital pre-press instruction was initially developed on a custom basis or for in-house use. The sale of such canned or prewritten digital pre-press instruction in tangible form is a sale of tangible personal property, the retail sale of which is subject to tax.
(h) Mailing. Tax does not apply to charges for postage or for addressing for the purpose of mailing (by hand or by mechanical means), folding for the purpose of mailing, enclosing, sealing, preparing for mailing, or mailing letters or other printed matters, provided such charges are stated separately on invoices and in the accounting records. Tax applies, however, to charges for envelopes.
(i) Signs, Show Cards, and Posters. Tax applies to retail sales of signs, show cards, and posters, and to charges for painting signs, show cards, and posters, whether the materials are furnished by the painter or by the customer.
Tax does not apply to charges for painting or lettering on real property. The painter or letterer is the consumer of the materials used in such work, and tax applies with respect to the sale of such property to, or the use of such property by, the painter or letterer.
History—Effective July 1, 1939.
Adopted as of January 1, 1945, as a restatement of previous rulings.
Amended June 10, 1959.
Amended September 2, 1965, applicable as amended August 1, 1965.
Amended June 20, 1967.
Amended October 8, 1968.
Amended by renumbering November 3, 1971, effective December 3, 1971.
Amended December 14, 1972, effective January 21, 1973.
Amended November 29, 1988, effective February 10, 1989. Amended subdivision (f)(2) to provide that copies of reproduction proofs are excluded from the definition of "sale" and "purchase".
Amended September 1, 1999, effective December 3, 1999. Subdivision (a) re-titled "Definitions" and the content, specifying the application of tax to various obsolete processes, deleted; also, language inserted to define certain terms current in the industry and used throughout the regulation. Subdivision (b) re-titled "Application of Tax" and the current language deleted; new subdivisions (b)(1) and (b)(2) added. Subdivision (c) re-titled "Special Printing Aids," and the current language deleted; new subdivisions (c)(1), (c)(2), (c)(3), (c)(4) and (c)(5) added. Subdivision (d), re-titled "Color Separators"; references to new subdivisions (b) and (c) added; also added examples of property consumed by color separators; in unnumbered paragraph provides examples of items printers and color separators can purchase for resale and cross-references to subdivisions (a)(1) and (c) added. Subdivision (e) renamed "Composed Type", old title deleted. Subdivision (e)(1) re-titled "In General" and its wording deleted; new language added to specify that tax does not apply to the fabrication or transfer by a typesetter or typographer of composed type, etc., to printers to use in the preparation of printed matter, and that typographers and typesetters are the consumers of the materials they use in preparing their products; also charts, graphs, tables, and similar methods of providing information are included in the definition of "composed type." Subdivision (e)(2) re-titled "Photocomposition" and the prior wording deleted. New language added to specify that tax does not apply to transfers of text only or text combined with clip art whether the product is on paper, film or camera-ready copy; however, the transfer of plates or mats for use in the printing process are taxable. Subdivision (e)(3) renamed "Artwork" and the previous language deleted; new language added to clarify that artwork, other than clip art, is not composed type and its transfer is subject to tax, to list examples of artwork, and to specify what is included in the entire charge for transfers of artwork. Subdivision (e)(4) deleted. Subdivision (f) heading and former subdivisions discussing obsolete typesetting methods deleted and renamed "Transfers of Information on Computer Disk or Other Electronic Media." Subdivision (g) heading and former content regarding obsolete uses of impressed mats deleted and re-titled "Mailing." New language added to specify that separately stated charges for postage, addressing or activities undertaken in the process of preparing for mailing are not subject to tax. Subdivision (h) heading "Duplication by Typewriters" and content deleted. Subdivision (i) deleted with heading and content absorbed by subdivision (h).
Amended May 29, 2002, effective October 3, 2002. Subdivision (a)—current subdivisions (1)–(5) deleted. Subdivision (a)(1)—language of former subdivision (a)(5) moved to here and amplified. Subdivisions (a)(2), (3), (4), (5), (6), (8,) and (9) added. Subdivision (a)(7)—language of former subdivision (a)(4) moved to here and amplified. Subdivision (a)(10)—language of former subdivision (a)(2) moved to here and amplified. Subdivision (a)(11)—language of former subdivision (a)(3) moved to here and amplified. Subdivision (a)(12)—language of current subdivision (a)(1) moved to here and amplified. Subdivision (b)(1) first sentence deleted and phrase "The measure of tax is" deleted in second sentence; new first sentence added and language "Unless … to" added to beginning of second sentence; designations (a), (b), and (c) deleted; cross-reference to "(g) below)" changed to (h); word "of" deleted from fourth sentence and phrases "or sales price from" and ", nor … aids" added. Subdivision (b)(2) language ", or … by," added to second sentence; word "the" changed to "a"; phrase "Such … to" deleted and phrase "Property … includes" added; word "electronic" replaced with "digital"; and word "and" added. Subdivision (c)—language of former subdivision deleted in its entirety; new language added. Subdivision (d) added. Former subdivision (d) re-designated (e) accordingly; cross reference to former subdivision (b) and (c) changed to "this regulation;" phrase ", or … by," added to third sentence; phrase ", but … to," deleted from fourth sentence; new fifth sentence added; in sixth sentence, phrase ", and persons such as printers when acting as color separators," added and "or printers" deleted and language "property … as" deleted; phrase "or 'special printing aids"' added to last sentence. Former subdivision (e) re-designated (f). Subdivision (f)(1)—cross-reference changed to reflect new subdivision designation. Subdivision (f)(3)—phrase ", but is not limited to," deleted; word "photographs" changed to "photographic images"; words "the charge for" added twice to third sentence; word "selling" changed to "sale" three times in the fourth sentence. Unnumbered paragraph language "the … less" and "the" deleted from first sentence and language "ten percent or fewer of the pages contain artwork" and "with an incidental transfer of artwork," and "that" added; "selling" changed to "sale" in second sentence; cross reference in second sentence changed. New subdivision (c)(4) added. Former subdivision (f) re-designated (g), and re-titled "Digital Pre-press Instruction." first two sentences deleted; phrases "Digital pre-press instruction is" and "the sale of which." and ", provided" and "purchaser" added to third sentence and language "as defined", "and" and "if" and "electronic or" and "customer" deleted; phrases "The electronic or d" and "electronic or" deleted from fourth sentence and word "digital" capitalized; new sentence added. Former subdivision (g) re-designated (h) former subdivision (h) re-designated (I); the phrase ", or … letterer" added and the word "him" deleted.
Note.—See Sales Tax General Bulletin 50-24 following Regulation 1525.
Regulation 1541.5. Printed Sales Messages.
Reference: Section 6379.5, Revenue and Taxation Code.
(a) Definitions.
(1) "Printed Sales Messages" means and is limited to catalogs, letters, circulars, brochures, and pamphlets printed for the principal purpose of advertising or promoting goods or services. The term includes such items as department store catalogs, brochures advertising automobiles and vacations, circulars advertising professional services, and coupon books. The term does not include campaign literature and other fund-raising materials, stationery, reply envelopes, except as provided for in (b) of this regulation, order forms, 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.
(2) "Printed to the Special Order" means designed and prepared according to the specific request of the purchaser. The term is also applicable to additional or supplemental orders, when the original order was printed to the special order of the purchaser.
(3) "Mailing House" means any person engaged in the business of stamping, addressing, sealing or otherwise preparing property for mailing for compensation.
(4) "Common Carrier" means any person engaged in the business of transporting property for hire or compensation and who offers his services indiscriminately to the public or to some portion of the public.
(5) "Cost" means any consideration given for the acquisition of the property, whether directly or indirectly. Examples of indirect costs include subscription fees, franchise fees or any general overhead billing.
(6) "Any Other Person" as used herein means any person, other than the purchaser or the purchaser's agent, who takes physical delivery of the printed sales messages and who exercises dominion and control over the property.
(b) Application of Tax. Operative January 1, 1987, tax does not apply to the sale or use of printed sales messages which are:
(1) Printed to the special order of the purchaser;
(2) Mailed or delivered by the seller, the seller's agent or a mailing house acting as the agent for the purchaser, through the United States Postal Service or by common carrier;
(3) Received by any other person at no cost to that person who becomes the owner of the printed material.
(4) If all of the above conditions in (b)(1) through (b)(3) are not met, tax applies to the charges for the printed sales messages to the same extent as to charges for printed matter generally.
(5) To satisfy the common carrier requirement, it is only necessary that a common carrier be involved in some stage of the delivery.
(6) The tax exemption applies regardless of whether or not the purchaser of printed sales messages offers for sale the goods or services advertised in the printed sales messages.
(7) Tax does not apply to charges for containers, such as envelopes or wrapping paper, when sold with the printed sales messages for shipment or delivery, or when sold to persons who place the printed sales messages in the container and sell the printed sales messages together with the container.
(8) Generally, tax applies to sales of reply envelopes and order forms. However, reply envelopes, order forms, or other printed matter will be considered part of the printed sales message when such property is inserted in, stapled, glued, or otherwise affixed to the printed sales message in such a manner that it becomes a component or integral part of the printed sales message and is sold together with the printed sales message. Accordingly, the total charge in such cases is deemed to be for printed sales messages and not subject to tax.
(9) When printed sales messages are attached to reply envelopes and the reply envelopes are provided for the primary purpose of securement of a return payment on a billing, or business reasons other than the promotion of goods or services, tax applies to charges for such reply envelopes.
(10) A purchaser of printed sales messages may act as the agent of the seller of the printed sales messages to purchase from a third party supplier envelopes or other printed matter which become incorporated by the seller into the printed sales message and are sold together with the printed sales message. The purchaser must clearly establish with respect to any acquisition of printed matter that it is acting as agent for the seller of printed sales messages. To establish that a particular acquisition was made as an agent, the purchaser must (1) clearly disclose to the supplier the name of the seller for whom the purchaser is acting as agent, and (2) obtain, prior to acquisition, and retain written evidence of agent status with the seller of printed sales messages. The purchaser (agent) may not charge the seller, exclusive of any agency fee, an amount in excess of the amount paid to the third party supplier for the purchase of the envelopes or other printed matter (see Regulation 1540). The sale by the seller (third party supplier) under this agency relationship is a sale for resale to the seller of the printed sales message. Accordingly, the agent should provide the supplier with a resale certificate, purchase order, or other such document containing the principal/seller's name, address, permit number, signature of the agent or principal/seller, date of execution, and a statement that the property is purchased "for resale" (see Regulation 1668). Unless the resale certificate, purchase order, or other such document is given on behalf of the seller of printed sales messages pursuant to the agency agreement, it will be presumed that the purchaser is acting on its own behalf. At no time will the purchaser of the printed sales messages act as an agent of the seller with regards to the delivery of the printed sales messages.
(c) Supporting Documentation. Any seller claiming an exemption for the sale of printed sales messages must obtain and retain supporting evidence of the delivery of the property.
(1) Delivery by the Seller. A seller who mails exempt printed sales messages through the United States Postal Service or by common carrier, should obtain and retain U.S. Postal receipts or bills of lading and obtain and retain a timely exemption certificate, taken in good faith, from the purchaser. The exemption certificate should be similar to the following:
"I hereby certify that the items purchased are printed sales messages and that the printed sales messages described herein which I shall purchase from ___________________________ will be delivered by the seller or the seller's agent through the U.S. Postal Service or by common carrier at no cost to another person who becomes the owner of the printed material. If any of such printed material is delivered other than as specified above, I understand that I am required by the Sales and Use Tax Law to report and pay tax, measured by the purchase price of such property. Description of property to be purchased:_____________________________
Date _____________ , ______________
Purchaser:
(Company Name)
Address:
Signature:
(Signature of Authorized Person)
Title:
Seller's Permit No. of Purchaser (if any)"
(2) Delivery by Mailing House as Agent for Purchaser. When the seller of printed sales messages delivers the property to a mailing house acting as agent for the purchaser, the contract of sale should specify to whom the property was delivered, and the seller should obtain and retain a timely exemption certificate, taken in good faith from the purchaser, similar to the following:
"I hereby certify that the items purchased are printed sales messages and that the printed sales messages described herein which I shall purchase from __________________ delivered by the seller to the mailing house designated below, will be delivered by the mailing house, acting as my agent, through the United States Postal Service or common carrier at no cost to another person who becomes the owner of the printed material. If any such printed material is delivered other than as specified above, I understand that I am required by the Sales and Use Tax Law to report and pay tax, measured by the purchase price of such property. Description of property to be purchased: _____________
Mailing house:
(Name)
(Address)
Date ________ , ________
Purchaser:
(Company Name)
Address:
Signature:
(Signature of Authorized Person)
Title:
Seller's Permit No. of Purchaser (if any)"
(3) A copy of the exemption certificate described in subdivision (c)(1) or (c)(2), accepted in good faith, shall relieve the seller from liability for the sales tax for the sale of printed sales messages delivered in accordance with subdivisions (b)(2), (b)(3), and (b)(10) of this regulation. If the seller fails to deliver the printed sales messages in such a manner, the seller will not be relieved from liability for the sales tax, on the ground that an exemption certificate was obtained with respect to the transaction.
(4) If a purchaser certifies in writing to a seller that the printed matter is a printed sales message or that the printed sales messages purchased will be delivered in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax and it is determined that the printed matter is not a printed sales message or the purchaser arranges for the delivery of the printed sales messages in some other manner, the purchaser shall be liable for payment of sales tax as if the purchaser were a retailer making a retail sale of the printed matter at the time of such use and the sales price of the printed matter to the purchaser shall be deemed the gross receipts from such retail sale.
(5) If a purchaser wishes to designate on each purchase order that the property is an exempt printed sales message, the seller should obtain a qualified exemption certificate, i.e., one that states "see purchase order" in the space provided for a description of the property to be purchased. Each purchase order must then specify whether the property covered by the order constitutes an exempt printed sales message within the provisions of this regulation or whether tax applies to the order. If each purchase order does not so specify, it will be assumed that the property covered by that purchase order is not an exempt printed sales message. If the purchase order includes both exempt printed sales messages and printed matter subject to tax, the purchase order must specify which items are exempt printed sales messages and which items are subject to tax.
(6) When the purchaser and seller of printed sales messages enter into an agency agreement for the purchase of envelopes or other printed matter, pursuant to subdivision (b)(10), the purchaser must clearly disclose to the third party supplier the name of the seller for whom the purchaser is acting as an agent prior to, or at the time of purchase. This condition will be met by including on all purchase orders provided to the third party supplier a statement containing the elements noted on the following example:
"This order is placed for and on behalf of
[printer/principal's name]; seller's permit No.
[printer/principal's permit number] located at
[address of printer/principal] for whom
[purchaser/agent's name] is acting as agent.
"The order is for ________ [number of envelopes] envelopes to be used as
containers for printed sales messages. The envelopes are to be delivered to
________ [mailing house name] for inclusion of the printed sales
message.
Date: ________ , ________
(Signature of Purchaser or Authorized Agent)"
(7) Pursuant to subdivision (b)(10), prior to the acquisition of the envelopes or other printed matter, the purchaser and seller of the printed sales messages must agree that the purchaser is acting as an agent for the seller with respect to the purchase of envelopes or other printed matter which become incorporated by the seller into the printed sales message sold. This condition will be met by including a statement in a letter of agreement or other such document similar to the following example:
"You are hereby authorized to act as our agent in the procurement on our behalf of ________________ [number of envelopes] envelopes purchased for resale under seller's permit number ________________ [printer/seller's permit number] from ________________[third party supplier's name], located at ________________ [address of third party supplier] for inclusion of printed sales messages to be sold and delivered pursuant
to Regulation 1541.5.
Date:________ , 19 ________
(Signature of Printer/Seller)"
(8) The fact that the seller/principal of the printed sales messages may not formally reimburse the purchaser/agent with respect to the acquisition of envelopes or other printed matter from the third party supplier will not invalidate the agency relationship between the seller and purchaser of printed sales messages when all other provisions of this regulation are met.
(d) Examples of the Application of Tax Under Specific Circumstances.
(1) A real estate company contracts with a printer to design and prepare a brochure describing homes for sale in an area. The brochures are delivered by the seller to a mailing house for redelivery by common carrier to local merchants at no charge to the merchants. The merchants voluntarily display on the store premises the brochures which are available to the public free of charge. The merchants may dispose of the brochures in any manner they see fit. Tax does not apply to the charges for the brochures by the printer since the mailing house delivered the brochures by common carrier to a person other than the purchaser.
(2) The same real estate company in Example 1 requests the printer to prepare a second distribution of the same brochures in the same manner one month later. Tax does not apply to the charges for the second distribution, since the original printed matter was prepared to the special order of the purchaser and met the other conditions of the exemption.
(3) A manufacturer of automotive oil contracts with a printer to design and prepare a brochure describing the unique features of the oil. The brochures are delivered by the seller to a mailing house for redelivery by the U.S. Postal Service to automotive parts stores at no charge to the stores. The automotive parts stores voluntarily display on the store premises the brochures which are available to the public free of charge. Although the automobile parts store sells the oil, there is no direct or indirect cost to the store for displaying the brochures, that is, the wholesale cost is not determined by the distribution of the brochures. Tax does not apply to the charges for the brochures by the printer since the mailing house delivered the brochures by the U.S. Postal Service to a person other than the purchaser and all other conditions of the exemption were met.
(4) A fast-food franchiser contracts with a printer to prepare and deliver by a common carrier to the franchisee, coupons for a free soft drink. The franchisee distributes the coupons to its patrons at the premises. The franchisee pays a flat monthly fee to the franchiser for general expenses incurred by the franchiser for promotion of the products sold by the franchise. Although no specific charge was made by the franchiser to the franchisee, an indirect charge was made by way of the monthly fee, and, accordingly, tax applies to the charge for the printed matter.
(5) A company contracts with an advertising agency, who is acting as a seller, to prepare and deliver printed sales messages. The advertising agency contracts with a third party to do the printing and mailing. When the advertising agency separately bills the printed material to the company, and all other requirements for exemption are met, tax does not apply to the advertising agency's charges for the printed matter, since the seller need not be the actual printer to qualify for an exemption from the tax.
(6) A department store contracts with a printer to prepare sales catalogs. The printer delivers the catalogs through the U.S. Postal Service to the department store where the catalogs are available at no charge to the store's patrons. Tax applies to the charges made by the printer since delivery was made to the purchaser.
(7) The same department store in Example (6) requests the printer to deliver 75 percent of the catalogs through U.S. Postal Service to be distributed to individuals at no cost to those individuals. The printer delivers 25 percent of the catalogs to the department store and separately lists and prices on the invoice to the department store the charges for the printing aids used in the preparation of the printed sales messages. Tax would not apply to the charges by the printer on 75 percent of the printed material; tax would apply to the 25 percent delivered to the department store and to the entire charge for the printing aids.
(8) An attorney requests a printer to prepare and mail a letter to potential clients advertising the attorney's professional services. The printer inserts a reply envelope into the folded letter and places both into a larger envelope and mails the material through the U.S. Postal Service. The letter qualifies as an exempt sales message. The outer envelope is an exempt container sold with the exempt printed sales message. The reply envelope is a component or integral part of the printed sales message when inserted with the letter into the larger envelope and sold with the exempt printed sales message.
(9) A furniture store requests a printer to prepare and mail billings and furniture advertisements to the store's customers. Both the billings and the advertisements are placed by the printer in the same envelope and mailed through the U.S. Postal Service. When the charges for the advertisement material are separately stated, tax does not apply to such charges. Tax does apply to the charges for the preparation of the billings and charges for the envelopes containing the billings, since the primary use of the envelopes is to mail billings and the addition of the printed sales messages is only secondary.
(10) A distributor requests a printer to prepare and mail through the U.S. Postal Service sales catalogs and order forms. The distributor also contracts with an envelope company to prepare reply envelopes to be incorporated into the catalog. The envelope company is requested by the distributor to deliver the reply envelopes to the printer, who will staple a reply envelope with an order form into the center of each catalog. The catalogs are subsequently delivered to the recipients free of charge through the U.S. Postal Service. Tax does not apply to the charges made by the printer for the catalogs or order forms. The order forms were sold by the printer along with the sale of the catalogs and became component parts of the catalogs. Tax applies to the distributor's purchase of the reply envelopes, since the reply envelopes were not component parts of the catalogs at the time they were purchased. However, when the distributor purchases the envelopes from the envelope company as an agent of the seller of the catalogs (in this case the printer), and such agency relationship is disclosed at the time of purchase, the reply envelopes will be considered sold with the catalogs. Accordingly, tax does not apply to the purchase of the envelopes (purchased for resale on behalf of the printer) or the printer's subsequent sale of the reply envelopes. In this case, the reply envelopes are sold along with the catalogs and become component parts when inserted.
(e) Special Printing Aids. The exemption provided under this regulation is limited to sales of printed sales messages and does not affect the application of tax with respect to "special printing aids" or other materials used in the preparation of printed sales messages. Tax applies to the sale of "special printing aids" as provided in Section 1541(e) of Title 18.
History—Adopted September 2, 1987, effective November 13, 1987. Added Regulation 1541.5 to provide that the sale of printed sales messages as prescribed are exempt from tax.
Amended November 18, 1998, effective February 14, 1999. Subdivision (b)(8) amended by striking phrase ", even … message" after "forms" in first sentence and adding words "inserted in" to second sentence.'subdivision
(b)(10) added. Subdivision (c)(1) amended by adding phrase "items … the" to first sentence of first unnumbered paragraph and phrase "is … or" to second sentence. Subdivision (c)(2) amended by adding phrase "that … and" to first sentence of first unnumbered paragraph. Subdivision (c)(3) amended by striking word "and" from between "(b)(2)" and "(b)(3)" and adding words ", and (b)(10)" to first sentence; phrase "or … regulation" deleted from second sentence. Subdivision (c)(4) amended by adding phrase "seller … or" and "it … purchaser" to first sentence. Subdivisions (c) (6–8) added. Subdivision (d)(8) amended by deleting phrase "places … envelope" and adding phrase "inserts … both" in second sentence; deleting word "not" adding "when … message" and deleting phrase "and … taxable" in last sentence. Last three sentences added to subdivision (d)(10).
Regulation 1542. Signs, Show Cards, and Posters.
[Repealed June 7, 1973, effective July 11, 1973. Added as Section (i) to Regulation 1541.]
Regulation 1543. Publishers.
Reference: Sections 6006, 6015, 6094, 6244, 6362, 6379.5, and 6396, Revenue and Taxation Code.
(a) Definitions.
(1) Art Director. An art director prepares general specifications (in the form of verbal instructions or rough sketches) for an illustrator or photographer.
(2) Author. An author creates an original manuscript, whether written by hand, on a typewriter or computer, or otherwise, for the purpose of publication. For purposes of this regulation, the following persons are also authors:
(A) Copy editor, who reviews a manuscript for grammatical consistency and clarity.
(B) Developmental editor, who consults with the author who created an original manuscript for purposes of publication to develop the concepts in the manuscript, or who reviews the copy edited manuscript and recommends visual concepts.
(C) Manuscript reviewer, who reviews a manuscript for technical accuracy and acceptability to the proposed audience. For example, a reviewer may review the manuscript of a book on gardening for technical accuracy and suitability of the gardening advice for a particular climate.
(D) Photo researcher, who assists other authors or publishers in obtaining permission and rights from third parties to use photographic images for purposes of reproduction in the publication of a manuscript.
(E) Translator, who produces a manuscript that is a translation of material from a different language.
(3) Designer. A designer plans and prepares a general layout of typographical and illustrative elements for printed literature.
(4) Finished Art. Finished art is the final artwork used for actual reproduction by photomechanical or other processes, or used for display. It includes electronic art, illustrations (e.g. drawings, diagrams, halftones, or color images), photographic images, sculptures, paintings, and handlettering.
(5) Illustrator. An illustrator creates an illustration, which is an original artwork (including cartoons and comic strips) licensed for the purpose of publication.
(6) Photographer. A photographer creates an original photographic image through the use of a camera or similar device, which photographic image is licensed for the purpose of publication.
(7) Photostat. A photostat (also called a "stat") is a copy produced by photographic means, often used in layout, dummy work, or "for position only" on camera-ready art.
(8) Preliminary Art. Preliminary art is tangible personal property which is prepared solely for the purpose of demonstrating an idea or message for acceptance by the client before a contract is entered into, or before approval is given, for preparation of finished art, provided neither title to, nor permanent possession of, such tangible personal property passes to the client. Examples of preliminary art include roughs, visualizations, layouts, comprehensives, and instant photos.
(9) Production Function. A production function is a segment of the process of producing camera-ready art or camera-ready copy, and includes the following:
(A) Alterations, which are changes made to typeset copy or camera-ready copy.
(B) Dummy, which is a mock-up or layout of a page showing position and overall form, used for approval. A dummy can be assembled manually or generated by a computer program. A dummy is never physically incorporated into a mechanical or paste-up.
(C) Formatting, which is a manuscript mark-up, when done electronically.
(D) Manuscript mark-up, which is the application of type specifications to a manuscript for typesetting, when done manually.
(E) Mechanical or paste-up (also called camera-ready art or camera-ready copy), which is produced by preparing copy to make it camera-ready with all type and design elements, and then pasting the prepared copy on artboard or illustration board in exact position along with instructions, either in the margins or on an overlay, for the platemaker.
(F) Production Coordination or Production Direction, which is the coordination and scheduling of the various components of a project.
(G) Production Editing, which is editing that maintains editorial integrity of the author's work during the production process.
(H) Proofreading, which is a reading of typeset copy for correctness in comparison with the original manuscript.
(I) Typesetting, typography, or composition, which is the fabrication or production of composed type, or reproduction proofs thereof, for use in the preparation of printed matter. Typesetting, typography, or composition does not include the fabrication or production of a paste-up, mechanical, or assembly of which a reproduction proof is a component part.
(10) Publisher. A publisher owns, outright or by license, the rights to reproduce, market, and distribute printed literature.
(11) Syndicator. A syndicator receives from authors original manuscripts, or reproduction proofs thereof, including columns, cartoons, and comic strip drawings, and distributes those manuscripts to publishers for publication.
(b) Application of Tax.
(1) Authors.
(A) The transfer by an author to a publisher or syndicator, for the purpose of publication, of an original manuscript or copy thereof, including the transfer of an original column, cartoon, or comic strip drawing, is a service, the charge for which is not subject to sales tax. If the author transfers the original manuscript or copy thereof in tangible form, such as on paper or in machine-readable form such as on tape or compact disc, that transfer is incidental to the author's providing of the service, and the author is the consumer of any such property. However, the transfer of mere copies of an author's work is a sale of tangible personal property, and tax applies accordingly.
(B) Tax applies to charges for transfers of photographic images and illustrations, whether or not the photographic images or illustrations are copyrighted. Transfers of photographic images or illustrations illustrating text written by the photographer or illustrator are not taxable when they are merely incidental to the editorial matter.
(2) Syndicators. The transfer by a syndicator to a publisher of impressed mats or proofs of syndicated columns, cartoons, or comic strip drawings for the purpose of publication is not subject to tax.
(3) Designers and Art Directors. Fees paid to a designer or art director for his or her ability to design, conceive or dictate ideas, concepts, or specifications are not subject to tax if the designer or art director does not transfer to the client or to any other person on behalf of the client title or possession of any tangible personal property used to convey the ideas. The designer or art director is the consumer of any paper, tape, film, diskette, or other tangible personal property used. Tax applies to the sale of such tangible personal property to, or use of such tangible personal property by, the designer or art director.
(4) Production Functions.
(A) Tax applies to the gross receipts from the retail sale of camera-ready art or camera-ready copy. The measure of tax includes charges for the performance of all production functions, whether the charges are separately stated or not.
(B) A contract under which a person performs only the following functions (or any combination of the following functions) is not subject to tax: manuscript mark-up, formatting, typesetting, proofreading, production coordination, and production editing. Charges for any of such functions are taxable when they are provided as part of the taxable sale of camera-ready copy or camera-ready art unless there is no contract for the camera-ready copy or camera-ready art until after such functions are completed, in which case the charges for such functions are nontaxable.
(5) Contract to Perform Services and to Furnish Tangible Personal Property. One person may, under a single agreement, contract both to perform author, design, or art direction services, and to produce camera-ready copy or art. If, under the terms of the agreement, the client retains the right to approve the manuscript, layout, or general specifications before authorizing preparation of camera-ready copy or art, and if the author, designer, or art director does not transfer to the client title to the layouts or possession of the layouts other than for the purpose of review and approval only, then separately stated charges for performance of the services are not taxable. In the absence of specific contractual language, proof of client approval shall be evidenced by contemporaneous notation of receipt of approval in the records of the author, designer, or art director. No other proof shall be required.
(6) Preliminary Art. Tax does not apply to separately stated charges for preliminary art, except where the preliminary art becomes physically incorporated into the finished art, as for example, when the finished art is made by inking directly over a pencil sketch or drawing, or the approved layout is used as camera copy for reproduction. The charge for preliminary art is separately stated if it is billed separately to the client, either on a separate billing or separately itemized on the billing for the finished art, provided it is clearly identified on the billing as roughs, visualizations, layouts, comprehensives, or other preliminary art. Proof of ordering or producing the preliminary art, prior to the date of the contract or approval for finished art, shall be evidenced by purchase orders of the buyer, or by work orders or other records of the seller. No other proof shall be required. Tax applies to the total charges made for finished art. If there is no separately stated charge for preliminary art, then there is no deduction for such services from the taxable measure for the sale of the finished art except as provided in subdivision (b)(2)(C) of Regulation 1540.
(7) Sales by Publishers. Sales of printed literature are subject to tax unless the sale is for resale or is specifically exempted by law, e.g., qualifying sales of printed sales messages and sales in interstate and foreign commerce.
(8) Transportation Charges and Services Related to Transportation. Tax applies to charges for the transportation of printed matter in connection with a taxable retail sale except as provided in Regulation 1628.
Separately stated charges for services such as addressing (by hand or by mechanical means), folding, enclosing, or sealing directly related to the transportation of printed matter to the customer are not subject to tax . Tax applies, however, to charges for envelopes except as otherwise provided in Regulation 1541.5.
(9) Purchase of Property for Resale. Tax applies to the purchase of tangible personal property that is consumed in any production function and does not become a part of the finished product. However, a person may purchase such property for resale if that person's contract of sale with its client explicitly passes title to the property to that person's client prior to its use. Tangible personal property so purchased must be separately listed and priced on the person's sales invoice to the client and sales tax applies to that charge.
(10) Reproduction Rights. Notwithstanding anything to the contrary in this regulation, if the transfer of a photographic image or artwork is made pursuant to a technology transfer agreement under subdivision (b)(2)(D)2. of Regulation 1540, tax applies to the transfer of the artwork in accordance with that provision.
(c) Examples of the Application of Tax Under Specific Circumstances.
(1) A firm provides various services to a publisher. In performing a contract with the publisher, the firm buys a color separation from a third party. The firm does not make a copy of the color separation or use it in any way, but resells it to the publisher. The firm may give a resale certificate to the third party but tax applies to the sale to the publisher.
(2) The firm in Example (1) uses the color separation before reselling it to the publisher. Both the firm and the publisher are consumers, and both sales are subject to tax.
(3) The firm in Example (1) buys both the color separation and a photostatic copy of it from the third party who separately states the price of each item on the sales invoice. The firm retains the photostatic copy but resells the color separation to the publisher without using it in any way. Since the third party used the color separation to make a copy of it, the sale of the component parts to the third party, or the third party's use of those component parts, is subject to tax. The firm may give a resale certificate to the third party for the color separation, but tax applies to the third party's sale of the photostatic copy. Tax also applies to the firm's sale of the color separation to the publisher.
(4) A firm contracts with a publisher to perform a contract in three stages, as follows:
(A) The firm creates an original manuscript of a book. The publisher reviews the first draft, comments on it, and approves it. The firm then does developmental editing, in which the writer and editors develop the manuscript for sound editorial structure and organization. The publisher reviews the resulting second draft, comments on it, and approves it. The firm then does copy editing, in which editors review the manuscript for grammatical consistency and clarity. After this, the firm passes title to the manuscript to the publisher for the purpose of publication. Under the contract, the firm can proceed with further work only with the publisher's approval.
Tax does not apply to the sale of the finished manuscript or to any of the steps of writing and editing it.
(B) In the second stage, the publisher returns the accepted manuscript to the firm for typesetting into galleys, which the publisher reviews and approves. The firm then arranges the galleys into page form, which the publisher reviews and approves.
The firm then produces camera-ready art, which the publisher reviews for approval or alterations. The publisher then accepts and takes title to the camera-ready art.
Tax applies to the firm's gross receipts from the sale of the camera-ready art, including formatting, typesetting, proofreading, and production coordination, whether separately stated or not. To preserve the nontaxable status of the receipts described in Example (4)(A), the charges for work done in Example (4)(A) must be separately stated from the charges for the sale of the tangible personal property in this Example (4)(B).
(C) In the third stage, the publisher returns the camera-ready art to the firm for printing. The firm subcontracts the printing to a printer. The firm manages the quality of the printing. A representative of the publisher visits the printer to approve the work. At the firm's instruction, the printer ships the completed books to the publisher's warehouse.
Since the firm will be reselling the books to the publisher without using them, the firm may issue a resale certificate to the printer. Since the publisher intends to resell the books, the publisher may issue a resale certificate to the firm . Tax applies to sales of the books by the publisher to consumers unless the sales are specifically exempt by statute (e.g., sales in interstate commerce).
(5) A publisher owns an existing manuscript. The publisher contracts with an editorial design firm for developmental editing, copy editing, and design specifications. The firm reviews the manuscript and makes recommendations to the publisher for developing it into publishable form, including recommended layout and a general approach to design (e.g., trim size). After the publisher accepts these recommendations, a designer (at the firm or a subcontractor) prepares sample sketches and dummies to express the idea to the publisher. After the publisher approves the sketches and dummies, the designer creates type specifications. A developmental editor and a copy editor (at the firm or a subcontractor) perform development and copy editing services. The edited manuscript, dummies, and type specifications are transferred to the publisher.
Tax does not apply to the editing services because they are author's services. Tax does not apply to charges for the dummies and type specifications those charges are separately stated and if possession and title is retained by the editorial design firm.
(6) A publisher has an office in California and an office in New York. The publisher's California office purchases camera-ready art from a California production firm with title passing in California. However, the production firm, on instructions from the publisher, ships the camera-ready art directly to the publisher's New York office for use at the New York office, with no use of the camera-ready art in California.
Tax does not apply to the production firm's gross receipts from the sale of the camera-ready art, because the sale is in interstate commerce.
(7) A commercial artist (such as a commercial photographer or illustrator) makes a temporary transfer of finished art (such as a photograph or illustration) that qualifies as a technology transfer agreement under subdivision (b)(2)(D)2. of Regulation 1540 to a publisher for purposes of reproducing the finished art in a children's book. The publisher makes a computer scan of the finished art and returns the original finished art to the commercial artist. The publisher incorporates the computer scan into layouts which are used to reproduce the finished art in the printed children's books, which are then sold. The commercial artist is paid an advance against royalties, and is then paid royalties based on retail sales of the children's book. The commercial artist does not make a separate charge for the tangible personal property leased to the publisher in accordance with subdivision (b)(2)(D)2.a. of Regulation 1540. As provided in subdivision (b)(2)(D)2.b. of Regulation 1540, if the commercial artist has leased like property for a separate price to an unrelated third party without also transferring an interest in the copyright, or has leased that finished art or like finished art for a separate price satisfying the requirements of subdivision (b)(2)(D)2.a. of Regulation 1540, then tax applies to that separate price. Otherwise, tax applies to the commercial artist's transfer as specified in subdivision (b)(2)(D)2.c. of Regulation 1540. Except for the tax due under subdivision (b)(2)(D)2.b. or (b)(2)(D)2.c. of Regulation 1540, no further tax is due on the royalties or the advance paid to the commercial artist. Tax applies to the retail sales of the children's book unless specifically exempt by statute.
History—Adopted July 31, 1990, effective March 17, 1991.
Amended December 11, 1991, effective April 18, 1992.
Chapter 85, Statutes 1991, repealed the exemption from tax for the sale of newspapers and periodicals and for sale of a photograph when possession, but not title, was transferred to be produced one time only in a newspaper regularly issued at average intervals not exceeding three months. Chapter 88, Statutes of 1991, changed the effective date from July 1, 1991 to July 15, 1991.
Amended July 24, 1996, effective November 23, 1996. Added subdivision (a)(9); amended subdivision (b)(1)(A) to include sales by an author of an original manuscript or copy thereof, including an original column, cartoon, or comic strip drawing, even if in machine-readable form; added new subdivision (b)(2) and re-numbered former subdivisions (b)(2 8) accordingly.
Amended May 29, 2002, effective September 18, 2002. Term "photograph(s)" changed to "photographic image(s)" throughout to reflect changes in usage in the industry. Subdivision (a)—generally rewritten. Subdivision (a)(5) and (6) added. Subdivision (b)(1)(A)—phrase "a … tax" added; second sentence re-written to convert to active voice; phrases "the transfer of" and "is … accordingly" added to third sentence and phrase "tax … sale of" deleted. Subdivision (b)(3)—phrase ", or … by," added. Subdivision (b)(4)(B)—word "only" moved; phrase "(or … functions)" added, and word "Manuscript" changed to lower case; in second sentence word "If" deleted, phrases "Charges for any of", and "are … unless" added, phrases ", … that" and "in which the" deleted. Subdivision (b)(6) re-titled "PRELIMINARY ART"; word " stated" added to first sentence, phrase "is … is" and words "itemized" and, "provided it is" added to second sentence and phrases "must be", "charged for", and ". It must be" deleted; new sixth sentence added. Subdivision (b)(8) phrase "AND SERVICES RELATED TO TRANSPORTATION" added to title, phrases "In general, " and "tangible … see" and "Transportation Charges" deleted in first sentence and phrase "Printed … in" added and word "Tax" changed to upper case; in un-numbered paragraph, phrases "such … directly," "matter" and "except
… 1541.5" added and words "directly" and "material" and "the" and "e.g. … sealing" deleted. Subdivision (b)(9)—words "that … passes" and "and … charge" added and language "passes" and "and … appropriate" and last three sentences deleted. Subdivision (b)(10) added. Subdivision (c)(3)—words "stat" and "his" deleted and phrase "the sales" added to first sentence; the word "stat" deleted and the phrase "photostatic copy" added in second sentence; third sentence added. The word "stat" deleted and the phrase "photostatic copy" added in the fourth sentence. Subdivision (c)(4)(B)—words "exempt" and "above" and "receipts" and "should" deleted and phrases "nontaxable" and "must" and "charges … done" and "charges … property" added. Subdivision (c)(4)(C)—words "The" and "furnish" and ", who … way.)" deleted from first sentence and phrase "Since … the" and "issue" added to first and second sentences; phrases "of the books" and "unless … commerce.)" added to third sentence. Subdivision (c)(5), un-numbered paragraph—phrases "charges for" and "those charges" added and the phrase "the … specifications" deleted. Subdivision (c)(6)—phrase "for … California" added. Subdivision (c)(7) added.