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SALES

TAX

This review of sales tax practices in New


York and California was commissioned by
AIGA based on success in clarifying the
issue in these bellwether states through
legal and administrative proceedings.
The intention of this chapter is to provide
information to all AIGA members and to
allow members in other states to use the
New York and California examples as
support in clarifying their sales tax liability
in their own states.

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As tax agencies more aggressively You should be aware, however, A key distinction: Is your work according to the laws of the
enforce the sales tax laws, more that many accountants, even those tangible or intangible? home jurisdiction.
are eager to audit for possibly “familiar with sales tax issues,” The basic divide that determines
overlooked revenue. Designers may have no idea whatsoever what what is subject to sales tax is the Services
can best protect themselves from the sales tax issues are with regard sometimes-blurry line between Services, as noted above, are
unexpected tax liability by learn- to this poorly defined area of the the tangible and the intangible. usually not subject to tax unless
ing when they are and are not design profession, and may sug- Transfers of tangible goods are specifically included in a statute
required to collect sales tax on the gest the safest course (but most generally taxed, unless specifically or regulation. This is the general
work they provide for clients. costly to designers): to charge tax exempted by statutes or regula- category under which to group
on everything. A better course tions; services and intangible charges for time and labor; bill-
Sales tax is a state—and occasionally will be for designers to contact an property are generally exempt able time for producing concepts
a local—matter, which prevents accountant, and armed with this and designs, scanning and ma-
from tax, unless statutes or
AIGA from pursuing a single document, raise their conscious- nipulation, time spent on press,
regulations specifically render
national clarification of the issue. ness of this issue, and then get time spent building and encoding
them taxable. Designers typi-
Statutes and the practice of the their advice on how this affects a website and similar billables
cally provide services that are in
taxing authority will vary somewhat your personal situation. should be calculated as services
most cases nontaxable, and grant
from jurisdiction to jurisdiction. and so noted in all contracts and
or license to clients the right to
In addition, design services are invoice terms.
reproduce their work. Licenses
seldom addressed explicitly
are considered intangible per-
in state sales tax laws. The many Intangible property
sonal property, and transfers of
things that design embraces—
such are generally not subject to Copyright licenses are intan-
design services, illustration, print-
ing specifications and delivery tax. Designers may, however, also gible property, as opposed to the
of printed matter or digital files— provide their clients with tangible intangible services of time and
are viewed as different forms of personal property such as fin- labor. Designers, unlike illus-
property and are treated and ished printed matter or a disk that trators, tend not to treat their
grouped differently for tax pur- contains the intangible personal client commissions as copyright
poses from state to state. While property—a reproduction rights licensing transactions. The
AIGA offers a general guide to transfer—that is the substance images that a designer creates,
sales tax principles, dealing with of the contract. Tangible personal however—whether the logo, which
sales tax should be worked out in property is generally subject to is clearly a free-standing im-
consultation with an accountant. tax. While tangible printed mat- age, or the larger images created
ter should be presumed taxable, by arranging type, illustrations
treatment of disks or other layout and photographs in a brochure
transfers may vary widely from or package or poster design—are
jurisdiction to jurisdiction. copyrightable works of graphic
art that the designer licenses to
The designer, then, must consider the client. This is not the place
what is being done, and what is for a lengthy examination of
being transferred, in the various the copyrightability of design.
elements of each client contract, But the designer who registers
and separate out a job’s taxable designs when appropriate and
elements from its nontaxable who, with or without registration,
elements as precisely as possible makes clear to the client that he
in all contracts or invoices, or she is acquiring a license, not

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purchasing ownership of either (however calculated) and the The New York example rather than a license of “repro-
the original design itself or the licenses granted, from the taxable Nowhere in these classifications duction rights.”
boards or disks on which the costs of the tangible printing and does the designer, as such, clearly
design is embodied, is better able production, is essential to avoid appear. Under New York tax law, Nonetheless, designers generally
to retain control of the design and unnecessary tax liability. then, a designer’s services and license original work to the client.
its integrity. Regarding sales tax, licenses are potentially exempt Even if the original work of an an-
a clear paper trail that indicates What is less clear:
from tax, but the designer must nual report, book jacket design or
the design is a copyright property Is design tangible?
know in which category to classify brochure design incorporates il-
being licensed to the client makes While most states do not tax different jobs. lustrations or photography which
clear to a taxing authority that the intangible services or copyright are someone else’s original work,
portion of a job not tax-exempt as transfers, the state laws and New York exempts grants of the the end result which the designer
“services” is a nontaxable transfer regulations may not be clear as right to reproduce an “original licenses to the client is an original
of intangible property. to whether or not “design” falls image” from sales tax and also work in itself, in the form of a
within provision of services and exempts “the services of an ad- collective work which arranges
Tangible property
copyright license transfers or is vertising agency or other persons the type, images, colors, paper,
Printed matter, such as bro- merely a production adjunct of the acting in a representative capac- etc., into a different whole. The
chures, stationery or posters, printing trade. Many state laws are ity.” Thus creation of an original designer may have to pay tax on a
is taxable as tangible property woefully out of date—having been work, such as a logo or creative “license to use” a stock image that
if the designer sells them to the drafted long before the adoption services of a consulting nature, he or she manipulates to create
client. If, however, the designer of the current copyright law, in appears to be excluded. the original design licensed to the
simply acts as the client’s agent in the era of engraving houses, hot end client, but the designer’s end
dealing with the printer, with the type and keylining—and do not New York does not, however, design, if reproduced as is, is a
client paying the printer directly, even recognize the existence of extend that exemption to what it license of reproduction rights and
the transfer to the client will still the designer independent from a terms a “license to use.” Licens- not taxable. If the client, rather
be subject to tax; in this instance printing or typesetting establish- ing of “original work”—i.e., cre- than the designer, adapts it and
the printer, not the designer, will ment. As an auditor’s knowledge ated by the licensor—is a transfer manipulates it, then it would ap-
have to collect the tax. The issue of the industry may well con- of reproduction rights under pear the end client is licensing to
that arises when the designer sist entirely of regulations that New York law, and not subject to “use” rather than to “reproduce,”
transfers tangible personal prop- describe the industry as of 20 or tax, if it is used as is. If, however, and must pay tax.
erty to the client in addition to more years ago, it falls entirely on one is merely licensing the use of
performing services and licensing the designer to provide clarifica- another’s work, that is a “license This would seem to be a strong
the design is how, and where, the tion within the relevant laws and to use” and subject to tax. It is incentive for both designers and
line will be drawn between the regulations, no matter how out also considered a taxable “license clients to not have the client “adapt
intangible, nontaxable portion of of date, to explain why design to use” if the licensee retouches and apply” a design, but rather
the transaction and the tangible, should be exempt from collection or alters the work. The taxable license it for straight reproduction.
taxable portion. Taxing authori- of tax in the event of an audit. “license to use” may apply to the Not only does the client avoid
ties are typically concerned that designer who licenses an image paying tax, as does the designer
in a transaction of this nature the from an archive or stock house, avoid having to collect it, but
bulk of the value will be loaded where the archive or stock house the designer retains a greater level
into the nontaxable portion of is not the creator of the work. of control over his or her work.
the transaction as an exercise in If the designer manipulates the
tax evasion, which is why a clear image in the sense of retouching
paper trail—differentiating the it, the license paid by the designer
value of the intangible services is also a taxable “license to use”

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“Original work,” even that images that the designer has (3) Where some use other than changed or altered. The receipts
incorporating the licensed work retouched or otherwise manipu- reproduction is made of the origi- from such transactions are subject
of others, is the property of the lated. In the case of the logo, the nal work such as retouching to the tax. Since the dealer merely
designer whether the designer is designer’s grant of reproduction or exhibiting a photograph, the collects the photographic prints
a sole proprietor, or whether the rights is clearly not subject to tax; transaction is a license to use, and does not have the right to
designer is a commercial entity in the case of manipulated im- which is taxable. grant the right to reproduce
such as a partnership or corpora- ages, to avoid tax liability under a the original, the transaction is
tion. In the latter instance, the “license to use,” it would be nec- Example 1: A person contracts deemed a license to use tangible
original work of authorship— essary for the designer to be able with an artist for a right to repro- personal property.
“the design”—is a work-for-hire either to classify the job as being duce one of the artist’s paint-
work of authorship owned by done in the role of an “advertising ings on a book cover. No other ¶ 165-033 (b)(5) “Exclusions”
the commercial entity. True, the agency or other person acting in a right is given by the artist for the Fees for the services of advertising
term “work-for-hire” raises the representative capacity,” or as the use of his or her painting. The agencies or other persons acting
hackles on every creator, but if a grantor of rights in the original person who obtains the repro- in a representative capacity are
work of authorship is created by derivative image, of which the duction right to the painting may excluded from the tax. Advertising
several creatives in a company, designer is in fact the author. have copies made and returns services consist of consultation
and the end result is licensed the painting to the artist without and development of advertis-
by the company rather than an Explanations in New York sales alteration, change or correction, ing campaigns, and placement of
individual, the work is a “work for and use tax law and without having destroyed advertisements with the media
hire” owned by the company, and ¶165-018 (f) “Reproduction rights” or publicly exhibited the painting. without the transfer of tangible
the company is the author. (1) The granting of a right to The transfer is not held to be a personal property. The furnishing
reproduce an original painting, il- transaction subject to the sales tax, of a personal report containing
In New York, design fees are not lustration, photograph, sculpture, as a rental, lease or license to use. information derived from infor-
taxable, but transfers of tangible manuscript or other similar work mation services, by an advertising
personal property such as layouts, is not a license to use or a sale, Example 2: A photographer takes agency to its client for a fee, is
printing plates, catalogues and and is not taxable, where the pay- photographs and furnishes the not a taxable information service.
promotional handouts are. If you ment made for such right is in the same to a magazine publisher for However, if an advertising agency
actually hand over design in a nature of a royalty to the grantor the purpose of reproduction. In is engaged only for the purpose of
tangible form, rather than allow- under the laws relating to artistic the course of reproduction, the conducting a survey or if a survey
ing the client to transfer design and literary property. publisher retouches the photo- is separately authorized and billed
electronically for specified uses graph. After reproduction, the to the customer, the taxability
(without leaving a disk or tangible (2) Mere temporary possession or photograph is returned to the of such survey is determined in
product), you are less likely to be custody for the purpose of making photographer. The receipts from accordance with the provisions of
liable for tax on a tangible product. the reproduction is not deemed such a transaction are subject to subdivision (a) of this section and
to be a transfer of possession the tax as a license to use. the other provisions of this subdi-
The designer may sometimes act which would convert the repro- vision. Sales of tangible personal
as an advertising agency, or as an duction right into a license to use. Example 3: A dealer collects property such as layouts, printing
“other person acting in a repre- See Howitt v. Street and Smith photographs and photographic plates, catalogs, mailing devices
sentative capacity,” avoiding tax Publications, Inc., 276 NY 345 and prints. He or she furnishes the or promotional handouts, tapes or
on fees charged in both cases. A Frissell v. McGoldrick, 300 NY 370. prints to a magazine publisher films by an advertising agency for
designer may also, however, grant for the purpose of further repro- its own account are taxable sales
a license to reproduce an original duction. After reproduction the of tangible personal property.
image—as in the case of a logo— prints are returned to the dealer.
or may license, or sublicense, The prints may or may not be

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Example 4: An advertising agency The California example during the development of Silicon This presumption of a taxable 25
is hired to design an advertising Unlike New York, California Valley, and which exempts trans- percent can be reduced in three
program and to furnish artwork does directly refer to designers fers of intangible rights to images ways. (1) If the designer’s contract
and layouts to the media. The fee in its regulations, but the under- but does impose a minimal sales or invoice states the fee for the
charged by the agency to its clients standing of the design industry tax when such rights are trans- copyright license separately from
for this service is not subject to reflected there has traditionally ferred even temporarily in a tan- the sale price for permanent
the tax. However, if the layout and rendered most finished work li- gible medium. The regulations af- transfer of the tangible material,
artwork are sold by the advertising able to tax. California in the past fected include California sales and or the lease price for temporary
agency to the customer for his or has exempted what it calls “pre- use tax regulations 1528, 1540, transfer of the tangible material,
her use, the advertising agency is liminary art”—conceptual work, 1541 and 1543, and new regula- the copyright license is nontax-
making a sale of tangible personal sketches and preliminary lay- tion 1507; the most important for able and the sale or lease price is
property which is subject to the outs—but subjected “total charges designers are regulations 1507, the amount on which tax is due.
sales tax. for finished art”—used for actual which discusses the technology (2) If the contract or invoice does
reproduction—to sales tax. Until transfer concept, and 1540, which not separately state the charge for
recently, California’s sales tax applies that concept to design, transferring the tangible work,
authority consistently refused to but most designers will at some the designer can calculate this
recognize the concept of licensing time or other have to familiarize taxable amount by referencing the
or reproduction rights as applied themselves with regulations 1528 taxable amounts of similar work
to images, though it did recognize (photography), 1541 (printing) done in the past. (3) The third
these rights with regard to written and 1543 (publishing). option is to calculate the taxable
works of authorship. amount at 200 percent of the costs
In brief, images transferred in of materials and third-party labor.
In the decision of Preston v. State intangible form—e.g., by mo-
Board of Equalization, the California dem—are wholly exempt from tax, Under this last option, if a designer
Supreme Court rejected the state’s but when the rights to an image has no third-party labor costs
traditional application of sales are transferred using tangible (e.g., is a sole proprietor without
tax to image-based transfers of means, such as flat art, boards or employees or other assistance)
rights. In that case, an illustrator disks, the rights transfer itself is and does the work on a computer,
successfully sued the board for exempt from tax, but the transfer the sole taxable amount would be
applying tax to payments for the of the tangible medium remains 200 percent of the cost of materials
copyright licenses she transferred taxable, even if the transfer is (i.e., of the disk or CD on which the
to various publishers, and to the temporary. Calculation of the final files are recorded and turned
royalties she was subsequently amount subject to tax begins with over to the client). Thus, with good
paid. As a result of this favorable a rebuttable presumption. If pay- record keeping, the actual tax
decision, brought about largely ment is received in a lump sum burden can be calculated so as to
through an amicus brief filed by without distinguishing between be reduced to almost nothing.
the Graphic Artists Guild and “conceptual services” (which
strongly supported by AIGA, the include all preliminary sketches
California sales tax regulations and presentation pieces) and
have been extensively redrafted. “finished art” (the final used for
The redrafted regulations discuss reproduction), it is presumed
rights transfers in terms of “tech- that 75 percent of the job fee is for
nology transfer agreements,” a conceptual services, leaving only
California concept which evolved 25 percent of the fee subject to tax.

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Sales tax venue Contract language that unaltered and unretouched to To minimize your sales tax
Sales tax applies only to business
clarifies the tax status [the name and address of liability, you should consider the
conducted within the designer’s The contract or proposal should the designer].” following practices:
home state, with two exceptions. contain language permitting the
A few contiguous states, usu- designer to pass through to the The following wording should ■ Differentiate on your invoices
ally adjoining, have reciprocal client any sales tax he or she must be in all contracts for taxable the fees for design services
agreements; the designer living pay on a project and protecting projects: “This estimate does not (consulting), intangible prod-
in a state that has one of these the designer in the event that any include sales tax. Sales tax will be ucts (use licenses) and tangible
agreements should consult an taxing authority assesses sales tax charged for that portion of the job products (boards and disks,
accountant to determine if tax is on audit. The following word- delivered in [State] when the which should be treated as a
due on transactions with clients ing should be in all contracts job is invoiced.” commodity rather than as a
in the reciprocal state. Also, if an for nontaxable transactions and specialized product to which
out-of-state client has a substan- grants of rights for one-time Recommendations to minimize all of the value of your creativity
tial business nexus such as a store reproduction of designs only: sales tax liability accrues). This may not be
or branch office in the designer’s “Client is liable for sales tax paid Most states fall somewhere sufficient. An even more
home state, tax will apply if due. by [the designer] to vendors or between New York and Califor- explicit approach would be to
If the designer is having printing freelancers for services rendered nia in their application of sales execute separate contracts
done out of state for an in-state or materials purchased relating tax to designers. The statutes for tangible and intangible
client, the shipping of the com- to the execution of this project. and regulations may or may not products and services.
pleted printed matter from out of The client shall also pay any sales, recognize designers as such, or
state will still be subject to tax if use or other transfer taxes that the existence and intangibility ■ Clarify in your written
the designer, not the printer, bills may be applicable to the services of reproduction rights, but most agreement with the client that
the client. provided, including any tax that states—including California, you are providing the rights
may be assessed on subsequent once the regulatory revisions are to use your work, but not the
The designer’s role audit of [the designer’s] books of complete—exempt most aspects ownership of the work itself.
in collecting sales tax accounts.” of design transactions except for
the delivery of tangible printed ■ Specify on your boards or
Clients, understandably, do not disks that they are the property
On projects where the client is matter. The designer who wishes
want to pay tax if they can avoid of your studio and should
being provided the grant of a to avoid needlessly collecting tax,
doing so, and frequently attempt be returned.
right for one-time reproduction and to avoid unnecessary liabil-
to evade sales tax by the simple
of the designs only, all mechani- ity for sales tax if audited, must
expedient of refusing to pay or Have clients pay directly for
cals and disks sent to the client be aware of how his or her home ■
ignoring the line item on the tangible products, such as
must be marked with a stamp or state statutes and regulations are
invoice. The designer, however, printing, so that you do not
label that provides the following configured, and adjust contracts
is liable to the state for the tax have to assume the sales tax
message to avoid appearing to be and billing to clearly distinguish
owed, whether or not the client collection role.
a taxable transaction: “Ownership tangibles from intangibles, and
pays—and so should stress to the
and title of all drawings, artwork, taxable transfers from nontax-
client that sales tax is “charged”
electronic files and other visual able, in a manner that conforms
by the state, not the designer,
presentations at all times remains to them. Initial consultation with
who merely collects it on behalf
the property of [the designer]. an accountant familiar with sales
of the state, as mandated under
Temporary transfer of possession tax can provide the designer with
state law.
is granted only for the purpose a template for design transactions
of reproduction after which all that will enable the designer to
materials must be returned, avoid unpleasant surprises.

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AIGA | the professional association for design Disclaimer: Legal information is not legal advice.
164 Fifth Avenue, New York, NY 10010 This publication provides information about the
212 807 1990 www.aiga.org law designed to help designers safely cope with
their own legal needs. But legal information is
PUBLISHER not the same as legal advice — the application
Richard Grefé, AIGA of law to an individual’s specific circumstances.
Although AIGA goes to great lengths to make sure
our information is accurate and useful, we rec-
EDITORIAL CONTENT
ommend that you consult a lawyer if you want
A Client’s Guide to Design:
professional assurance that our information, and
Joanne Stone and Lana Rigsby
your interpretation of it, is appropriate to your
particular situation.
Use of Fonts:
Allan Haley
Contributing editors: Sam Berlow, IN-KIND PAPER PARTNER

Matthew Carter, Jonathan Hoefler, Arctic Paper


Zusana Licko and Frank Martinez arcticpaper.com
Cover: Munken Polar, 300 g/m
Use of Illustration: Text: Munken Lynx, 130 g/m
Brad Holland and Tammy Shannon
PARTIAL IN-KIND PRINTING PARTNER
Use of Software: Blanchette Press
Business Software Alliance Richmond, BC, Canada
blanchettepress.com
Sales Tax:
Daniel Abraham and Marci Barbey DESIGN
Grant Design Collaborative, Atlanta
Guide to Copyright:
Tad Crawford
PHOTOGRAPHY
Jerry Burns, StudioBurns, Atlanta
Use of Photography:
Tad Crawford
FONTS

Standard Form of Agreement for Design Services: Interstate and Filosofia


Jim Faris and Shel Perkins
COPYRIGHT
© 2009 AIGA
First edition published in 2001.

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