The charges are usually more specific and descriptive of the various components/steps in the process to get to the finished artwork. To further complicate things many times there is not a single line item charge for finished art/digital disk. The following three examples show possibilities of how the changes in 1540 may be interpreted.
Example I
Typical charges may be art direction, production supervision, mechanical art, color comps, etc. These charges include non-taxable services such as concept development, preliminary art, and/or conveyance of ideas. Since there is no line item charge for finished artwork, the state could look at each line item as a lump sum charge of artwork.
Sample invoice I
Art direction $2,000
Production supervision 1,000
Color comps 500
Tax is due on 25% of each line item since all charges are a step in the process of finished art and includes non-taxable services.
Example II
If charges for preliminary artwork, concept development, etc. are billed as separate line items the 25% rule may not apply and 100% of the artwork charges would be taxable. The separately stated charges for preliminary art and concept development and/or conveyance of ideas would be non-taxable.
Sample invoice II
Preliminary art/color comps $1,500
Disks to printer (final art) 500
Tax is due on $500 since the non-taxable services are separately stated. The final art is not, therefore, billed lump sum and is 100% taxable.
Example III
Conversely if no charge is made for final artwork 25% of the total invoice could be deemed to be the minimum taxable amount.
Sample invoice III
Concept Development/preliminary art $5,000
Color concepts 1,000
Final disk to printer N/C
Since there is no charge for the finished art, the state could take the position that the final art charge is buried in the preliminary stage and treat the total invoice as 25% taxable.
The reinterpretation of Regulation 1540 has made it much easier for Ad agencies to act as agents for their clients (but it is not mandatory). It will now be presumed that Ad agencies will act as agents for their clients and should pay tax on their cost of any buy out items (i.e. items purchased from outside companies such as printing, photography, illustrations, etc.) and not tax these items when sold to their clients. The net effect of the reinterpretation of Regulation 1540 is that less tax will be due from Ad agencies as long as client contracts: estimates and invoicing are structured properly. This presents a great planning opportunity on a proactive go forward basis. Moreover, these agencies could be due retroactive refunds provided they refund/or credit any excess tax they collected back to the clients.
Any electronic of digital art sent to a client electronically is not subject to sales tax as long as no disk or other tangible personal property is transferred. The Ad agency or graphic artist can download artwork onto a customer’s computer as long as the disk is in the control and possession of the seller at all times. Note that certain statements (see Regulation 1540) must be signed by the buyer and seller attesting to this procedure for support upon audit.
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