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Sales and Use Tax Memorandum Opinions

Eric Eckstein

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Preparing drawings from an established reference material provided by the customer does not involve the creation of original concepts or ideas. Thus, the transfer of drawings is considered the true object of the contract and subject to tax.

Where the taxpayer has complete responsibility for the design, shape, size, and material specification for the proposed product, the preparation and transfer of the original drawing is exempt from tax as the true object of the contract is the purchase of original concept or ideas.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petition of ERIC ECKSTEIN dba EMPIRE ENGINEERING

Appearances:

MEMORANDUM OPINION

A petition has been filed by Mr. Eric Eckstein for a redetermination of the tax deficiency determination issued for additional sales and use taxes for the period April 1, 1963, to March 31, 1966, in the amount of $1,017.16, plus statutory interest.

The petitioner is the sole proprietor of a firm engaged in producing drawings for customers. The production of the drawings is carried out by employees with varying degrees of drafting and engineering skills. The petitioner is a registered engineer.

The protested measure of tax of $24,455 consists of the labor portion of time and material billings to customers for the preparation of certain types of drawings. The work performed by petitioner's firm is in three separate categories which have been described as follows:

1. The firm redraws a completed drawing provided by the customer on a new permanent type of paper. The drawing is prepared for the purpose of reproducing other drawings, for making microreproduced copies or for other purposes. Technical information obtained from independent reference material may be added to the drawing prepared by the firm.

2. Working from a design drawing provided by the customer, the firm produces a high quality manufacturing drawing for use in manufacturing a product. The drawing may represent a topical view, side view, or only a designated portion of the original design drawing. Again, technical information obtained from military manuals or other defense material may be catalogued on the face of the drawing.

3. A third type of work described by petitioner at the oral hearing consists of the preparation of an original drawing of a proposed product or component part of a product. The firm is said to have complete responsibility for the design; including the shape, size, and materiel specifications for the product. Petitioner has not complied with the staff's request for exhibits and audit information for transactions claimed to be in this category.

It is petitioner's contention that the charges were for the performance of exempt services, or in the alternate that the property was purchased by the customers for purposes of resale. This alternate basis for exemption must be denied in view of the absence of evidence that the purchases were made by the customer for purposes of resale. Petitioner has not presented resale certificates to overcome the presumption that the transactions were retail sales (Rev. & Tax. Code § 6091; sales and use taxes ruling 68).

In determining the classification of these labor charges, the essential question is whether the customer desired to acquire the service labor per se or the tangible property produced by the service labor for his use. (People v. Grazer (1956) 138 Cal.App.2d 274; Albers v. State Board of Equalization (1965) 237 Cal.App.2d 494.) If the customer merely sought to obtain the intangible concepts or ideas which flowed from the performance of the service labor (true object of the contract) then the transaction would qualify as an exempt sale of services. This would follow even though tangible personal property was incidentally used to convey the intangible concepts or ideas to the customer. (Sales and use taxes ruling 1.) However, if the object of the contract was to secure the production of a drawing from detail supplied by the customer, the transaction constitutes a sale of tangible personal property under the provisions of section 6006(f) of the code which defines a sale to include:

"A transfer for a consideration of the title or possession of tangible personal property which has been produced, fabricated, or printed to the special order of the customer, or of any publication."

Based upon the evidence before us, we conclude that the activities performed by petitioner in the first and second category described above are properly classified as sales of tangible personal property under the aforementioned provisions of section 6006(f) of the code. In preparing these drawings, the petitioner worked from an established reference material to produce drawings acquired for use by the customer. While the work performed by petitioner's employees undoubtedly required considerable skill, it did not involve the creation of original concepts or ideas. Since the contracts were for the production of detailed drawings and not original concepts or ideas, the finished article, the drawing, is considered to be the true object of the contract.

The labor charges attributable to the addition of the technical information are includible in the measure of the tax as services performed as part of the sale (Rev. & Tax. Code § 6012(a)).

Any transactions in the third category described above would be properly classified as a sale of exempt services because the true object of the contract was the purchase of original concepts or ideas for a newly created product or component thereof. The record does not contain any evidence from which a determination can be made of the amount of such items included in the protested measure of tax. Although petitioner has been requested to provide this information, we take note of the fact that he has not done so. Therefore, with respect to this class of transactions, we conclude that petitioner has not sustained his burden of proving the amount of the receipts exempt from taxation (Rev. & Tax. Code § 6091).

For the reasons stated, it is hereby ordered that the taxes be redetermined as originally determined.

Done at Sacramento, California, this 7th day of August 1969.

John W. Lynch, Chairman

George R. Reilly, Member

Paul R. Leake, Member

Attested by: H. F. Freeman, Executive Secretary