Laws, Regulations and Annotations


Business Taxes Law Guide – Revision 2023

Sales and Use Tax Memorandum Opinions

Anthony J. Carsello

Artistic expressions in the form of paintings, photographs, sculpture and designs are tangible personal property and the sale of such items do not represent the sale of services but rather the taxable sale of tangible personal property.


In the Matter of the Petition for Redetermination of ANTHONY J. CARSELLO


For Petitioner:

Mr. Earl Schuller
Attorney at Law

For Staff:

Mr. T. P. Putnam
Mr. John H. Knowles
Tax Counsels


A petition has been filed by Anthony J. Carsello for redetermination of sales taxes for the period February 1, 1963, to March 31, 1965, in the amount of $2,414.64, plus a penalty of $241.46 for failure to file returns.

The taxpayer is an industrial designer. Companies engaged in the manufacture of consumer goods wish to make their products look as if they can perform their intended function better than competitive products. Such products are said to have "shelf appeal". The taxpayer is retained by companies of this type to aid in the external design of a product. During the time in question, the taxpayer participated in the design of such items as a chain saw, an electric razor, an outboard motor, a camera, and drawer pulls.

The taxpayer is basically an artist by training; although he has had some engineering background. The engineering of the product is generally completed before the taxpayer is called in. The taxpayer in most instances works with the research and development department of the manufacturer, which supplies him with the engineering data and an explanation of the product's intended use. The taxpayer, when agreeing to a job, gives an estimate of his charges. The taxpayer will then bill his clients monthly for work performed on the contract during that month. It may be necessary for the taxpayer to contact or consult with the client several times as the design progresses.

In each instance, the manufacturer wants some representation of the final design to be prepared by the taxpayer. During the course of the design, the taxpayer may prepare sketches of his ideas, but he is working towards producing a final representation which could take the form of a two or three dimensional drawing, a clay model, a mock-up, or a working model.

The taxpayer was audited for the period February 1, 1963, to March 31, 1965. Amounts billed clients that were not clearly labeled as arising from nontaxable services were scheduled as taxable gross receipts. Upon the recommendation of the hearing officer following a preliminary hearing, the taxpayer was contacted in order that an adjustment might be made in the audit figures for any commissions or fees relating to services not connected with sales of tangible personal property. The taxpayer through his attorney stated that he could not produce any figures to support an adjustment for such commissions or fees.

We have previously adopted a comprehensive, administrative ruling dealing with the subject of "Advertising Agencies, Commercial Artists and Designers". It is designated as ruling No. 2 (Cal. Adm. Code, Title 18, section 1902) and provided at all times material to the present matter as follows:

"(a) Nontaxable Services

"Tax does not apply to charges by advertising agencies, commercial artists or designers for services rendered that do not represent services that are a part of a sale of tangible personal property, or a labor or service cost in the production of tangible personal property. Examples of such nontaxable services are: writing original manuscripts and news releases; writing copy for use in newspapers, magazines, or other advertising, or to be broadcast on television or radio; compiling statistical and other information; placing and/or arranging for the placing of advertising in media, such as newspapers, magazines, or other publications; billboards and other forms of outdoor advertising, cards in cars, busses and other facilities used in public transportation; and delivering or causing the delivery of brochures, pamphlets, cards, etc. Charges for such items as supervision, consultation, research, postage, express, telephone and telegraph messages, transportation and travel expense, if involved in the rendering of such services, are likewise not taxable.

"(b) Agency Fee or Commission

"When an amount billed as an agency 'fee,' 'service charge', or 'commission' represents a charge or part of the charge for any of the nontaxable services described under paragraph (a) above, the amount so billed is not taxable. Such a charge by a recognized advertising agency will be considered to be made for nontaxable services.

"(c) Items Taxable

"The tax applies to the entire amount charged to clients for items of tangible personal property such as drawings, paintings, designs, photographs, lettering, assemblies and printed matter. Whether the items of property are used for reproduction or display purposes is immaterial.

"(d) Preliminary Art

" 'Preliminary art' as used herein means roughs, visualizations, comprehensives and layouts prepared for acceptance by clients before a contract is entered into or approval is given for finished art. ('Finished art' as used herein means the final art used for actual reproduction by photomechanical or other processes.) Tax does not apply to separate 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 must be billed separately to the client, either on a separate billing or separately charged for on the billing for the finished art. It must be clearly identified on the billing as preliminary art, of one or more of the types mentioned in the preceding paragraph. Proof of ordering or producing the preliminary art prior to date of 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.

"(e) Retouching

"Retouching ordinarily constitutes a step in the process of preparing photographs or other art work for reproduction, and is done to improve the quality of the reproductions. Tax applies to charges for photo retouching unless it can be clearly demonstrated that the retouching is done only for the purpose of repairing or restoring a photograph to its original condition.

"(f) Items Purchased by Agency, Artist or Designer

"An advertising agency, artist, or designer is the consumer of tangible personal property used in the operation of its business, such as stationery, ink, paint, tools, drawing tables, T-squares, pens, pencils, and other office supplies. Tax applies to the sale of such property to the agency, artist, or designer.

"The agency, artist, or designer is the seller of, and may purchase for resale, any item that he resells before use, or that becomes physically an ingredient or component part of tangible personal property sold by him, as, for example, illustration board, paint, ink, rubber cement, flap paper, wrapping paper, photographs, photostats, or art purchased from other artists."

The ruling is determinative of the question presented. Designers are subject to tax on finished art sold to their clients. While preliminary art is not taxable, it must be separately stated on the invoice, a practice not followed by the taxpayer during the audit period. Similarly, the taxpayer has been unable to substantiate any portion of his charges as being attributable to services that are not a part of a sale of tangible personal property. The burden of proof of such a matter is on the taxpayer.

The taxpayer contends that ruling 2 is inapplicable and that he is selling ideas which he conveys by use of a model rather than selling an end item of tangible personal property. As respects the application of ruling 2 to the taxpayer's situation, we note that this ruling purports to cover "designers" generally. The ruling is directed as well at commercial artists and advertising agencies producing art work. The taxpayer is retained principally for artistic reasons. Thus, the taxpayer is engaged in an activity which falls within ruling 2 both because he must be classified as a designer and on the principle that the taxpayer is performing in an area similar to others falling within the ruling's provisions.

The question of whether the taxpayer is really selling ideas and uses the models to convey them involves us in one of the most difficult areas in the administration of the sales tax. This board has not recognized transfers of tangible personal property to be taxable sales when the transfer is the means of conveying ideas. Thus, the transfer of a lawyer's brief, a writer's manuscript, and an architect's blueprint are not subject to the tax. Artists, however, have never come within this rule. Artistic expressions in the form of paintings, photographs, sculpture, etc. are taxable when sold. The distinction is not between service industries on the one hand and manufacturers on the other. As pointed out in People v. Grazer (1956) 138 Cal.App.2d 274 [291 P.2d 957]:

"The expense of the producer of pictures is almost entirely the cost of the skilled services of the radiologist and the technicians and the use of equipment which is generally quite costly. But the price charged for all taxable transfers is one more often than not largely a charge for services rendered in connection with the tangible object transferred." 138 Cal.App.2d at 278.

Rather the distinction is between whether the client or customer in the final analysis desires the idea or the tangible object.

In Albers v. State Board of Equalization (1965) 237 Cal.App.2d 494 [47 Cal.Rptr. 69], the court found a draftsman who produced mechanical drawings in which he did not incorporate any of his own ideas, concepts, designs or specifications subject to tax on his sales. The court held that in such a case the customer was purchasing the detailed drawing. We believe the proper construction of this case and the test of whether an item is taxable is whether an end item of tangible property is called for in the contract.

Ruling 2 must be construed as an administrative determination that final art is such an end item. As applied to the facts of this case, there is support for the position that the customer was principally interested in the drawing or model. The end item was always called for by the contract, and title to it passed to the customer. After delivery the taxpayer's job was finished, but the drawing or model was used by the manufacturer to aid in the decision to go ahead with the project and to form the artistic basis for prototypes and production models.

The petition for redetermination is denied.

Done at Sacramento, California, this 25th day of February, 1969.

John W. Lynch, Chairman

George R. Reilly, Member

Paul R. Leake, Member

Richard Nevins, Member

Attested by: H. F. Freeman, Executive Secretary