In Hearing No. 47,841, the taxpayer reviewed preliminary designs for holiday cards, invitation postcards, mailing stuffers, insert cards, banners, t-shirts, brochures, flyers, trade show inserts, ads and notebooks prepared by a third party. The taxpayer reviewed the designs only in electronic form. The taxpayer then instructed the third party to deliver the designs to a printer who made final changes to the designs and produced the final products. The taxpayer argued that since it reviewed only preliminary designs in electronic form, the third party’s services were nontaxable as preliminary art. The administrative law judge disagreed and held that Rule 3.321 suggests that if preliminary art does not become part of the finished art for any reason, but the client must still pay a charge for the preliminary art, then the Comptroller will consider the charge for the preliminary art as the purchase of a non-taxable design service. But, if a portion of the preliminary art is incorporated into finished art, the charge for the art is subject to tax as the sale of tangible personal property. Because the taxpayer agreed that the preliminary designs that it reviewed were incorporated into the final product, the design work was taxable as finished artwork. The ALJ also clarified that it was irrelevant that the taxpayer reviewed only electronic versions of the designs.You can review the text of the Hearings Decision on the Comptroller’s STAR System.

STAR Document No. 200904347H (