85-0213 - Sales





Petitioner, )



AUDIT DIVISION OF THE : Appeal No. 85-0213


Respondent. :



An Informal Hearing was held on this matter XXXXX. James E. Harward and XXXXX, Hearing Officers, heard the matter for and in behalf of the Tax Commission. XXXXX appeared representing XXXXX and XXXXX. Also present were XXXXX and XXXXX. The Tax Commission Audit Staff was represented by XXXXX, XXXXX and XXXXX, Assistant Attorney General.

The Petitioner, XXXXX operated a sole proprietorship until XXXXX. At that time, he incorporated into XXXXX. XXXXX. is a successor in interest of XXXXX DBA XXXXX, and therefore, both Petitioners are treated as one taxpayer for the purposes of this hearing. The Petitioner is in the business of providing design services to clients. Initially, a client will come to the Petitioner and discuss concepts or ideas for design which will fulfill the clients needs. The Petitioner then creates a visualization of the ideas or concepts involved. After showing the visualization to the client and discussing it with the client, the Petitioner makes a camera ready artboard of the concept.

The artboard is the property of the Petitioner, and at all times remains the property of the Petitioner. The client is never sold or rented the artboard. The client is charged for the taxpayer services in consulting and producing the artboard and for the materials used by the Petitioner in producing the artboard. The client is, however, granted a first right of reproduction to have the artboard. The client does not have an exclusive reproduction right, merely a first reproduction right. At no time is the client given the right to alter or have altered or touched up in any way the artboard. The Petitioner delivers the artboard to a third party who reproduces the artwork contained in the artboard for mass production purposes. Such third party would include printers, makers of color separations, etc. The artboard is then return to the Petitioner who maintains possession of the artboard.

All materials used by the Petitioner in the creation of the artboard are purchased by the Petitioner, and sales tax is paid thereon. If the Petitioner bills the client for printing materials (which is unusual), that billing includes sales tax which was paid to the printer. Normally, however, the client is billed separately by the printer, and pays the printer's bill separately which printer's bill includes tax.


The starting point for discussion on the facts and law regarding this case began with Utah Code Ann. 59-15-4(a) which requires that there is levied and there shall be collected and paid a tax upon every retail sale of tangible personal property within the state of Utah. The issue before the Commission is whether or not there has been a transfer or sale of tangible personal property under the facts as outlined above.

Tax Commission Regulation S-81 provides that paintings, drawings, etchings, statues, figurines, etc., which are sold by artists are subject to sales tax. The sales tax is to be computed on the total sales price of the art object without consideration of the materials used by the artist. Regulation S-81 does not deal with the sale or transfer of an intangible right of first reproduction. Therefore, Regulation S-81 does not apply to the facts at hand.

On the other hand, Regulation S-65, although comparable, is not applicable to the situation at hand. Regulation S-65(d) provides for non-taxation of artwork produced within the office of an advertiser or an advertising agency. The Petitioner is neither an advertiser or an advertising agency and therefore, Regulation S-65 does not apply.

Where a regulation of the Tax Commission is not directly on point, the Commission is obliged to look at a case law to determine whether or not the subject transaction is a taxable transaction as contemplated by the Utah Code Annotated. The first question the Tax Commission is confronted with is whether or not there has been a transfer (or sale) of tangible personal property which would subject it to the application of the statute. No case law exists in the state of Utah as it relates to these particular facts. It appears that there is no transfer of tangible personal property. The only transfer that is made is a transfer of the right to first reproduction of the product created by the Petitioner. Although the Utah Supreme Court has not dealt directly with that issue, the Supreme Court of the State of New York has done so in, XXXXX v. XXXXX and XXXXX Inc. 12 NE 2d 435. The court held "the right to reproduce is not .... a use that should make this transaction taxable as a sale of tangible personal property." The court was relying upon facts which are substantially the same where the Petitioner paid the Respondent money for the right to reproduce the Respondent's paintings. No right to exhibit publicly the paintings were given, nor were the paintings sold. The Tax Commission is persuaded under the fact situation at hand, there has not been a transfer of tangible personal property which would subject it to the taxing provisions of the Utah Code.

The nature of the transaction is one of the providing of services by the Petitioner to his clients. The Utah Code provides the taxation of "services" for repairs, renovations, cleaning or washing of tangible personal property or for installation of tangible personal property rented in connection with other tangible personal property. (Utah Code Ann. 59-15-4(e).) The Tax Commission has reviewed XXXXX v. State Tax Commission of Utah, July XXXXX, and the holding that where "Petitioners are rendering a professional service in which the training, skill and artistry still predominate, the cost of material used has very little to do with the charge made to the patients". Therefore, the mere providing of services with incidental costs thereto, does not make the transaction taxable and subject to Utah Code Ann. 59-15-4. The providing of service by the Petitioner with incidental costs of artboard production is similar to the XXXXX case. The Commission finds the holding in XXXXX persuasive.

Therefore, it is the Conclusion and Decision of the Utah State Tax Commission that the Petition for Redetermination filed by the Petitioner be granted and the Notice of Deficiency be stricken.

DATED this 14 day of April, of 1986.


Mark K. Buchi R. H. Hansen

Chairman Commissioner


Roger O. Tew Joe B. Pacheco

Commissioner Commissioner