Helpful New York State Sales Tax Hints for Graphic Design Studios
Prepared by Peter Harrison, Pentagram and Stewart Buxbaum, Buxbaum and Company
These New York sales tax hints have been formulated from the experience gained during two sales tax audits at Pentagram, including a trip to Albany with the AIGA sales tax committee to talk with senior New York State civil servants in the department of taxation and finance. During these audits it became clear that the way one individual auditor interprets the rules may be very different from the way another auditor may interpret them. Therefore neither Peter Harrison or Stewart Buxbaum should be held responsible in any way for the use of the information contained in these helpful hints. Always seek the advice of your accountant when making changes to your billing procedures. It is your accountant that will have to face tax auditors. To those of you who do not work in New York state, we encourage you to form a committee, make the appropriate appointments and travel to your state capitol to get the record straight.
When is sales tax due?
The basic rule of New York State sales tax is: Whenever a tangible and physical piece of property changes ownership by being sold, sales tax must be collected. There are exceptions to this rule for such items as houses and food, but for the graphic design studio this basic rule holds.
Who is responsible for collecting the tax?
As far as New York State is concerned, the seller (your studio) is responsible for collecting the sales tax and paying it to the state in quarterly filings.
Are there any guidelines to help me?
The AIGA New York Chapter formed a committee which created a set of guidelines that were officially approved by New York State. These are available as an Adobe Acrobat pdf file here. The following helpful hints are meant to augment the official guidelines with some real-life examples.
What do I need to do to protect my business in case of a future audit?
The most important procedure is to understand the difference between nontaxable and taxable work. Never combine sales taxable work and nontaxable work on the same invoices, even when the work is for the same client and the same general project. Make sure your studio recognizes the three different types of work outlined below and presents these services to clients as separately billed work.
For the graphic design studio there are three basic types of work to be considered.
Example 1
Sale of reproduction rights for one time use only
In this case the designer retains ownership of the work and only sells the right to reproduce from the original. Ownership must not be transferred. If ownership is transferred, tax is due.
Example 2
Resale of printing (or other tangible product)
If ownership of the finished product is transferred to the client, then sales tax must be charged. At the inception of the project clearly outline this work as a separate job and create a separate job number and contract from any other type of work you may be doing for the client in addition to this. If you put example 1 and example 2 projects on the same contract and invoice you will be required to charge sales tax on the entire combined total for the job. Keep them scrupulously separate.
Example 3
Sale of design items for multiple use (such as corporate identity)
An identity program or symbol/logotype is deemed by New York state to be sales taxable. This is based on the premise that a specific design for multiple use by a client will not remain the property of the design studio. New York state has ruled that the clientís placement and reuse of the logo/identity repeatedly, without recourse to or permission from the original designer, cedes ownership to the client.
Procedures to apply for each project example type
Sales tax audit agents do not generally understand the businesses they review. The basic rule they apply is: If you sell a tangible object, you must charge sales tax. They are looking to identify sales of tangible property when they audit you. Below are actions and procedures you can take which should help to give you some protection. You must take these steps form the beginning of all projects.
Example 1
Sale of reproduction rights for one time use only.
Proposal
It is essential that the proposal and or contract should contain within the terms and conditions the following statement, “Artwork, disks and files prepared for this project remain the property of XXX Design Associates Inc. Photography, illustration or other art remain the property of the original artist. It is for one time reproduction use only and is not to be altered or retouched.”
Contract or purchase order
Have your client to sign the approved proposal and/or contract as it adds enormous credibility if audited. Request a purchase order from the client which includes your proposal and terms by reference.
Advance invoice
It is essential that all invoices contain the following statement, ìArtwork disks and files prepared for this project remain the property of XXX Design Associates Inc. Photography, illustration or other art remain the property of the original artist. It is for one time reproduction use only and it not to b altered or retouched.î
Design presentation
All disks, backs of presentation boards and other forms of presentation materials should be labeled “This artwork or file is the property of XXX Design Associates Inc. It is for one time reproduction use only and is not to be altered or retouched.”
Final invoice
It is essential that all invoices contain the following statement, ìArtwork disks and files prepared for this project remain the property of XXX Design Associates Inc. Photography, illustration or other art remain the property of the original artist. It is for one time reproduction use only and is not to be altered or retouched.î
Additional suggestions
Please keep in mind that during the process of this kind of job, your studio must pay all sales taxes for materials and labor used to create property such as the presentation and the mechanicals. You must have receipts showing that sales tax has been paid on all items and labor involved in the job. If you pay sales taxes to any freelancers involved on the project, you must have a receipt from the freelancer showing receipt of the tax. This means you will not be using your resale number at any time during this project. You will not be charging any sales tax on your final invoice because you are not selling anything.
The client’s printer will them reproduce from your files or mechanicals, which will remain your property. Keep as many disks, comps and proofs on file as you can. If you get audited, producing a wealth of evidence helps you prove the work remains your property.
Make sure no printing related items appear on any proposal, contract or invoice for this type of project. If you include press checks as part of your consulting fee, bill that time as a separate invoice with sales tax charged only for the time spent at the printer supervising manufacturing.
Example 2
Resale of printing (or other tangible product).
Proposal/contract
Make sure your proposal and contract contain this statement within the terms and conditions, “This estimate does not include sales tax. Sales tax will be charged for the portion of the job delivered in New York State when the job is invoiced.î
Purchase order
Have your client sign the approved proposal and contract. Request a purchase order from the client which includes your proposal and terms by reference.
Advance invoices
Have all advance invoices contain the statement, ìThis is an advance payment. All New York State sales taxes applicable to this project will be charged when this project is invoiced at the completion of the job.î
Final invoice
You must include all applicable New York State sales taxes on the final invoice. This is the only point at which a sale of tangible property has taken place.
Additional suggestions
During the process of the job the designer will not pay sales tax to suppliers, but will use present a resale certificate (New York State form ST 120) for the items purchased for resale to the client. The designer will collect the sales tax on the total final invoice issued to the client. Please note that any fees and expenses attributable to the job for press checks which are part of this contract must be included in the total bottom line for the job and sales tax must be charged.
The only exception is in the event the client is purchasing promotional materials for distribution outside New York State. You can issue an Exempt Use Certificate (New York State form ST 121) and check box D which allows you to exempt from sales tax ìpromotional materials that will be distributed to customers or prospective customers located outside New York State for use outside the state.î
Example 3
Sale of design items for multiple use (such as corporate identity).
The rules governing this type of project are basically the same as for projects above involving the resale of printing. New York State sales tax should be collected for design and production as well as printed items. Research, information gathering and evaluation consulting should be on a completely separate consulting contract with separate billing, and such work would not be sales taxable as long as no property changes hands and the results of the research remain the property of the design studio. Make sure this consultant work is billed on a separate invoice and contains the statement, ìResearch, information gathering and its results for this project are provided to the client on a consultant basis only, the research remains the property of XXX Design Associates Inc.
Proposal/contract
The proposal and contract should contain this statement within the terms and conditions, ìthis estimate does not include New York State sales tax. It will be charged for the portion of the job delivered in New York State when the job is invoiced.î
Purchase order
Get the client to sign the approved proposal and contract. Try to get a purchase order from the client which includes your proposal and terms by reference.
Advance invoices
All advance invoices should contain, ìThis is an advance payment. All New York State sales taxes applicable to this project will be charged when this project is invoiced at the completion of the job.î
Final invoice
You must include all applicable New York State sales taxes on the final invoice. This is the only point at which a sale of tangible property has taken place.