Ruling 95-7

Sales and Use Taxes
Advertising and Public Relation Services
Business Public Relation Services
Graphic Design

This Ruling is amplified by PS 95(5)

FACTS:

A multinational paper manufacturer (the "Company") has a Creative Services Department ("CSD") located in Connecticut. The CSD is responsible for the design, content, production and distribution of human resource materials, such as an in-house newspaper, and customer communications and advertising materials, such as sample books and sales brochures, as well as for the design, production and distribution of location-specific communications, such as economic impact statements targeted to state and local governments and the community where the Company's various facilities are located. The production of each of these publications, for which the CSD uses independent contractors, is described as follows:

A. Human Resource Materials:

1. In consultation with an independent graphic designer, the CSD creates a rough layout with written copy, photographs and illustrations.
2. An independent color separator adjusts the color and tint of the photos and illustrations, and digitizes them into an electronic format on a floppy disk.
3. An independent prepress facility combines the photos and illustrations on the disk with the written copy into an electronic layout and creates a photographic negative of each page.
4. An independent printer uses the negative to create printing plates and prints the materials on paper supplied by the Company. The printer mails the materials using preprinted mailing labels provided by the Company (roughly 500 recipients in Connecticut).

B. Sales Brochures:

1. An independent graphic designer develops several ideas for the design of a brochure intended to promote the Company's premium grade of paper by demonstrating its printability, versatility and other desirable characteristics.
2. The Company selects an idea. If the Company does not choose any of the ideas presented by the graphic designer, the contract between the parties is renegotiated for a lesser amount to be paid to the designer. The CSD coordinates the efforts of independent copywriters, photographers and illustrators.
3. The CSD sends the materials to a graphic designer, who produces a graphic design (the mechanical).
4. The mechanical is sent to an independent printer, who uses it to produce the brochures on paper supplied by the Company. The printer then ships the brochures to the Company's distribution facility outside Connecticut.
5. The Company's distribution facility mails the brochures, with approximately one percent of the finished brochures returning to Connecticut.

C. Economic Impact Statements:

The economic impact statements, which are targeted for state and local government officials and members of the community, are designed to summarize and communicate the annual economic benefits provided by the Company's operations at a specific location. The CSD follows the same procedure as for brochures, except that the statements are distributed by being shipped to the Company's facility in each state targeted for a statement.

ISSUES:

1. Whether the copywriting and graphic design services purchased by the Company in preparing its human resource materials, promotional brochures or economic impact statements are taxable as advertising and public relations services under Conn. Gen. Stat. §12-407(2)(i)(V) (formerly Conn. Gen. Stat. §12-407(2)(i)(W)) or as business public relations services under Conn. Gen. Stat. §12-407(2)(i)(J).
2. If the graphic design services purchased by the Company are held to be taxable, the extent to which a charge for the purchase of some or all of the incidents of ownership of the graphic design (such as the right to use, change, reproduce or market the design) may be excluded from tax.

DISCUSSION:

The term "public relations services" for purposes of Conn. Gen. Stat. §12-407(2)(i)(V), advertising and public relations services, is defined in TSSN-30 as including:

Conn. Agencies Regs. §12-407(2)(i)(J)-1(g) defines "business public relations services" for purposes of the tax on business analysis, management, management consulting and public relations services as:

As explained in the latter definition, public relations services rendered to a service recipient engaged in business are taxable as business public relations under subparagraph (J) of Conn. Gen. Stat. §12-407(2)(i), and not as public relations services enumerated by subparagraph (V) of said statute. Plainly, the Company is engaged in business, and so public relations services rendered to it are business public relations services within the meaning of Conn. Gen. Stat. §12-407(2)(i)(J) as opposed to public relations services enumerated in Conn. Gen. Stat. §12-407(2)(i)(V).

The same examples of services listed in TSSN-30 for purposes of defining public relations under subparagraph (V) of Conn. Gen. Stat. §12-407(2)(i) also exemplify business public relations for purposes of subparagraph (J) of the statute. Therefore, some examples of taxable business public relations services under Conn. Gen. Stat. §12-407(2)(i)(J) include, but are not limited to, the preparation of press releases, company newsletters, political campaigns, product receptions, speeches and videos.

The public relations services rendered to the Company in connection with its economic impact statements and human resource materials are taxable under Conn. Gen. Stat. §12-407(2)(i)(J). The fact that the human resource materials are directed within the Company, instead of outside of it to existing or potential customers, does not prevent the copywriting and graphic design services rendered in the preparation of such materials from being business public relations services. The human resource materials are designed to influence a specific group, the Company's employees, by providing information relevant to the Company's business goals, strategy, products and operations, and as such the services rendered in the creation of such materials are taxable business public relations services.

The services rendered in connection with the creation of the Company's promotional brochure, which the Company uses to demonstrate the desirable characteristics of its premium paper grade, are advertising services under Conn. Gen. Stat. §12-407(2)(i)(V). The promotional brochure is neither media advertising, since it does not involve the sale of time or space in or on a preexisting medium for broadcast or dissemination to all or a segment of the public (see Ruling No. 93-8), nor cooperative direct mail advertising (defined in TSSN-30 as "direct mail advertising for more than one business delivered by mail in a single package or bundle to potential customers of such businesses participating in the advertising"; see also Val Pak of Central Connecticut North, Inc. v. Commissioner of Revenue Services, Super. Ct., No. 523267 (Dec. 2, 1994)).

Advertising services under Conn. Gen. Stat. §12-407(2)(i)(V) are sourced to where the benefit of such services is realized--in other words, at the location or locations to which the advertising materials are disseminated (see TSSN-30). Thus, the advertising services purchased by the Company in connection with its promotional brochures are taxable to the extent that the brochures are disseminated within Connecticut. Business public relations services under Conn. Gen. Stat. §12-407(2)(i)(J) are taxable at the location where the service recipient "does business or has some presence." (Ruling No. 93-13.) Thus, the same results follow for the business public relations services rendered in connection with the Company's human resource materials and economic impact statements as for the advertising services purchased by the Company--the business public relations services are taxable to the extent the materials are sent to the Company's Connecticut offices.

In the past, the gross receipts from the sale of graphic designs, including photographs and illustrations, have been taxed as the sale of tangible personal property when the graphic design in its finished form, whether on paper, film or disk, was sold by the graphic designer to the customer, without deduction for the cost of fabrication labor, the services purchased or the tangible personal property purchased for such production. When only limited rights to use or reproduce a graphic design were sold, such sale has been treated as nontaxable.

A graphic design is the physical representation of the intellectual work product of, and services performed by, its creator, similar to the production of a master copy of an audio or video production (see Policy Statement 92(13)). As such, the sale of some or all of the intangible incidents of ownership to a graphic design, such as the rights to reproduce, change and market the graphic design, should be treated not as the sale of tangible personal property but as the sale of a combination of intangible personal property and the services of the graphic designer (which may be taxable as advertising services under some circumstances). In contrast, when the true object of the transaction is the transfer of the tangible component of the property (even if the intangible incidents of ownership are being transferred as well, such as the right to reproduce, change or market the property), the transaction is taxable as the sale of tangible personal property. (One example of such a transaction is when a graphic design is purchased by a collector who wants to own the original of the design).

As previously stated, whether or not the Company chooses any of the designs created by a graphic designer for its sales brochures or economic impact statements, tax is due on the services of the graphic designer because such services are related to non-media advertising, in the case of the sales brochures, or business public relations services, in the case of the economic impact statements. However, a fee representing only the sale of the right to change, reproduce or market the graphic design, without more, is not taxable to the extent that such fee can be separately stated from the charge for clearly taxable services. But if a charge represents both a fee for the sale of the right to change, reproduce or market a graphic design and a fee for taxable services, and such fees are not separately stated, then the entire charge is presumed to be taxable as the sale of taxable services, subject to the taxpayer's ability to rebut the presumption.

RULING:

The Company's purchases of the services involved in creating its human resource materials and economic impact statements are taxable as business public relations services under Conn. Gen. Stat. §12-407(2)(i)(J). The Company's purchases of the services involved in creating its promotional brochures are taxable as advertising services under Conn. Gen. Stat. § 12-407(2)(i)(V).

Effective upon the issuance of this ruling with respect to all open tax periods, to the extent that a fee for the transfer of some or all of the intangible incidents of ownership of a graphic design, such as the right to reproduce, change or market the design, is separately stated from the fee for taxable services rendered in creating such design, the fee for the transfer of the incident(s) of ownership is excludable from tax. If, however, the fees for the sale of the incident(s) of ownership and taxable services are not separately stated, the entire charge is presumed to be taxable as the sale of taxable services.

This Ruling modifies and supersedes TSSN-30 (to the extent that it conflicts with this Ruling) and Ruling No. 89-103.

LEGAL DIVISION

Issued April 26, 1995