Is drafting, marine surveying, marine appraisal, or marine architecture/engineering/consulting work taxable under Texas sales tax?

Plain-English Summary

The Texas Comptroller responded to a taxpayer performing marine surveying, marine appraisals, marine architecture/engineering/consulting, and drafting, none of it done by computer at the time. The ruling draws a sharp line based on who does the intellectual work versus who just produces the physical output.

Drafting is taxable as the sale of "graphic art" (a finished design) only when the customer hands the drafter all the schematic drawings, specifications, and requirements, and the drafter's job is simply to turn that information into a drawing or blueprint. But if the drafter develops the specifications and schematics independently, or works with the customer to develop them, the service is nontaxable professional engineering services — even though the end product (a finished design) looks the same. If a computer is used to perform any of these design services, they may instead become taxable data processing services.

Marine surveying and marine appraisals — inspecting vessels, machinery, equipment, or furnishings to assess value or condition — are not taxed when performed for general purposes, such as helping a prospective buyer decide whether a yacht's asking price is fair. However, the same survey or appraisal work becomes a taxable insurance service when performed on behalf of an insurance carrier, an insured, a policyholder, or others in connection with an insurance policy — for example, estimating the value or extent of a loss to settle or adjust an insurance claim.

The taxpayer did not compile and sell the results of surveys/appraisals to third parties, so none of the services qualified as taxable information services either.

What This Means For You

Draftsmen and design professionals

Whether your drafting work is taxed hinges on who originates the specs. If a client gives you complete schematics and specifications and you just render the drawing, that's a taxable sale of graphic art. If you develop the specifications yourself, or collaborate with the client to develop them, the whole engagement is nontaxable professional engineering services — document who created the underlying specs, not just who received the final drawing.

Marine surveyors and appraisers

Routine surveys and appraisals of vessels, machinery, or equipment (e.g., pre-purchase inspections) are not taxable. But if you're hired by or on behalf of an insurance carrier, insured, or policyholder to value a loss or support a claim, that same work becomes a taxable insurance service under 34 Tex. Admin. Code § 3.355. Track who is paying you and why, since the same physical inspection can fall on either side of the line.

Anyone starting to use computers for these services

This ruling was premised on the services being performed manually, without a computer. The Comptroller flagged that using a computer to perform architectural, engineering, consulting, or drafting services could convert some of those services into taxable data processing services — a different analysis than the one applied here.

Q&A

Q: I'm given full specs and drawings by my client and I just draft the blueprint — is that taxable?
A: Yes. That is taxed as the sale of graphic art (a finished design), because the customer supplied all the schematics, specifications, and requirements.

Q: I develop the engineering specs myself and then produce the finished drawing — is that taxable?
A: No. Because you (independently or with the customer) developed the original specifications and schematics, the engagement is professional engineering services, which is not taxed, even though you deliver a finished design.

Q: Is a marine survey or appraisal taxable?
A: Not by itself. Surveying or appraising a vessel, its machinery, equipment, or furnishings to assess value or condition (for example, for a prospective buyer) is not a taxable service.

Q: Does that change if an insurance company hires me?
A: Yes. Marine surveys and appraisals performed on behalf of an insurance carrier, its insured, its policyholders, or others in connection with a policy of insurance — such as estimating the value or extent of a loss to settle a claim — are taxable insurance services under 34 Tex. Admin. Code § 3.355.

Q: Does using a computer change the answer?
A: It can. The ruling notes that using a computer to provide these architectural, engineering, consulting, or drafting services may cause more of them to be taxed as data processing services instead.

Citations

• 34 Tex. Admin. Code § 3.355 (insurance services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408697L

Original ruling text

August 31, 1994

Dear ** :

Thank you for your patience while waiting for the written response to confirm
the answers given in our earlier telephone conversation. You wrote questioning
the application of tax to marine surveying; marine appraisals; and marine
architecture, engineering, or consulting services.

During our telephone conversation, you explained that (1) marine surveying is
not the same activity as real property surveying and (2) you do not use a
computer to provide any of these services. If you begin using the computer to
provide architectural, engineering, or consulting services you will call back
to clarify the exact activities performed.

Drafting is taxed as the sale of graphic art (finished design) when the
customer provides all the schematic drawings, specifications, requirements,
etc., used to produce the actual design. However, if you work with the
customer to develop (or if you independently develop) the original
specifications, schematics, etc., ad well as produce the actual design, then
the services are considered professional engineering services and not taxed
even though you deliver a finished design.

It is possible that more of these services become taxed as data processing
services when the computer is utilized. I have enclosed the administrative
section relating to data processing services.

Marine surveying and marine appraisals include activities to look at or review
recreational and commercial marine vessels, machinery, equipment, and
furnishings. These activities may be performed for a variety of purposes; for
example, a prospective buyer may hire you to "survey" a yacht to determine
whether the sales price is a good value, etc. This "surveys or "appraisal" is
not taxed.

The consideration paid for marine surveying and marine appraisals may be taxed
as insurance services when performed on behalf of an insurance carrier, its
insured, its policyholders, or others pertaining to a policy or policies of
insurance. Marine surveying and marine appraisals that estimate the value or
extent of loss of marine property, for the purpose of settling or adjusting an
insurance claim are taxable insurance services. The consideration aid for
these services is taxed.

I have enclosed administrative section 3.355 regarding insurance services.
Please review the definitions in subsection (a). Your activities that meet
these definitions are insurance services, and the fee is taxed when performed
on behalf of an insurance carrier, its insured, its policyholders, or others
pertaining to a policy of policies of insurance. The other subsections of this
rule point out when services are not taxed and your responsibilities as a
seller.

You explained that you do not compile and sell the results of your appraisals
or surveys. Based upon this none of your services fall within taxable
information services. The total amount for which a taxable insurance service or
taxable drafting (design production) is sold includes the charges for vehicle
mileage, manpower, overhead, etc.

This opinion is based upon the facts presented. If there are different or
additional facts, this opinion may change.

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division