Is the labor to develop a multimedia presentation, desktop-published literature, or graphic art (booth graphics, ads, slides) taxable in Texas when it's delivered to the client on a diskette or as film/output, and can the developer buy reproduction materials tax-free?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered a developer's questions about three kinds of creative work delivered to clients on a diskette or as film/output: (1) a multi-media, on-screen presentation (described as a sort of electronic brochure with interactive "buttons"); (2) literature created with desktop publishing software, such as a sales brochure; and (3) one-off graphic art like booth graphics, advertisements, or 35mm slides that get output once rather than duplicated many times.

For the multimedia presentation, the Comptroller ruled that the total charges — both labor and materials — to create it are taxable, because the transaction is treated as the sale of a computer program under Rule 3.308(b)(1), which defines a computer program as a series of instructions sold as a completed program, whether on magnetic tape, diskette, or other tangible or electronic media. This holds whether the client reproduces and distributes the diskette themselves, or the developer reproduces it (or subcontracts the reproduction) and sells the duplicated disks — both the completed presentation and the duplicated disks are taxable in whole.

For desktop-published literature, the labor to create it is taxable regardless of whether the client takes the diskette to a printer to generate film and reproduce the piece, or the developer generates the film and hands it to the client — in the second case, both the labor to develop the literature and the labor/materials to reproduce it are taxable.

For one-off graphic art (booth graphics, ads, slides), the labor to develop the item is taxable whether the client takes the diskette to a service bureau for output, or the developer works with the service bureau directly — in the latter case, tax is due on creating the final product, and the developer must collect tax on the sale of the finished item to the end consumer.

In each of these scenarios, the developer may issue a resale certificate to suppliers of materials or taxable services (for example, diskettes or reproduction/output services) that are passed through to the customer as part of the taxable sale, so those inputs can be purchased tax-free.

What this means for you

Multimedia, presentation, and interactive-content developers

If you build an on-screen or interactive presentation and deliver it to a client on a diskette, the whole charge — labor plus materials — is taxable as a computer program sale, whether the client reproduces/distributes it or you do. You can buy the diskettes and any reproduction services tax-free with a resale certificate since they're transferred to the customer as part of a taxable sale, but you must collect tax on your full charge to the client.

Desktop publishers and graphic designers producing literature, ads, or booth graphics

Your labor to create brochures, ads, booth graphics, or slides is taxable, regardless of whether you or the client (or a print shop/service bureau) handles the final reproduction or output. If you handle reproduction or work directly with a service bureau, both your development labor and the reproduction/output labor and materials are taxable, and you must collect tax from the end consumer on the finished item.

Businesses using resale certificates with suppliers or service bureaus

Because these transactions are already taxable when sold to your customer, you can issue a resale certificate to your own suppliers (for diskettes, film, printing, or service-bureau output) so you aren't taxed twice on materials or services that pass through to the customer. The tax gets collected once, from the end consumer.

Common questions

Q: Is the labor to build a multimedia presentation delivered on a diskette taxable?
A: Yes. The Comptroller treats this as the sale of a computer program under Rule 3.308(b)(1), so total charges (labor and materials) are taxable.

Q: Does it matter whether the client or the developer reproduces the diskettes?
A: No — in both situations described in this letter, the completed presentation and the duplicated disks are taxable in whole.

Q: Is labor to create desktop-published literature (like a sales brochure) taxable even if the client takes it to a printer?
A: Yes, the letter states the labor to create the literature is taxable in that situation.

Q: What about one-off items like booth graphics, ads, or 35mm slides?
A: The labor to develop these is taxable. If the developer also works with the service bureau to output the final product, tax is due on creating the item, and tax must be collected on the sale of the finished item to the end consumer.

Q: Can a developer avoid paying tax twice on materials that get passed through to the customer?
A: Yes. The letter says a resale certificate may be issued to suppliers of materials or taxable services (like diskettes or reproduction services) that are transferred to the customer as part of the taxable sale.

Q: Can another business rely on this letter?
A: No. The letter states the opinion is based on the facts presented, and if there are any additional or different facts, the opinion may change.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.308(b)(1) (defining "computer program" for tax purposes)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9508L1367G12

Original ruling text

August 23, 1995

Dear **:

Thank you for your letter of August 11, 1995. You asked that we address the
taxability of the following situations:

1. I develop a multi-media (on-screen) presentation for a client on a diskette.

(A) I give the client the diskette and they reproduce it and distribute it.
Is the labor to develop the presentation taxable?

Response: In our phone conversation of August 22, 1995, you explained that this
presentation is a sort of electronic brochure. In essence, the presentation is
an interactive slide presentation. The reader may select an on-screen "button"
to obtain additional information on the selected item. As such, the total
charges (i.e., labor and materials) to create this presentation are taxable.
This transaction is the sale of a computer program. The following definition
is found in Rule 3.308(b)(1):

"Computer program means a series of instructions sold as a completed program
which are coded for acceptance or use by a computer system and which are
designed to permit the computer system to process data and provide results
and information. The series of instructions may be contained in or on magnetic
tapes, semiconductor chips, punched cards, printed instructions, or other
tangible or electronic media."

(B) I reproduce (or subcontract) the reproduction of the presentation
myself. Is the labor to develop the presentation taxable? Is the labor and
materials to reproduce the diskettes taxable?

Response: Sales of the completed presentation and the duplicated disk are
taxable in whole. You may issue a resale certificate to suppliers of
materials or taxable services that are transferred to your customer. For
example, computer diskettes or reproduction services may be purchased
tax free because they are transferred to your customer as part of the
taxable sale.

2. I develop a piece of literature using desktop publishing software.

(A) I give the client the diskette and they work with a printer to
generate the film and reproduce the literature. Is the labor to create
the literature taxable?

Response: I understand that the literature is a sales brochure and
the diskette contains the brochure contents in its completed format.
The labor to created the literature is taxable.

(B) I generate the film and give it to the client who then works with
a printer to reproduce the literature. Is the labor to develop the
literature taxable? Is the labor and materials to reproduce the
literature taxable?

Response: The labor to develop the literature and the labor and
materials to reproduce the literature are taxable. Again, you may
issue a resale certificate to suppliers of materials or taxable
services that are transferred to your customer.

3. I develop booth graphics, an advertisement, or 35mm slides
   (anything that is developed and outputted once; multiple copies
   are not generated).

(A) I give the client the diskette and they work with a service
bureau to output the final product. Is the labor to develop the
item taxable?

Response: Yes.

(B) I work with the service bureau to output the final product.
Is the labor to develop the item taxable? Is the labor and materials
to output the product taxable?

Response: Tax is due to create the final product. You may issue a
resale certificate to the service bureau for their printing charges.
You must then collect tax on the sales of the finished item to the
end consumer.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The
direct line is 512/475-0037. You also may write to Tax
Administration Division, Comptroller of Public Accounts.

Sincerely,

Lindey Osborne
Tax Administration Division

NOTE: Previous Accession Number 9508073L