Effective Date: December 19, 2000

Re:  Sales and Use Tax Treatment of Purchases of Graphic Design Services

The purpose of this Tax Bulletin is to inform vendors of the Tax Commission's recent adoption of administrative rule R865-19S-111, Graphic Design Services. This new rule, effective December 19, 2000, outlines the sales and use tax obligations of a vendor that provides graphic design services.

Graphic Design Services Not Subject To Sales And Use Tax

Rule R865-19S-111 provides that the sale of graphic design services is a sale of a nontaxable service, and accordingly not subject to sales and use tax, if both of the following conditions are met.

1. The graphic design services must be the object of the transaction.
2. The transaction does not include the delivery of tangible personal property that incorporates the graphic design services, unless that tangible personal property is merely a sample or template representing the graphic design services.

For example, if the purchaser's request is for the design of a company logo and that logo is delivered to the purchaser on a computer disk, the sale is a sale of a nontaxable service and the vendor is not required to collect sales and use tax.

While the rule does not define the term "graphic design services," the Commission's intent is that the term be read broadly enough to include such services, regardless of whether the person providing the services styles himself as a graphic designer, printer, advertiser, or other designation.

Transactions That Include Both Graphic Design Services 
And Tangible Personal Property That Incorporates Those Services

Rule R865-19S-111 provides that if a vendor provides both graphic design services and tangible personal property that incorporates those services, there is a rebuttable presumption that the tangible personal property, and not the graphic design services, is the object of the transaction. Where taxable tangible personal property is the object of the transaction a vendor must collect sales and use tax on the tangible personal property as well as any graphic design services included in the transaction.

While the general rule is that a vendor supplying both graphic design services and tangible personal property incorporating those services must collect sales and use tax on the entire transaction, if the sale of the graphic design services and the sale of the associated tangible personal property are, in fact, separate and distinct transactions, each transaction will be analyzed for sales tax purposes on its own merits.

Accordingly, the rule provides that if the vendor subcontracts the production of the tangible personal property to an independent third party, the purchase of the graphic design services and the associated tangible personal property are separate and distinct transactions. In these circumstances, the vendor's sales and use tax obligations are as follows.

1. The vendor is not required to collect sales and use tax on the graphic design services if the vendor separately states those graphic design services on the invoice. If the services are not separately stated, the vendor must collect sales and use tax on the entire invoice amount.
2. The vendor's purchase of the tangible personal property from the independent third party is exempt from sales and use tax as a purchase for resale.
3. The vendor must collect sales and use tax on the sale of the tangible personal property.

In addition to the situation where the production of the tangible personal property is subcontracted to an independent third party, there may be other circumstances where a transaction including both graphic design services of a significant nature and associated tangible personal property is appropriately characterized as two separate and distinct transactions. While the determination of whether the mixed transaction should be viewed as separate and distinct transactions is based on the totality of the evidence presented, factors that may indicate the presence of separate and distinct transactions include: 

1. the graphic design services and the production of the associated tangible personal property are performed by different divisions within the vendor's organization;
2. the vendor has customers that purchase graphic design services but not tangible personal property that incorporates those services;
3. the vendor has customers that purchase tangible personal property but not graphic design services;
4. the vendor has separate and independent price lists for graphic design services and associated tangible personal property, such that the purchase price for the tangible personal property is constant, regardless of whether that tangible personal property was purchased in conjunction with graphic design services; and 
5. graphic design services are separately stated and billed on the invoice.

If the vendor is able to provide evidence that the purchase of the graphic design services and the purchase of the associated tangible personal property are separate and distinct transactions, each transaction will be analyzed separately for sales and use tax purposes. In that case, vendors are not required to collect sales and use tax on the graphic design services if those services are separately stated on the invoice, but are required to collect sales and use tax on taxable tangible personal property. If the services are not separately stated on the invoice, the vendor must collect sales and use tax on the entire invoice amount.

To ask questions regarding this Tax Bulletin, please call Taxpayer Services at (801) 297-2200 or call toll free 1-800-662-4335. To submit questions in writing, mail to Taxpayer Services, 210 North 1950 West, Salt Lake City, UT 84134. Those who have impaired hearing may call the Telecommunications Device for the Deaf (TDD) at (801) 297-2020.