May 28, 1999

You have requested a letter ruling on behalf of *************** (the "company"). Your request concerns the application of the sales tax to several of the company's transactions.

FACTS

The company was formed and continues to be managed by persons who were trained as architects. The company primarily provides computer simulations and visualizations of architectural and building environments. It also provides design development services to the architecture and building industry.

The company's computer simulations are made using an enhanced version of software that is publicly available. The publicly available software is almost 100 different programs in what is known as "toolkit" form. The company has modified this software by making minor modifications to the underlying code, and by creating software tools that link the various programs and manage the process of developing an image. The company's enhanced public software is proprietary.

To create its computer simulations, the company first builds a three dimensional CAD/CAM simulation using somewhat conventional CAD/CAM software. The company applies its proprietary software to the three dimensional image produced by the CAD/CAM software. The company's proprietary software manipulates the four following elements to enhance and create a more precise image: 1) geometry, 2) material, 3) lighting, and 4) viewpoint (i.e., camera angle).

A client usually engages the company for two reasons. First, to ensure that its architectural design is going to produce the desired result or end product; i.e., to ensure the completed building will look as intended. The visual image created by the company allows the client to study and evaluate the design before the actual structure is built. The images are shown to the architect, the architect's clients and subcontractors for purposes of review, design, modification and adjustment.

Second, the company is also engaged so a client can obtain an image that can be used for presentation, marketing or fundraising purposes. Approximately, 10-20% of the company's clients are tax-exempt organizations. The company's product helps these tax-exempt organizations market and raise the funds necessary to complete their projects.

In general, what the company transfers to a client is a disk or CD-ROM that contains the architectural image or visualization. Sometimes the company transfers a print in addition to the CD-ROM or disk.

Typically, there are five steps to the company's process:

Step 1: The company obtains the data and documentation of the architect's design in one of two ways: (1) in the form of blueprints, sketches and other written materials; or (2) in the form of a two dimensional CAD/CAM data file containing the information.

Step 2: The company builds a three dimensional CAD/CAM model using conventional CAD/CAM software and techniques. It is estimated that 50% - 75% of the company's fee is for developing this three dimensional CAD/CAM model. In some instances, the company will receive the three dimensional model from the client, but this occurs in less than 10% of the cases.

Step 3: The company applies its proprietary software to the three dimensional data contained in its three dimensional model. During the first iteration the company manipulates the geometry, material, lighting and viewpoint to begin to create a precise image of the architect's design. It is during this step that gaps and inconsistencies in the design documentation are revealed.

Step 4: Usually, there are two to five iterations before a project is complete. During each iteration the company will present the preliminary and intermediate images to their client and point out any inconsistencies and gaps in the information. Oftentimes, the architect has additional documentation and data that he or she provides that addresses certain gaps and inconsistencies and design changes. Other times, the additional data and documentation is developed as a direct result of what is revealed in the first iteration. Occasionally, the company makes recommendations that are incorporated into the design data and specifications. In addition, the client may decide to make changes to the geometry, material, lighting and viewpoint once it has reviewed and discussed the preliminary images with the company or has received feedback from its clients and subcontractors. The company's process allows the parties to determine how design changes affect the ability to meet the requirements of zoning laws and neighborhood appearance. During each iteration, no tangible personal property is delivered to the architect. Steps 1 through Step 4 account for 90% of the company's time.

Step 5: The company produces a final image in the form of a print, CD, slide or digital transfer which is given to the client.

The company's contractual arrangements can be summarized as follows.

1. Its activities include design development, presentation to clients, and marketing for clients.

2. Contracts are typically for fixed fees plus any additional costs for prints.

3. Physical property provided to clients includes prints, CD-ROM, disks, slides and digital transfer.

4. Most of the value of the company's activity is spent creating the three dimensional CAD/CAM computer model (on average about 50-75%).

5. The company maintains possession, copyright and title to the computer simulation and only transfers the output (i.e., the print, CD-ROM, disk, slide or digital transfer).

6. Approximately 10% to 20% of the company's sales are made directly to tax-exempt organizations or out-of state clients.

ISSUES

Your primary question is whether the transactions described above are taxable assuming that the client receives the company's simulation in the form of a print, CD-Rom, disk or slide. You have a series of additional questions that are predicated on the possibility that the company's transactions might be deemed taxable. Because we conclude that the company's transactions are not taxable, we have not evaluated these additional questions.

DISCUSSION

An excise is imposed upon the retail sale of tangible personal property in the Commonwealth. See G.L. c. 64H, § 2. A "retail sale" is defined as the "sale of ... tangible personal property ... for any purpose other than resale in the regular course of business." G.L. c. 64H, § 1. The term "retail sale" does not include "professional, insurance, or personal service transactions which involve no sale or which involve sales as inconsequential elements for which no separate charges are made." Id. A "sale" is defined, in part, as "any transfer of title or possession, or both ... of tangible personal property ... for a consideration." The rule that determines whether a transaction is a taxable retail sale or a non-taxable service evaluates "the object of the transaction." See, e.g., Commissioner of Revenue v. Houghton Mifflin Co., 396 Mass. 666 (1986); Houghton Mifflin Co. v. State Taxation, 373 Mass. 772 (1977).

When an architect creates a building design and transfers that design in the form of a blueprint the transaction constitutes a non-taxable service transaction. See DD 93-4(1), (5). [1] See also Stone & Webster Engineering Corporation v. State Tax Commission, ATB Docket No. 53902 (1972). However, when an entity purchases a model, photo, or drawing of a proposed building that is based upon an architectural design, that transaction is taxed as the sale of tangible personal property. See DD 93-4(6).

Because of the unique nature of the services rendered by the company, we conclude that its transactions more closely resemble an architect's design services. In making this determination, we rely primarily upon the fact that the company's transactions are intended to permit an architect to determine whether his or her designs are architecturally and aesthetically sound. In this regard, we note both that the transactions are performed by persons who are trained by architects and also that the transactions are the result of the creation of custom software by these persons.

CONCLUSION

The company's sales of architectural visualizations in the form of a disk, print, CD-ROM or other tangible media are not subject to sales tax.

Very truly yours,

/s/Frederick A. Laskey

Frederick A. Laskey
Commissioner of Revenue

FAL:DMS:mf

LR 99-12



[1] The Department has recently promulgated 830 CMR 64H.1.2, which concludes that certain advertising transactions are non-taxable pursuant to these rules.