Were monthly charges taxable when an advertising firm owned postcards and racks placed in restaurants for patrons to take free of charge?

Plain-English summary

An advertising firm installed postcard racks in about 90 Los Angeles restaurants and nightlife locations. Advertisers paid monthly for one postcard slot in every location, patrons took the cards free of charge, and the firm replenished the racks. Participating restaurants received a free designed postcard for one slot.

The request said title remained with the “client/advertiser,” but supplied no facts showing a sale to the clients. The Legal Department therefore assumed title actually remained with the advertising firm.

Under that assumption, the monthly charge was for advertising placement rather than a sale of postcards, so sales tax did not apply to the client charge.

The firm nevertheless exercised ownership rights over the postcards and racks by placing and using them in California. It owed use tax, measured by its purchase price, on postcards and racks bought from out-of-state retailers for that California use.

What this means for you

Advertising firms

Who owns the promotional material matters. A service conclusion based on firm ownership does not eliminate tax on the firm's own property purchases.

Advertisers and restaurants

Free distribution to patrons supported the service model described, but the opinion did not treat the physical cards as having disappeared from the tax analysis.

Accountants and tax professionals

Resolve title first, then analyze both sides: tax on client charges and sales or use tax on the service provider's inputs.

Common questions

Q: Were advertisers buying the postcards?

A: Not under the Department's assumption; the advertising firm retained title.

Q: Were the monthly placement charges subject to sales tax?

A: No, under that assumption.

Q: Did the firm owe tax on the postcards and racks it bought?

A: Yes. It owed use tax on out-of-state purchases used in California.

Q: What if the advertisers actually owned the postcards?

A: The opinion's service conclusion expressly depended on the opposite assumption, so different facts could change the result.

Citations and references

• California Revenue and Taxation Code § 6201

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0034.310
• Original supporting opinion: 100.0034.310 PDF

Original ruling text

100.0034.310

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
Telephone (916) 445-645O
Fax No. (916) 323-3387

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

January 18, 1995
BURTON W. OLIVER
Executive Director

Mr. A--- R---, CPA, MS
Accounting and Tax Planning
XXX --- --- South, Suite X--- ---, --- XXXXX
Re: G---'s Card Gallery
Dear Mr. R---:
This is in reply to your November 16, 1994 letter regarding the application of California sales and use tax to charges by G---'s C--- G--- (GCG). GCG is an advertising firm which offers alternative advertising for various clients by placing the clients' postcards strategically in Los Angeles restaurants and night spots. "BACKGROUND GCG solicits various companies that wish to advertise in the Los Angeles area. The owners of GCG have had extensive advertising experience and have connections in the industry. Typical companies that would advertise with GCG are, A--- V---, J--- J---, etc. "OPERATIONS The basic service that GCG delivers is the presentation of their client's advertising in the form of postcards not to be used for resale purposes in various Los Angeles restaurants. GCG has approached approximately 90 restaurants and asked them if they would be willing to have a postcard rack (photo enclosed) placed in their location. If the restaurant agrees, a rack is installed by GCG. In return, the restaurant gets their own postcard printed free of charge to be placed in one slot in their rack. GCG will design the restaurant's postcard.

Mr. A--- R---, CPA

-2-

January 18, 1995
100.0034.310

"Each rack can hold 24 postcards, thus with the restaurant taking 1 for themselves, there are 23 remaining for GCG to fill with their client's postcards." "ADVERTISING SERVICE DELIVERED The benefit to the Client is that they receive repeated exposure in 90 locations in Los Angeles for patron's waiting to be seated, at the bar, or on their way out. Postcards are free of charge to patrons. The postcards are not to be sold but simply used to further enhance their client's message and image. In effect, title to postcards remains with the client/advertiser. "Each client is guaranteed 1 slot in all 90 restaurants. "PRINTING & MONTHLY SERVICING GCG is usually not responsible for designing postcards as most clients already have their own logos. GCG has these logos printed into finished postcards by an outside vendor (out of state). Finished cards are then shipped from the printer to GCG. GCG then places them and refills racks during the month in their 90 restaurants. "SALES & BILLING Clients are billed monthly for the aforementioned advertising." Since you state no facts indicating that GCG sells the postcards to its clients, we assume that, where you state that "title to postcards remains with the client/advertiser," you mean that title remains with GCG. You conclude that, under the transactions, GCG provides advertising services to its clients, and sales tax does not apply to GCG's charges to its customers for placing the postcards in the California locations. We agree with your conclusion provided our assumption is correct that there are no facts showing GCG sells the postcards to its clients. If our assumption is correct, GCG provides an advertising service to its clients and places its own postcards in the restaurants for the restaurant patrons to take free of charge. Revenue and Taxation Code section 6201 imposes a use tax on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. The law defines "use" to be any exercise of any right or power over tangible personal property incident to the ownership of the property except for the sale of the property in the regular course of business. When GCG places its postcards in a restaurant in California for persons to take for no charge, GCG thereby makes a "use" of the postcards in this state. Also, when GCG places racks in restaurants to hold those postcards, GCG makes a use of the racks in this state. Accordingly, when GCG purchases postcards and racks from an out-of-state retailer for use in this state and

Mr. A--- R---, CPA

-3-

January 18, 1995
100.0034.310

uses the tangible personal property in this state, GCG is responsible for reporting and paying use tax on the use of that property measured by the sales price of the property to GCG. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel

RLD:sr

cc: --- --- District Administrator - --