Were monthly charges for placing free advertising postcards in restaurant racks taxable, and who owed tax on the cards and racks?

Plain-English summary

An advertising firm installed postcard racks in about 90 restaurants, filled them with client advertisements, and replenished them during the month. Restaurant patrons could take the postcards free of charge, and clients paid monthly for repeated exposure.

The request said title remained with the client or advertiser, but counsel found no facts showing a sale to the client and expressly assumed title remained with the advertising firm. On that assumption, the monthly client charge paid for a nontaxable advertising service.

The firm nevertheless used tangible property in California. Placing its postcards in restaurants for free distribution and placing its racks there were taxable uses. When it bought those items from out-of-state retailers, it had to report and pay California use tax measured by its purchase price.

What this means for you

Place-based advertisers

Client service charges can remain nontaxable when the advertiser owns and controls the promotional material rather than selling it to the client.

Restaurants and display locations

Free distribution to patrons did not make the cards resale inventory; it was the advertiser's use of the cards.

Accountants and tax professionals

Confirm title and ownership rather than relying on contract labels, and accrue use tax on out-of-state printed materials and racks used in California.

Common questions

Q: Were the monthly advertising charges taxable?

A: No, under the assumption that the firm did not sell the postcards to its clients.

Q: Did giving postcards to restaurant patrons count as resale?

A: No. The opinion treated free distribution as the advertising firm's use of its own cards.

Q: Was tax due on postcards printed out of state?

A: Yes. The firm owed California use tax when it used those postcards in California.

Q: Were the display racks also subject to use tax?

A: Yes. Installing the firm's racks in California restaurants was a taxable use.

Citations and references

• California Revenue and Taxation Code § 6201

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0012.840
• Original supporting opinion: 515.0012.840 PDF

Original ruling text

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MEMBER

STATE BOARD OF EQUALIZATION

First D1tiri ct

450 N STREET. SACRAMENTO. CALIFORNIA
{P.O. BOX 942879, SACRAMENTO. CALIFORNIA 94279-00011 Telephone (9161 445-6450

Fax No. (9161 323-3387

BRAD SHERMAN
cond Diatrict. Los Angeles

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:ST J . ORONENBURG, JR .
"'TP'ti't'tM7'tSiri ct , San Di ego
MATTHEW K. FONG
Fourth Oi,,ttict, LGS Angeles
GRAY DAVIS
ConrroHer, S•cramento

January 18, 1995

BURTON W . OLIVER
Executive Director

Deal

to your November 16, 1994 letter regarding sand use tax to charges by is an advertising firm which a vertising for various clients by placing the restaurants and clients' postcards strategically in night spots.

"BACKGROUND
-3olicits various companies that wish to advertise in the area. The owners of-have had extensive advertising ,experience and have connections in the industry. Typic
• I • • • •advertise with - a r e ,
I

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•

•

"OPERATIONS

The basic service that-delivers is the presentation of their client's adve~ng in the form of postcards
~ e used for resale purposes in various
-restaurants.
has approached approximately
90 restaurants and asked them if they would be willing to have a postcard rack (photo enclosed) placed in their l o c a t i ~ the restaurant agrees, a rack is ··- · installed b y - I n return, the restaurant gets their own postcar d p r i n t e ~ of charge to be placed in one slot in their rack.-will design the restaurant's postcard.

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January 18, 1995

" Each ra-ck can hold 24 po·stcards , thus with the restaurant t a ~ l for themselves, there are 23 remaining f o r - t o fill . with their client's postcards.-= "ADVERTISING SERVICE DELIVERED The benefit t~ the Client i ~ e c e i v e repeated exposure in 90 locations i n - - - - - - - f o r 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

• i s usually not responsible for designing ~ r d s
  as most clients already have their own logos.--has these logos printed into finished postcards by an outside vendor (out of state). Finished cards are then shipped from the printer to • . 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 t h a t - s e l l s 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 w i t h • You conclude that, under the transactions-provides advertising services to its clients, and sales tax does not apply t o - • s charges to its custo~ers for placing the postcards in the California locations. We agree with your conclusion provided our assumption is correct that there are no facts s h o w i n g sells the postcards to its clients. If our assumption is correct,-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, us ~ or other consumpt ion in this s 1:ate. The law defines "use" to be any

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January 18~ 1995

exercise of any ~ i ght or power over tangible personal property incident to the ownership of the property except for the sale of the property in the regular cou~se of business. When-places its postcards in a restaurant in California for persons to take for no charge,-thereby makes a "use" of the postcards in this state. Also, when-places racks in restaurants to hold those postcar~makes a use of the racks in this state. Accordingly, when-purchases postcards and racks from an out-of-state retailer for use in this state and uses the tangible personal property in this s t a t e , _ is responsible for reporting and paying use tax on the use of that property measured by the sales price of the property t o 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