When a New York advertising agency acts as a formal agent for an out-of-state client to produce and place a national advertisement, which parts of the engagement — creative fees, production costs, media placement — are subject to New York sales tax, and how does the agency-client relationship change the answer?

Plain-English summary

A New York advertising agency enters a principal-agent contract with an out-of-state client: everything the agency produces belongs to the client once paid for, and the agency uses both outside professionals and its own staff to create a "for sale" advertisement for a national publication, charging a creative fee, production costs, and a media-placement fee. Work happens both inside and outside New York.

The Department's answer runs through several layers, all built on a foundational 1983 Department memo (TSB-M-83(16)S) that's still the controlling framework:

Genuine agency status is a threshold, three-part test. For the agency to be treated as merely acting on behalf of the client (rather than as the taxable seller itself), it must (1) clearly disclose the client's name to suppliers as the actual purchaser, (2) have written proof of its agent status obtained before buying anything, and (3) bill the client at cost with no markup on the underlying purchases (a separate, disclosed agency fee is fine). If all three are met, purchases the agency makes "as agent" are treated as purchases by the client directly.

Advertising services themselves are simply not taxable. Consultation, campaign development, and media placement — without any transfer of tangible personal property — are specifically excluded from tax under the regulations. So separately stated fees for creative consulting/preproduction discussions and for placing the ad with media are tax-free regardless of the agency relationship.

Production work on tangible items is where taxability actually lives. When the agency (as agent) buys photographs, artwork, or composition and then performs taxable production services (fabricating, processing, printing, assembling) to turn them into layouts, mechanicals, or color separations, New York's destination-tax rule applies: tax is due at the rate where the purchased property is delivered (typically the agency's New York office) and at the rate where the production services are performed. It doesn't matter that the finished color separations are ultimately shipped to the client out of state — services performed on intermediate production items used to create the final advertisement are taxable where performed, even if the intermediate items themselves later leave the state. Services performed directly on the item that IS the final desired result (the advertisement itself) escape tax only if that finished item is delivered outside New York with no other in-state use.

The manufacturer's exemption can wipe out most of this tax anyway. Because the whole point of the exercise is producing an advertisement destined for a publication that will be sold to the public, the property and production services used "directly and predominantly" in that production can qualify for New York's manufacturing exemption — as long as the agency gets a properly completed Form ST-121 (Exempt Use Certificate), executed by the client, within 90 days of purchase.

What this means for you

Advertising agencies working with out-of-state clients

Nail down genuine agent status in writing before any purchases are made, disclose the client by name on every purchase order, and never mark up pass-through costs — get any of these three conditions wrong and you become the taxable "vendor" of everything you produce rather than a tax-neutral purchasing agent.

Agencies producing advertisements for products/publications ultimately sold to the public

Don't overlook the manufacturer's exemption just because you're a service business — production materials and fabrication services used to create an advertisement destined for a for-sale publication can be fully exempt with a timely Form ST-121, even though the agency itself isn't a traditional "manufacturer."

Accountants and tax professionals

The key analytical distinction is intermediate vs. final production items: services performed on intermediate items (layouts, mechanicals used to build the ultimate ad) are taxable where performed regardless of eventual out-of-state shipment, while services performed on the final desired-result item can escape tax entirely if that item itself leaves the state without other in-state use — a subtle but consequential difference.

Common questions

Q: Does having a written agency contract automatically make an advertising agency's purchases tax-exempt?
A: No — the agency must actually satisfy all three conditions (client disclosure to suppliers, pre-purchase written proof of agency, no markup on pass-through costs) for its purchases to be treated as the client's purchases rather than its own.

Q: Are an advertising agency's consulting and media-placement fees ever taxable?
A: Generally no — those specific services (campaign consultation/development and media placement, without transferring tangible property) are excluded from tax by regulation, separate from the analysis of production services.

Q: Does shipping the finished product out of state always avoid New York tax?
A: Not necessarily — if taxable production services were performed in New York on intermediate items used to build the final product, that tax is still owed even though the intermediate items are later shipped out of state; only services on the actual final desired-result item can escape tax via out-of-state delivery.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(1), (2), (3) (information services; producing/fabricating; installing/repairing)
• Tax Law § 1105-B (production parts/tools/supplies and related services exemption)
• Tax Law § 1110(a), (f) (compensating use tax; rate)
• Tax Law § 1115(a)(12) (manufacturing exemption); § 1115(d) (out-of-state delivery exemption)
• Tax Law § 1118(7) (credit for tax paid to another jurisdiction)
• Tax Law § 1132(c)(1) (exemption certificates; burden of proof)
• 20 NYCRR § 525.2(a)(3) (destination tax); § 527.3(b)(5) (advertising agency services exclusion); § 528.13 (manufacturing exemption); § 532.4(b) (good-faith certificate acceptance)
• TSB-M-83(16)S (Advertising Agencies, June 10, 1983); TSB-M-78(3)S (principal-agent conditions); TSB-M-79(7.1)S (manufacturer's exemption)
• Publication 852 (Sales Tax Information for Manufacturers..., 12/97)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_57s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(57)S
Sales Tax
December 11, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S010130B

On January 30, 2001, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Catanio, Moskowitz & Gutwetter, CPAS PC, 70 Grand Avenue, Suite 104,
River Edge, NJ 07661.
The issue raised by Petitioner, Catanio, Moskowitz & Gutwetter, CPAS PC, is whether
various advertising services provided by an advertising agency are subject to sales tax, and how any
such tax liability would be affected by the formation of a principal-agent relationship between
the advertising agent and its out-of-state client.
Petitioner submits the following facts as the basis for this Advisory Opinion.
An advertising agency located in New York enters into a principal-agent contract with a
client located outside New York. The contract states that all material or property produced under
the contract by the advertising agency is the property of the client upon payment to the advertising
agency. All work is performed by either outside professionals or by agency staff.
The advertising agency will produce for the client an advertisement for a “for sale” national
publication. The client will be charged a creative fee, the cost of production of the advertisement,
and a fee for placement of the advertisement in national media. The work may be performed within
and without New York.
Applicable Law and Regulations
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby
imposed and there shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
(1) The furnishing of information by printed, mimeographed
or multigraphed matter or by duplicating written or printed matter in

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any other manner, including the services of collecting, compiling or
analyzing information of any kind or nature and furnishing reports
thereof to other persons, but excluding the furnishing of information
which is personal or individual in nature and which is not or may not
be substantially incorporated in reports furnished to other persons,
and excluding the services of advertising or other agents, or other
persons acting in a representative capacity. . . ." (emphasis added)
(2) Producing, fabricating, processing, printing or imprinting
tangible personal property, performed for a person who directly or
indirectly furnishes the tangible personal property, not purchased by
him for resale, upon which services are performed.
(3) Installing tangible personal property . . . or maintaining,
servicing or repairing tangible personal property . . . not held for sale
in the regular course of business . . . whether or not any tangible
personal property is transferred in conjunction therewith . . . .
Section 1110 of the Tax Law provides, in part:
(a) Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state . . . except as otherwise exempted under this
article, (A) of any tangible personal property purchased at retail . . . (D) of any
tangible personal property, however acquired, where not acquired for purposes of
resale, upon which any of the services described in paragraphs (2), (3) and (7) of
subdivision (c) of section eleven hundred five of this part have been performed....
*

*

*

(f) For purposes of clauses (C), (D), and (E) of subdivision (a) of this section,
the tax shall be at the rate of four percent of the consideration given or contracted to
be given for the service, including the consideration for any tangible personal
property transferred in conjunction with the performance of the service and also
including any charges for shipping and delivery of the property so transferred and
of the tangible personal property upon which the service was performed as such
charges are described in paragraph three of subdivision (b) of section eleven hundred
one.
Section 1115 of the Tax Law provides, in part:

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Exemptions from sales and use taxes. (a) Receipts from the following shall
be exempt from the tax on retail sales imposed under subdivision (a) of section
eleven hundred five and the compensating use tax imposed under section eleven
hundred ten:
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(12) Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, gas, electricity,
refrigeration or steam for sale, by manufacturing, processing, generating, assembling
. . . but not including parts with a useful life of one year or less or tools or supplies
used in connection with such machinery or equipment. . . .
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*

*

(d) Services otherwise taxable under paragraph (1), (2), (3), (7) or (8) of
subdivision (c) of section eleven hundred five shall be exempt from tax under this
article if the tangible personal property upon which the services were performed is
delivered to the purchaser outside this state for use outside this state.
Section 1105-B of the Tax Law provides, in part:
Exemptions for certain parts, tools, supplies and services relating to tangible
personal property used or consumed in production.
(a) Receipts from the retail sales of parts with a useful life of one year or less,
tools and supplies for use or consumption directly and predominantly in the
production of tangible personal property . . . for sale by manufacturing, processing,
generating, assembling, refining, mining or extracting shall be exempt from the tax
imposed by subdivision (a) of section eleven hundred five of this article.
(b) Receipts from every sale of the services of installing, repairing,
maintaining or servicing the tangible personal property described in paragraph
twelve of subdivision (a) of section eleven hundred fifteen of this article, including
the parts with a useful life of one year or less, tools and supplies described in
subdivision (a) of this section, to the extent subject to such tax, shall be exempt from
the tax on sales imposed under subdivision (c) of section eleven hundred five of this
article.
(c) Parts with a useful life of one year or less, tools and supplies described in
subdivision (a) of this section and services described in subdivision (b) of this

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section shall be exempt from the compensating use tax imposed by section eleven
hundred ten of this article.
Section 1118(7) of the Tax Law provides:
(a) In respect to the use of property or services to the extent that a retail sales
or use tax was legally due and paid thereon, without any right to a refund or credit
thereof, to any other state or jurisdiction within any other state but only when it is
shown that such other state or jurisdiction allows a corresponding exemption with
respect to the sale or use of tangible personal property or services upon which such
a sales tax or compensating use tax was paid to this state. To the extent that the tax
imposed by this article is at a higher rate than the rate of tax in the first taxing
jurisdiction, this exemption shall be inapplicable and the tax imposed by section
eleven hundred ten of this chapter shall apply to the extent of the difference in such
rates, except as provided in paragraph (b) of this subdivision.
(b) To the extent that the compensating use tax imposed by this article and
a compensating use tax imposed pursuant to article twenty-nine are at a higher
aggregate rate than the rate of tax imposed in the first taxing jurisdiction, the
exemption provided in paragraph (a) of this subdivision shall be inapplicable and the
taxes imposed by this article and pursuant to article twenty-nine shall apply to the
extent of the difference between such aggregate rate and the rate paid in the first
taxing jurisdiction. In such event, the amount payable shall be allocated between the
tax imposed by this article and the tax imposed pursuant to article twenty-nine in
proportion to the respective rates of such taxes.
Section 1132 (c)(1) of the Tax Law provides, in part:
For the purpose of the proper administration of this article and to prevent
evasion of the tax hereby imposed, it shall be presumed that all receipts for property
or services of any type mentioned in subdivisions (a), (b), (c) and (d) of section
eleven hundred five . . . are subject to tax until the contrary is established, and the
burden of proving that any receipt . . . is not taxable hereunder shall be upon the
person required to collect tax or the customer. Except as provided in subdivision (h)
or (k) of this section, unless (I) a vendor, not later than ninety days after delivery of
the property or the rendition of the service, shall have taken from the purchaser a
resale or exemption certificate in such form as the commissioner may prescribe,
signed by the purchaser and setting forth the purchaser's name and address and,
except as otherwise provided by regulation of the commissioner, the number of the
purchaser's certificate of authority, together with such other information as the
commissioner may require, to the effect that the property or service was purchased
for resale or for some use by reason of which the sale is exempt from tax under the

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provisions of section eleven hundred fifteen, and, where such resale or exemption
certificate requires the inclusion of the purchaser's certificate of authority number or
other identification number required by regulations of the commissioner, that the
purchaser's certificate of authority has not been suspended or revoked and has not
expired as provided in section eleven hundred thirty-four . . . the sale shall be
deemed a taxable sale at retail . . . Where such a resale or exemption certificate . . .
has been furnished to the vendor, the burden of proving that the receipt . . . is not
taxable hereunder shall be solely upon the customer. . . .
Section 525.2(a)(3) of the Sales and Use Tax Regulations provides:
Except as specifically provided otherwise, the sales tax is a “destination tax.”
The point of delivery or point at which possession is transferred by the vendor to the
purchaser, or the purchaser’s designee, controls both the tax incidence and the tax
rate.
Section 527.3(b)(5) of the Sales and Use Tax Regulations provides, in part:
Fees for the services of advertising agencies or other persons acting in a
representative capacity are excluded from the tax. Advertising services
consist of consultation and development of advertising campaigns, and
placement of advertisements with the media without the transfer of tangible
personal property. . . .
Example 5: An advertising agency is hired to design an advertising program
and to furnish art work and layouts to the media. The fee charged by the
agency to its client for this service is not subject to the tax. However, if the
layout and art work is sold by the advertising agency prior to use by it to the
customer for his use, the advertising agency is making a sale of tangible
personal property which is subject to sales tax.
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
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*

(b) Production. (1) The activities listed in paragraph (a)(1) of this section are
classified as administration, production or distribution.
(I) Administration includes activities such as sales promotion,
general office work, credit and collection, purchasing, maintenance,
transporting, receiving and testing of raw materials and clerical work

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in production such as preparation of work, production and time
records.
(ii) Production includes the production line of the plant
starting with the handling and storage of raw materials at the plant
site and continuing through the last step of production where the
product is finished and packaged for sale.
(iii) Distribution includes all operations subsequent to
production, such as storing, displaying, selling, loading and shipping
finished products.
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*

(c) Directly and predominantly. (1) Directly means the
machinery or equipment must, during the production phase of a
process:
(I) act upon or effect a change in material to form the product
to be sold, or
(ii) have an active causal relationship in the production of the
product to be sold, or
(iii) be used in the handling, storage, or conveyance of
materials or the product to be sold, or
(iv) be used to place the product to be sold in the package in
which it will enter the stream of commerce.
(2) Usage in activities collateral to the actual production process is not
deemed to be used directly in production.
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*

(4) Machinery or equipment is used predominantly in production, if over 50
percent of its use is directly in the production phase of a process.
Section 532.4(b) of the Sales and Use Tax Regulations provides, in part:

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Burden of proof. (1) The burden of proving that any receipt, amusement
charge, or rent is not taxable shall be upon the person required to collect the tax and
the customer.
(2) A vendor who in good faith accepts from a purchaser a properly
completed exemption certificate or, as authorized by the Department, other
documentation evidencing exemption from tax not later than 90 days after delivery
of the property or the rendition of the service is relieved of liability for failure to
collect the sales tax with respect to that transaction. The timely receipt of the
certificate or documentation itself will satisfy the vendor's burden of proving the
nontaxability of the transaction and relieve the vendor of responsibility for collecting
tax from the customer.
(i) A certificate or other document is "accepted in good faith" when a vendor
has no knowledge that the exemption certificate or other document issued by the
purchaser is false or is fraudulently presented. If reasonable ordinary due care is
exercised, knowledge will not be imputed to the seller required to collect the tax.
Technical Service Bureau Memorandum entitled Advertising Agencies, June 10, 1983,
TSB-83(16)S provides, in part:
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*

*

The following is a restatement of the application of the sales and use taxes
to purchases and sales of tangible personal property and services by advertising
agencies:
A. Principal-agent Relationship
In order for a principal-agent relationship to exist for sales tax purposes, the
conditions set forth in TSB-M-78(3)S must be met. Those conditions are:
1.

the advertising agency must clearly disclose to the supplier
the name of the client for whom the agency is acting as agent,

2.

the advertising agency must obtain and retain written
evidence of agent status with the client prior to the acquisition
of any tangible personal property or service, and

3.

the price billed to the client, exclusive of any agency fee,
must be the same as the amount paid to the supplier. The
advertising agency may not use the property for its own

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account, such as by charging the item to the account of more
than one client.
Condition 1 above will be met only where the complete name of the client is
disclosed on any purchase order given to a supplier and the advertising agency is
identified as agent acting for and on behalf of the disclosed client (e.g., X advertising
agency as agent for Y, name of client). The mere listing of the client's account
number or name or the statement "for the account of" are deemed to be insufficient
for meeting condition 1.
Condition 2 above will be met only where there exists a properly executed
written agency agreement which clearly sets forth that the advertising agency is
appointed to act as agent for and on behalf of the client with respect to making
purchases.
Condition 3 above will be met when any expenditures by the firm as agent
for a client are billed to the client without being marked up.
Since all purchases made by an agent on behalf of client are considered to be
purchases by the client, the appropriate sales tax is to be paid when property or
services are delivered to the client or the advertising agency within New York State.
However, advertising agencies are deemed to be vendors (not agents) of all items of
tangible personal property produced or fabricated by their own employees.
Where an advertising agency makes purchases of tangible personal property
as agent for its client and subsequently performs taxable services on the client's
property (i.e., fabricates, processes, assembles, prints, imprints, etc.) or otherwise
uses the property on the client's behalf, such services are subject to tax. If the
services are performed upon items which are used in producing or creating the
property which is the desired end result of the contract, such preliminary and
intermediate services are taxable even though the items, subsequent to such use on
the client's behalf, are delivered outside the state by the agency. If the services are
performed upon property which as serviced is the desired ultimate end result of the
contract, such services are taxable unless such property is delivered outside of
New York State without any other use within this State by either the advertising
agency or the client.
Any tax due on the preliminary or intermediate services is computed at the
applicable rate for the locality where the services are rendered or where the property
as serviced is subsequently used by the advertising agency. Any tax due on the final
services to property which, as serviced, is the ultimate end result of the contract

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between the advertising agency and its client is computed at the applicable rate for
the locality where the property as serviced is delivered.
Property purchased by the advertising agency, as agent for the client, may
qualify for the manufacturer's exemption in accordance with the provisions of
TSB-M-79(7.1)S.
Services performed upon the client's property may also qualify for the
manufacturer's exemption. . . .
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Example 2: An advertising agency located in New York State is hired by a
client to create color separations for an advertisement which the client will
place in a publication which is sold to the public by its publisher.
The client and the advertising agency enter into a written agreement
establishing a principal-agent relationship for the purposes of such contract.
In order to produce the color separations, the advertising agency purchases
photographs, composition and artwork and services such property to produce layouts
and mechanicals. The layouts and mechanicals are used to produce color separations
of the advertisement. The advertising agency then delivers the color separations, the
layouts, mechanicals, artwork, photographs and composition to the client outside
New York State.
The purchases of photographs, compositions and artwork by the advertising
agency as agent of the client are subject to tax at the rate in effect where such
property is delivered to the advertising agency (i.e. at its offices in New York State),
and the charges by the advertising agency for its services in producing, fabricating,
processing, assembling, printing, imprinting, and otherwise servicing the
photographs, artwork and compositions into layouts and mechanicals are subject to
tax at the rate in effect in the locality in which such services are performed. These
purchases and services may qualify for the manufacturer's exemption in accordance
with the provisions of TSB-M-79(7.1)S since such items are to be used in the
production of property for sale (i.e., the publication).
The film purchased by the advertising agency as agent of the client to be used
in making the color separations is subject to tax, however, such purchase may, as
above noted, qualify for the manufacturer's exemption. The charges by the
advertising agency for its services in creating the color separations are taxable

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services, however, in this example the agency is not required to collect sales tax on
such services since the property as serviced is delivered to the client outside the state.
Separately stated agency fees or commissions are taxable as part of the
"receipts subject to tax" unless such fees or commissions are related solely to the
acquisition of property or services by an agency on behalf of his principal.
TSB-M-83(16)S, supra, refers to TSB-M-79(7.1)S with respect to the manufacturer’s
exemption. For a more recent explanation of the manufacturer’s exemption, see Sales Tax
Information For: Manufacturers, Processors, Generators, Assemblers, Refiners, Miners, Extractors,
and Other Producers of Goods and Merchandise, Publication 852, (12/97).
Opinion
In accordance with TSB-M-83(16)S, supra, presuming the advertising agency has met the
three conditions set forth therein to establish a principal-agent relationship for sales and use tax
purposes, all purchases made by the agency on behalf of its client are considered to be purchases by
the client. The sales tax is a destination tax. See Section 525.2(a)(3) of the Sales and Use Tax
Regulations. Therefore, the appropriate sales tax is to be paid on purchases of property or services
delivered to the client or the advertising agency within New York State. Advertising agencies are
deemed to be vendors, not agents, with respect to all items of tangible personal property produced
or fabricated by their own employees. Property delivered to the client or agency outside New York
State, or services performed on such property, will be subject to use tax under Section 1110 of the
Tax Law if the property is used in the State. A credit against the use tax may be available for sales
or use tax paid to another state or jurisdiction with respect to such property or services. See Section
1118(7) of the Tax Law.
Where the advertising agency makes purchases of tangible personal property as agent for its
client and subsequently performs taxable services on the client's property (i.e., fabricates, processes,
assembles, prints, imprints, etc.), such services may be subject to tax under Section 1105(c) of the
Tax Law. If the services are performed in New York State upon property which, as serviced, is an
item such as a layout or mechanical which is used in the State to produce the property which is the
desired end result of the contract, i.e., the advertisement itself, such services are taxable even though
the production items are subsequently delivered outside the State by the agency. If the services are
performed in New York State upon property which, as serviced, is the desired end result of the
contract, i.e., the advertisement itself, such services are taxable unless such property is delivered
outside the State without any other use within this State by either the advertising agency or the
client. See Section 1115(d) of the Tax Law. Any tax due on the services is computed at the
applicable rate for the locality where the services are rendered or where the property as serviced is
subsequently used by the advertising agency. If services are performed upon property outside New
York State, use tax may be due if the property is used in the State, based on the consideration paid
for the service. See Section 1110(a)(D), (f) of the Tax Law.

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Tangible personal property used by the agency in the creation of the advertisement for the
client, and services performed on such property, may not be purchased for resale since such property
is not resold by the principal or agent. However, since the agency will produce an advertisement
that will be included in a national publication offered for sale, such tangible personal property and
services may qualify for the manufacturer’s exemption from State and local sales and use taxes. See
Sections 1115(a)(12) and 1105-B of the Tax Law. The tangible personal property, and services to
such property, may be exempt if the property is used directly and predominantly in the production
of the advertisement that will be included in the national publication. See TSB-M-83(16)S, supra.
In order to benefit from this exemption, the agency should furnish the vendor with a properly
completed Exempt Use Certificate (Form ST-121) executed by the client within 90 days of
purchasing tangible personal property or services for use in the production of property for sale. See
Section 1132(c) of the Tax Law and Section 532.4 of the Sales and Use Tax Regulations.
Advertising services are not taxable. Nontaxable advertising services “consist of
consultation and development of advertising campaigns and placement of advertisements with the
media without the transfer of tangible personal property” (Section 527.3(b)(5) of the Sales and Use
Tax Regulations). Under the facts as presented herein, separate charges by the agency to its client
for consulting or preproduction discussions, and for placement of the advertisement with the media
are not taxable.

DATED: December 11, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.