Are printed signs and displays a franchise advertising fund provides to its member restaurants exempt promotional materials under Tax Law 1115(n)(4)?

Plain-English summary

The petitioner is a not-for-profit cooperative advertising/promotion fund whose members are a restaurant franchisor and its franchisee restaurants. It collects funds from the member restaurants (a percentage of each member's food and beverage sales) and spends them on advertising and promotion, including printed signs and displays put on view at the franchisee restaurants. It does not charge a specific amount for the materials, and the charge does not vary with the quantity supplied. Some materials are shipped by FedEx; others are delivered by a distributor in its own trucks. The fund asked whether these materials are exempt promotional materials under Tax Law 1115(n)(4).

The Office of Counsel concluded they are not exempt. The items are "promotional materials" as defined in Tax Law 1101(b)(12) (advertising literature, promotional displays, etc.). But the 1115(n)(4) exemption -- for printed promotional materials the purchaser mails or ships to its customers or prospective customers, without charge, by common carrier/USPS/like service -- has four conditions (TSB-M-97(6)S), and these materials fail three of them:

• The "customer" requirement (fail): the materials go to the fund's members (the franchisee restaurants). The members are not the fund's customers or prospective customers.
• The delivery requirement (partial fail): only some materials are shipped by common carrier; those delivered by a distributor in its own trucks do not meet the common-carrier/USPS requirement.
• The "without charge" requirement (fail): because the franchisee restaurants pay funds to the fund, which the fund then uses to buy the materials, the materials are not provided without charge.

Because the materials are not exempt under 1115(n)(4), the fund cannot use Form ST-121.2 (Certificate of Exemption for Purchases of Promotional Materials) to buy them tax-free from vendors.

What this means for you

Co-op advertising funds, franchisors, marketing organizations

The promotional-materials exemption is narrow. To qualify, you (the purchaser) must mail/ship the printed materials to your own customers or prospective customers, for free, by common carrier or USPS. Supplying signs/displays to your members -- who fund you through contributions tied to their sales -- does not meet the "customers" or "without charge" tests, and any in-house/own-truck delivery defeats the common-carrier test. You cannot use Form ST-121.2 for such purchases.

Common questions

Q: Our items clearly are promotional materials -- doesn't that make them exempt?
A: No. Being promotional materials is only the threshold. The 1115(n)(4) exemption also requires shipping to your customers/prospects, without charge, by common carrier.

Q: Why aren't our member restaurants 'customers'?
A: The exemption contemplates the purchaser's customers or prospective customers. The fund's members (the franchisees who finance it) are not its customers for this purpose.

Q: We don't bill a set price for the materials -- isn't that 'without charge'?
A: No. The members pay funds (a percentage of their sales) that you use to buy the materials, so they are not provided without charge.

Q: Can we use Form ST-121.2 to buy these exempt?
A: No. Because the materials are not exempt under 1115(n)(4), Form ST-121.2 is not available for these purchases.

Citations and references

• Tax Law section 1101(b)(12) (definition of promotional materials)
• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1115(n)(4) (exemption for mailed/shipped promotional materials)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_16s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(16)S
Sales Tax
July 15, 2013

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S120427A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether, pursuant to Tax Law § 1115(n)(4), printed
promotional materials, including signs and displays, provided to its members and displayed at
retail outlets throughout the state are exempt from sales and use tax.
We conclude that these promotional materials are not exempt from sales and use tax
under Tax Law § 1115(n)(4).
Facts
Petitioner is a not for profit corporation formed under Chapter 1702 of the Ohio
Revised Code. The members of the Petitioner are name redacted (the franchisor), and the
franchisee restaurants of name redacted. Name redacted is the only voting member of the
Petitioner. Petitioner establishes and administers promotion and advertising programs for the
benefit of the franchisor and the franchisees. Petitioner collects funds from its member
restaurants and expends those funds for promotional and advertising purposes. Petitioner’s
activities include, but are not limited to, television and radio advertising production,
merchandising and promotions in retail outlets, direct mail and sponsorships. The promotional
materials are put on view at the franchisee restaurants. Petitioner does not charge a specific
amount to its members for the promotional materials, but the materials are paid for through the
funds that it collects from the members. The funds collected are based on a percentage of the
members’ restaurant food and beverage sales. The charge does not vary based upon the quantity
of materials that is provided.
Some of the promotional materials are delivered by Federal Express. Other items are
delivered by a distributor in its own trucks.
Analysis
Tax Law § 1101(b)(12) defines promotional materials in relevant part as:
Any advertising literature, other related tangible personal property (whether or not
personalized by the recipient’s name or other information uniquely related to such
person) and envelopes used exclusively to deliver the same. Such other related tangible
personal property includes, but is not limited to, free gifts, complimentary maps or other
items given to travel club members, applications, order forms, and return envelopes with

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TSB-A-13(16)S
Sales Tax
July 15, 2013

respect to such advertising literature, annual reports, prospectuses, promotional displays
and Cheshire labels but does not include invoices, statements and the like.
Tax Law § 1105(a) imposes sales tax on the receipts from every retail sale of tangible
personal property, except as otherwise provided. Tax Law § 1115(n)(4) provides:
Notwithstanding any contrary provisions of paragraph one of this subdivision,
promotional materials which are printed materials and promotional materials upon
which services described in paragraph two of subdivision (c) of section eleven hundred
five have been directly performed shall be exempt from tax under this article where the
purchaser of such materials mails or ships such promotional materials, or causes such
promotional materials to be mailed or shipped, to its customers or prospective
customers, without charge to such customers or prospective customers, by means of
common carrier, United States postal service or like delivery service.
In addition, TSB-M-97(6)S, Expanded Sales and Compensating Use Tax Exemption for
Promotional Materials, sets forth the four conditions that must be met for printed promotional
materials mailed or shipped to destinations in the state to be exempt from tax. The four
conditions are:


The printed promotional materials are ultimately mailed or shipped to customers or
prospective customers of the purchaser of the printed promotional materials.



The printed promotional materials are mailed or shipped by the purchaser of the
materials using a common carrier, the U.S. Postal Service or a like delivery service.
(This requirement is also met if the mailing or shipping is arranged by a third party
[such as a printer/mailer] on behalf of the purchaser of the promotional materials.)



There is no charge to the purchaser’s customer or prospective customer (ultimate
recipient) for the promotional materials, or for mailing or shipping them.



The purchaser of the promotional materials gives a properly completed Form
ST-121.2, Certificate of Exemption for Purchases of Promotional Materials, to the
seller of the promotional materials.

The promotional materials, including the signs and displays, provided by Petitioner
constitute promotional materials as defined in § 1101(b)(12) of the Tax Law. However, the
promotional materials do not meet the statutory conditions necessary to qualify for the
exemption under Tax Law § 1115(n)(4).
The customer requirement: The printed promotional materials are being delivered to
Petitioner’s members. The members of the Petitioner are not the Petitioner’s customers or
prospective customers as contemplated by the statute.

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TSB-A-13(16)S
Sales Tax
July 15, 2013

The delivery requirement: Only some of the printed promotional materials are shipped
by the purchaser of the materials using a common carrier to customers and prospective
customers. The materials delivered by a distributor in its own trucks do not satisfy the statutory
delivery requirement.
The “without charge” requirement: The printed promotional materials that are shipped
by common carrier still do not meet the “without charge” requirement of the statute. Because the
franchisee restaurants actually pay funds to the Petitioner which the Petitioner then uses to
purchase the printed materials supplied to the members, the printed materials are not being
provided, shipped or delivered to the franchisee restaurants without charge as required.
Since the promotional materials are not exempt under Tax Law § 1115(n)(4), Petitioner
cannot use Form ST-121.2, Exemption Certificate for Purchases of Promotional Materials, to
make exempt purchases of those materials from third party vendors.

DATED: July 15, 2013

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.