When an advertising agency sells an ad or promotional piece and bills a separate 'agency service fee,' is that fee subject to sales tax?

Plain-English summary

K.A.S. Studios, Inc., an advertising agency, bills its customers for preparing an ad or sales-promotion piece. The bill is broken into two parts: "copy, layout, design, type and photostats" and an "agency service fee." The agency asked whether sales tax should be charged on the agency service fee.

The Department held the entire charge — including the agency service fee — is taxable.

• Sales of tangible personal property are taxable. Section 1105(a) taxes the receipts from every sale of tangible personal property.
• "Receipts" means the sale price. Section 1101(b)(3) defines "receipts" as the amount of the sale price of the property, valued in money.
• The service fee is part of that sale price. What the agency is selling is tangible personal property (the finished ad or promotion piece). The "amount of the sale price" of that property includes the agency service fee.
• Result: the total charge, including the separately stated agency service fee, is subject to all applicable State and local sales taxes.

What this means for you

Separately stating a service fee doesn't carve it out of a taxable sale of goods. When the thing you deliver is tangible personal property, the whole price to get it — design labor, service fees, and the like — is generally part of the taxable receipt, even on its own invoice line.

The nature of what's sold drives the result. Because the agency's deliverable is a physical ad or promotion piece, the transaction is a sale of tangible personal property, and the service fee rides along as part of the sale price. An engagement that produced no tangible deliverable could be analyzed differently.

Bill and collect on the full amount. If you're an agency (or any vendor) selling a tangible product, plan to charge sales tax on the entire customer charge, not just the "materials" line.

Common questions

Q: We list the agency service fee separately — why is it taxed?
A: Because you're selling tangible personal property (the ad piece), and the taxable sale price under § 1101(b)(3) includes the agency service fee. Separating it on the invoice doesn't remove it from the taxable receipt.

Q: Is our design and layout labor taxable too?
A: On these facts the whole charge for the tangible ad/promotion piece — copy, layout, design, type, photostats and the service fee — is part of the taxable sale price.

Q: Would it be different if we didn't deliver anything physical?
A: The opinion turns on the agency selling tangible personal property. A transaction with no tangible deliverable would require its own analysis and could reach a different result.

Citations and references

Statutes and authority:

• Tax Law § 1105(a) — taxes the receipts from every sale of tangible personal property
• Tax Law § 1101(b)(3) — defines "receipts" as the amount of the sale price of the property; the sale price of the ad piece includes the agency service fee

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_2s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81 (2) S
Sales Tax
July 27, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810407B

On April 7, 1981, a Petition for Advisory Opinion was received from K.A.S. Studios, Inc.,
P.O. Box 25, Whitestone, New York 11537.
The issue raised is whether or not sales tax should be charged on certain fees of an
advertising agency.
Petitioner bills its customers for the preparation of an ad or sales promotion piece. The bill
is broken down into two parts, "copy, layout, design, type and photostats" and "agency service fee."
Section 1105(a) of the Tax Law imposes a sales tax on "The receipts from every sale of
tangible personal property. . .".
Section 1101(b)(3) of the Tax Law defines the term "receipts" as: "The amount of the sale
price of any property and the charge for any service taxable under this article, valued in money,
whether received in money or otherwise. . .".
The "amount of the sale price" of articles of tangible personal property sold by an advertising
agency, which is what is involved herein, includes the agency service fee. Therefore, the total charge,
including the agency service fee, made by Petitioner for the sale of items of tangible personal
property is subject to all applicable state and local sales taxes.

DATED: July 10, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR