Are an ad agency's purchases of photography and artwork taxable when the agency incorporates them into camera-ready mechanicals it sells to its clients?

Plain-English summary

DM Advertising, Inc., an advertising firm, helps clients create booklets and folders, and as part of that work provides camera-ready mechanicals. It asked whether the photography and artwork it buys to build those mechanicals is subject to sales or compensating use tax. It described two setups:

• Setup 1: it affixes purchased artwork and photography to the mechanical board and transfers the entire camera-ready mechanical to the client.
• Setup 2: it affixes photostats (reduced or enlarged) to the board to show size and placement, then transfers to the client both the mechanical board and the actual artwork and photography (needed so the client can complete the final production).

The Department held the purchases are not taxable — they are purchases for resale — and there is no use tax.

• The rule. Section § 1105(a) taxes retail sales of tangible personal property; a "retail sale" (§ 1101(b)(4)(i)) excludes a sale for resale "as such" or as a physical component part. The compensating use tax (§ 1110) reaches property bought at retail and used in the State when no sales tax was paid.
• Setup 1 — resale as a component part. Where the artwork and photography is affixed to the mechanical and sold with it, it is purchased for resale as a physical component part of the property DM sells. So its purchase isn't a taxable retail sale, and affixing it isn't a taxable use.
• Setup 2 — resale "as such." Where the mechanical carries photostats but the actual artwork and photography is transferred to the client too, that artwork and photography is sold "as such," so it was purchased for resale "as such." The only prior handling — photostatting — is done solely to make the artwork and photography more saleable, so it isn't a taxable use either.
• Result. In both setups, the purchase of the photography and artwork is not a taxable retail sale and their handling is not subject to compensating use tax.

What this means for you

Inputs you resell to your client aren't taxable to you. If the photography, artwork, or other materials you buy end up transferred to your client — either built into the product or handed over alongside it — you bought them for resale, and your purchase isn't taxed.

"As such" vs. "component part" both work. The resale exclusion covers property resold as a physical component of what you sell and property resold on its own. Here, both the built-in artwork and the separately transferred artwork qualified.

Handling that just makes an item more saleable isn't a taxable "use." Photostatting, mounting, or similar prep done to ready resale goods for sale doesn't convert a resale purchase into a taxable use.

Common questions

Q: I buy photos and art and build them into work I sell to clients. Do I owe tax on those purchases?
A: No — they're purchased for resale (as a component of, or transferred with, what you sell), so the purchase isn't a taxable retail sale and there's no use tax.

Q: What if I only attach photostats, but hand over the original art too?
A: The original art is then sold "as such," so it's still a purchase for resale. Making the photostats is handling to ready the art for sale, not a taxable use.

Q: When would these purchases become taxable?
A: If you consumed the artwork or photography yourself rather than reselling it to the client — then it wouldn't be a purchase for resale.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — "retail sale" excludes resale "as such" or as a physical component part
• Tax Law § 1110 — compensating use tax on property purchased at retail

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(14)S
Sales Tax
April 6, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810924B

On September 24, 1981, a Petition for Advisory Opinion was received from DM Advertising,
Inc., 600 Third Avenue, New York, New York 10016.
The issue here raised is whether Petitioner's purchase of photography and artwork used in the
construction of mechanicals to be sold, under the circumstances described below, are subject to the
sales and compensating use taxes imposed under Article 28 of the Tax Law. It is concluded herein
that they are not.
Petitioner is an advertising firm part of whose business consists of providing assistance to
clients in the creation of booklets and folders. As part of this process Petitioner creates and provides
its clients with mechanicals of two types. In one instance Petitioner purchases artwork and
photography which it affixes to the mechanical board, the entire camera-ready mechanical being then
transferred to its client. In the second case, Petitioner purchases artwork and photography, photostats
of which (in either reduced or enlarged form) are affixed to the mechanical board so as to indicate
the proper size and placement of the actual photography and artwork on the ultimate, camera-ready
mechanical. Petitioner then transfers to its customer both the prepared mechanical board and the
artwork and photography. Possession of the artwork and photography is necessary to enable the
client to make proper use of the mechanical, inasmuch as the two are used in conjunction in the final
production process.
Section 1105(a) of the Tax Law imposes the State sales tax on the ". . . receipts from every
retail sale of tangible personal property . . . . " The term "retail sale" is defined, in relevant part, in
section 1101(b)(4)(i) of the Tax Law as "A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible personal
property . . . . " The compensating use tax is imposed on the use within the State of tangible personal
property purchased at retail, by a resident of the State, upon which sales tax has not been paid. Tax
Law, §1110.
Where Petitioner provides its client with a mechanical part of which consists of artwork and
photography purchased by Petitioner it is clear that such items were purchased for resale as physical
component parts of tangible personal property sold by Petitioner. Accordingly, the purchase of such
artwork and photography would not constitute a retail sale the receipts from which are subject to
sales tax, and the use of the same (viz., being attached to the mechanical board) would not be subject
to the compensating use tax. Where the mechanicals composed of the photostats are transferred to
its client by Petitioner, the same are accompanied by the artwork and photography from which the
photostats had been made. In such instance the photography and artwork is sold "as such", and
accordingly was purchased by Petitioner "for resale as such."

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

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

-2­
TSB-A-82(14)S
Sales Tax
April 6, 1982

The photography and artwork in this instance is not used by Petitioner prior to its sale to the client
other than in a manner intended solely to render the photography and artwork themselves the more
saleable. It follows that the purchase of photography and artwork in this second instance does not
constitute a retail sale the receipts from which are subject to the sales tax, nor does their photostating
constitute a use subject to the compensating use tax.

DATED: March 30, 1982

s/GABRIEL DI CERBO
Deputy Director
Technical Services Bureau