Can an advertising agency buy materials tax-free by relying on its exempt client's status, when it isn't the client's designated purchasing agent?

Plain-English summary

Tromson Monroe Advertising, Inc. acts as the advertising agency for the Curacao Government Tourist Bureau, a tax-exempt entity — preparing and placing media advertising and performing the usual ancillary functions. For the materials it buys, the agency charges the client cost plus a commission. It asked whether it must pay sales tax on those material purchases given the client's exempt status, and submitted a sample contract.

The Department held the agency owes the tax — no purchasing-agent relationship was established.

• An exempt client's status only flows through via a real agency relationship. For the client's exemption to cover the agency's purchases, the agency must be buying as the client's purchasing agent, with the client standing behind the purchases.
• The contract didn't create that relationship. Nowhere does it designate the agency as purchasing agent, and nowhere does it make the client directly liable on the agency's purchase orders — the only client liability appears for operations cancelled at the client's request.
• Result: the agency pays the tax. With no agency relationship, the agency is not relieved of its obligation to pay sales tax on the materials it buys to perform the contract, notwithstanding the client's exempt status.

What this means for you

An exempt customer doesn't make your purchases exempt by default. If you buy materials in your own name to do a job for a tax-exempt client, you're the purchaser and you owe the tax — unless you're genuinely acting as the client's purchasing agent.

A purchasing-agency relationship has to be real and documented. The contract should actually designate you as the client's purchasing agent and make the client directly liable on the purchase orders. "Cost plus a commission" billing and the client's exempt status aren't enough on their own.

This is the recurring "exemption doesn't pass through" theme. Like a contractor buying to build for an exempt owner, an agency buying to serve an exempt client bears its own tax. The exemption belongs to the exempt entity as the actual, direct, liable purchaser — not to its vendors or agents.

Common questions

Q: My client is tax-exempt. Can I buy materials for its project tax-free?
A: Not unless you're the client's designated purchasing agent, with the client directly liable on the purchase orders. Absent that, you're the buyer and owe the tax, regardless of the client's exempt status.

Q: We bill the client cost plus a commission — doesn't that make it their purchase?
A: No. Billing arrangements don't establish a purchasing-agent relationship. The contract must designate you as purchasing agent and make the client liable on the orders.

Q: What would let the client's exemption apply?
A: A genuine agency relationship — the client designated as principal/purchaser, directly liable on the purchase orders — supported by proper exemption documentation.

Citations and references

Statutes:

• Tax Law § 1105(a) — sales tax on retail sales of tangible personal property (agency purchases taxable absent a purchasing-agent relationship)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_12s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(12)S
Sales Tax
March 24, 1983

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

PETITION NO. S820217A

On February 17, 1982 a Petition for Advisory Opinion was received from Tromson Monroe
Advertising, Inc., 40 East 49th Street, New York, N.Y. 10017.
The issue raised is whether Petitioner, an advertising agency, is required to pay sales tax on
purchases of materials made in connection with its contracts with clients which are entities exempt
from sales tax. Petitioner has submitted a sample contract as a basis for this determination.
The submitted contract outlines an agreement between Petitioner and the Curacao
Government Tourist Bureau whereby the former is to act as an advertising agency for the latter by
preparing and placing media advertisements, as well as performing the ancillary functions normally
attendant upon such an agreement. With respect to the purchases of materials at issue herein,
Petitioner receives from its client cost plus a commission. It is to be noted, in this regard, that
nowhere in the contract is Petitioner designated a purchasing agent for its client, either in these or
other terms. Further, nowhere in the contract is there any indication that the client is to become
directly liable on Petitioner's purchase orders. The only such assumption of liability appears with
regard to operations cancelled at the behest of the client. Accordingly, there being no agency
relationship established, Petitioner is not relieved of its obligation to pay sales tax on its purchases
in the course of its performance of the subject contract by reason of the exempt status of its client.

DATED: March 3, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau

ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO , DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)