Does an advertising agency's purchase order disclose principal-agent status clearly enough to buy materials as its client's agent for sales tax purposes?

Plain-English summary

William Esty Company, Inc., an advertising agency, buys materials from suppliers on behalf of its clients. It asked whether its purchase order clearly enough discloses that it is acting as its client's agent — the condition for a principal-agent relationship to be recognized for sales tax purposes under TSB-M-83(16)S (which carries forward TSB-M-78(3)S).

The Department held the purchase order does not satisfy the disclosure requirement.

• Why the relationship matters. If an agency is a recognized purchasing agent for an exempt client, it can buy the materials without tax. And whether or not agency exists changes how the agency's own work is taxed: if a principal-agent relationship exists and the client is not exempt, tax is due both on the materials and on the client's payments for services performed on them (editing, cropping, retouching) as producing/fabricating/processing under § 1105(c)(2). If no agency relationship exists, tax is still due on the materials, but the service payments are exempt advertising services under § 1105(c)(1).
• The disclosure must be clear, direct, and unequivocal. The rule requires the purchase order to name the client in full and identify the agency as agent for and on behalf of that named client — the example given is "X advertising agency as agent for Y (name of client)."
• This purchase order fell short. It stated only that Esty is "an accredited advertising agency and as such" is acting as agent for its client. That grounds agency status on the dubious theory that an advertising agency is inherently its clients' agent for purchasing. Whether an agency is truly a purchasing agent must be proven in each case from the actual agency-client agreement, so the boilerplate did not give clear, unequivocal notice and failed the requirement.

What this means for you

Boilerplate that you're "an agency, and therefore an agent" is not enough. To buy as your client's agent, your purchase order must name the client and expressly say you are acting as agent for and on behalf of that client — the "X as agent for Y" formula. Anything that merely implies agency from your line of business will be rejected.

Agency status drives real tax consequences. Recognized agency lets you make exempt purchases for exempt clients. But it also can make your service charges taxable production/fabrication when the client isn't exempt. Without recognized agency, your creative services stay on the exempt advertising-services side (§ 1105(c)(1)), while the materials are taxable to you.

Keep the agreement, not just the form. Because the Department will look at the underlying agency-client agreement, make sure your contracts actually establish purchasing-agent authority — the purchase-order language should reflect a real arrangement, not paper over its absence.

Common questions

Q: My purchase order says my company is an ad agency acting as agent for its client. Is that enough?
A: No. Saying you are an agency "and as such" an agent is not clear, direct, and unequivocal. You must name the client and state you are acting "as agent for and on behalf of" that named client.

Q: Why does it matter whether I'm a recognized agent?
A: A recognized agent can buy tax-free for an exempt client. It also affects your services: with agency and a non-exempt client, your work on the materials can be taxable production under § 1105(c)(2); without agency, your services are exempt advertising services under § 1105(c)(1).

Q: How does the Department decide if agency really exists?
A: Case by case, from your actual agency-client agreement — not from the general nature of the advertising business. Make sure your contract genuinely grants purchasing-agent authority.

Citations and references

Statutes:

• Tax Law § 1105(c)(1) — tax on certain services, excluding advertising services
• Tax Law § 1105(c)(2) — tax on producing, fabricating, processing, printing, or imprinting tangible personal property

Department guidance:

• TSB-M-83(16)S — Advertising Agencies (disclosure conditions)
• TSB-M-78(3)S — underlying principal-agent conditions

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a84_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84(22)S
Sales Tax
October 4, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840109A

On January 9, 1984, a Petition for Advisory Opinion was received from William Esty
Company, Inc., 100 East 42nd Street, New York, New York 10017.
The issue raised is whether Petitioner's purchase orders satisfy the disclosure requirement,
necessary for a principal-agent relationship to be recognized for sales tax purposes, set forth in
Technical Services Bureau Memorandum TSB-M-83(16)S. Where a principal-agent relationship is
established, the agent (in the present case an advertising agency) may make purchases without the
payment of tax where its principal is an organization exempt from tax under the provisions of the
Tax Law. If its principal is not an exempt organization, not only would sales tax be due on the sale
to the advertising agency, but, in addition, tax would be due on payments by the principal to the
advertising agency for services performed on the purchased materials (e.g., editing, cropping,
retouching, etc.). Such services would constitute the services of "producing, fabricating, processing,
printing or imprinting" such tangible personal property and, as such, the receipts from the sale of
such services would be subject to tax under section 1105(c)(2) of the Tax Law. On the other hand,
if a principal-agent relationship did not exist, the same tax would be payable on the purchase of the
materials, but no tax would be due on the payment for the services described above, as the same
would constitute exempt advertising services, pursuant to Tax Law, §1105(c)(1).
Petitioner, an advertising agency, states that it makes purchases on behalf of its clients, acting
as agent for its client in making such purchases. The front of the general purchase order used by
Petitioner provides a line for listing the name of Petitioner's client, there identified as its client. The
front of the purchase order also states, in bold type - "IMPORTANT! SEE TERMS AND
CONDITIONS ON REVERSE SIDE."
On the reverse of the form appears the following:
"The following terms and conditions shall be applicable to this order:

1. Work submitted by the VENDOR pursuant to this order must, in our opinion, be
   satisfactory for the purposes for which it is ordered, and is subject to approval by the client herein
   specified. All material delivered hereunder, when approved by client, becomes without reservation
   the property of the client from the moment of creation.
   . . .

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-84(22)S
Sales Tax
October 4, 1984

3. William Esty Company, Incorporated is an accredited advertising agency and as such, is
   acting as an agent for the client designated on the face of this order."
   Technical Services Bureau Memorandum TSB-M-83(16)S, Advertising Agencies, provides,
   in part, as follows:
   "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:
4. The advertising agency must clearly disclose to the supplier the name of the client for
   whom the agency is acting as agent,
   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)."
   As the example given indicates, the disclosure of agency status must be clear, direct and
   unequivocal. Such is not the case with the purchase order here under consideration. Thus, it is stated
   therein that the Petitioner is "an accredited advertising agency" and that it is "as such" that it is acting
   as an agent for its client. That is, it is acting as an agent insofar as an advertising agency by its nature
   and normal operation is an agent for its clients. However, it cannot be said that advertising agencies
   are necessarily agents of their clients for purposes of purchasing property to be used in creating an
   advertisement. Rather, the proposition must be proven in each case, by reference to the agreement
   entered into by the advertising agency and its client. Thus, the statement on the purchase order does
   not give clear and unequivocal notice of agency status, hut rather grounds such notice on a dubious
   legal theory. Accordingly, it cannot be said to satisfy the applicable requirement set forth in the
   Technical Services Bureau Memorandum cited above.

DATED: September 17, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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