How is an advertising agency's work taxed in New York — its services, the property it produces, and purchases it makes for clients?

Plain-English summary

Advantage Concepts, an advertising agency, asked how the various services it provides for clients are taxed. The Department sorted the work into six categories (A–F) and applied a few recurring rules: advertising services are excluded from the information-services tax under § 1105(c)(1) (agents "acting in a representative capacity"), while sales of tangible personal property are taxable under § 1105(a), and an agency's own purchases of materials to perform its services are generally taxable to the agency.

The pivotal question throughout is whether a true principal-agent relationship exists. An advertising firm is not automatically its client's agent when it buys property. The Department recognizes a principal-agent relationship for sales tax only if all three conditions are met (citing William Estey Company, TSB-A-84(22)S):

1. the agency clearly discloses to the supplier the name of the client it's acting for;
2. the agency obtains and keeps written evidence of agency status before acquiring any property or service; and
3. the price billed to the client (apart from the agency fee) is exactly what the agency paid the supplier — no markup, and the agency may not use the property for its own account (e.g., charge one item to more than one client).

The six categories:

• A. Consulting and planning campaigns/budgets. Not taxable to the client if no property is transferred; the agency pays tax on materials it uses.
• B. Producing ads and placing them in publications not for sale. With no agency relationship, the agency pays tax on its purchases (even for an exempt client; Tromson Monroe Advertising, TSB-A-83(12)S), and its total charge to the client isn't taxable whether or not costs are itemized. Under an agency relationship, the agency pays tax on materials/services bought for the client and must charge the client tax on the value its employees' labor adds (§ 1105(c)(2)); commissions and placement fees are exempt. For an exempt-organization client, no tax if the three conditions are met and Form ST-119.1 is furnished.
• C. Producing/placing ads in publications for sale. The agency can claim the manufacturing exemption (§ 1115(a)(12), via Form ST-121) on production equipment, parts, tools and supplies (TSB-M-79(7.1)S). A freelance artist's work on the agency's material is taxable under § 1105(c)(2). Incidentally turning finished material over to the client after use doesn't defeat the advertising-service exclusion (Laux Advertising v. State Tax Commission, 67 A.D.2d 1066) — but later selling retained artwork for an extra charge is taxable.
• D. Producing tangible personal property for sale (brochures, catalogs, logos, posters, printing plates). With no agency relationship, the agency buys items sold "as such" tax-free for resale (Form ST-120); it collects tax from the client on the total selling price of the finished product delivered in New York, with no deduction for fees or commissions.
• E. Directing/producing radio and TV commercials. A commercial embodied in tangible form (negative film, video tape, sound track) is taxable if delivered in New York. Raw film stock and processing/editing/mixing incorporated into the product can be bought for resale (ST-120); cameras, projectors and similar gear are production machinery (20 NYCRR 528.13) that may be bought exempt (except New York City) via ST-121 if used directly and predominantly — over 50% of use — in production. Converting film to videotape and post-production editing carry their own rules.
• F. Producing and arranging fashion shows. Not taxable to the client if no property is transferred (a service not enumerated under § 1105(c)); the agency's purchases or rentals of property are taxable.

Two catch-all rules: a mixed invoice must state the taxable charge separately or the entire receipt is taxed (20 NYCRR 533.2), and any exemption/resale document must be in hand within 90 days of delivery or the sale is deemed taxable at retail (§ 1132(c)).

What this means for you

"Advertising service" and "sale of property" are taxed oppositely — know which you're doing. Planning, consulting, placement and other pure services aren't taxable to the client, but the moment you hand over finished tangible property — a brochure, a printing plate, a commercial on tape — you've made a taxable sale on the full price. Many agency invoices contain both, which is why the separate-statement rule matters so much.

Buying "as the client's agent" only works if you do it by the book. Disclosing the client, getting written agency authority before you buy, and re-billing at exact cost with no markup are all required — miss any one and you're buying (and being taxed) for your own account, not the client's. A markup alone breaks the agency relationship. This is the same three-condition test New York applied in its broader ad-agency opinion the same year, TSB-A-86(35)S.

Match the certificate to the purpose. Resale (ST-120) is for property you'll sell to the client as such; the production/manufacturing exemption (ST-121) is for equipment, parts and supplies used directly and predominantly to produce the advertising; exempt-organization clients use ST-119.1. And whatever the document, get it within 90 days of delivery or the sale defaults to taxable.

Common questions

Q: Are my agency's creative and planning fees taxable?
A: Generally not, if you don't transfer tangible personal property with them. Consulting, planning campaigns, placement and arranging fashion shows are treated as non-taxable advertising services — but you pay tax on the materials you buy to perform them.

Q: When do I charge my client sales tax?
A: When you sell finished tangible property — brochures, catalogs, logos, printing plates, or a commercial embodied in film or tape — delivered in New York. Tax is on the total selling price, with no deduction for your fees or commissions.

Q: Can I buy things tax-free on my client's behalf?
A: Only if you meet all three conditions: disclose the client to the supplier, hold written agency authority before you buy, and re-bill the client at exact cost with no markup. Then you can use the appropriate certificate (ST-120 for resale, ST-121 for the production exemption, ST-119.1 for an exempt-organization client).

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(1) — information services; exclusion for advertising or other agents acting in a representative capacity
• Tax Law § 1105(a) — taxes retail sales of tangible personal property
• Tax Law § 1105(c)(2) — services of producing/fabricating/printing property for a person who furnishes it
• Tax Law § 1115(a)(12) — production/manufacturing exemption (claimed via Form ST-121)
• Tax Law § 1132(c) — exemption/resale document required within 90 days of delivery
• 20 NYCRR 527.3 — advertising services vs. sales of property; 528.13 — production machinery used "directly and predominantly" (over 50%); 533.2 — separately stating taxable charges on a mixed invoice

Rulings and cases cited:

• William Estey Company, TSB-A-84(22)S — the three-condition principal-agent test
• Tromson Monroe Advertising, TSB-A-83(12)S — agency pays tax on its purchases absent an agency relationship, even for an exempt client
• Laux Advertising v. State Tax Commission, 67 A.D.2d 1066 — incidental transfer of finished material doesn't defeat the advertising-service exclusion
• TSB-M-79(7.1)S; Publication 842 "Sales Tax Information for Printers" — production-exemption and printer guidance

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_25s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(25)S
Sales Tax
June 17, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S850919B

On September 19, 1985, a Petition for Advisory Opinion was received from Advantage
Concepts, 11 Northgate Drive, Albany, New York 12203.
At issue is the taxability of various services provided by Petitioner as an advertising agency
for its clients.
Section 1105(c)(1) of the Tax Law imposes a tax on the service of furnishing information
by printed or mimeographed matter, including the services of collecting, compiling or analyzing
information of any kind or nature and furnishing reports thereof to other persons. However, that
section excludes ". . . the services of advertising or other agents, or other persons acting in a
representative capacity . . . ."
Section 1105(a) imposes a tax on receipts from every retail sale of tangible personal property,
except as otherwise provided.
The Sales and Use Tax Regulations state that "Advertising services consist of consultation
and development of advertising campaigns, and placement of advertisements with the media without
the transfer of tangible personal property . . . . Sales of tangible personal property such as layouts,
printing plates, catalogs, mailing devices or promotional handouts, tapes or films by an advertising
agency for its own account are taxable sales of tangible personal property. . . .
Example 5: An advertising agency is hired to design an advertising
program and to furnish art work and layouts to the media. The fee
charged by the agency to its client for this service is not subject to the
tax. However, if the layout and art work is sold by the advertising
agency prior to use by it to the customer for his use, the advertising
agency is making a sale of tangible personal property which is subject
to the sales tax." (20 NYCRR 527.3[b][5]).
All purchases of materials by an advertising agency for use in performing its services are
purchases at retail subject to the sales tax. (20 NYCRR 527.3[c][2]).
An advertising firm does not necessarily act as an agent for its client when it purchases
property for use in creating advertisements. A principal-agent relationship for such purpose will be
recognized for sales tax application only if the following conditions are met:
1.

the advertising agency must clearly disclose to the supplier the name
of the client for whom the agency is acting as agent,

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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Sales Tax
June 17, 1986
2.

the advertising agency must obtain and retain written evidence of
agency status with the client prior to the acquisition of any tangible
personal property or service, and

3.

the price billed to the client, exclusive of any agency fee, must be the
same as the amount paid to the supplier. The advertising agency may
not use the property for its own account, such as by charging the item
to the account of more than one client. See William Estey Company,
State Tax Commission Advisory Opinion, Sept. 17, 1984, TSB-A­
84(22)S.

The essence of the services performed will determine the tax consequences of transactions
between an advertising agency and its clients.
Petitioner's services fall within the following categories:
A.

Consulting services and the planning of advertising
budgets and campaigns.

Petitioner is not required to collect tax on its charges to the client, provided no tangible
personal property is transferred to the customer or its designees in connection with this service. All
purchases of material by Petitioner for use in performing its services are subject to sales tax.
B.

The production of advertisements and their placement in
publications which are not for sale.

If no principal-agent relationship exists, Petitioner must pay tax on its purchases of property
and taxable services necessary to fulfill its agreement with the client, even if the customer is an
exempt organization. (See: Tromson Monroe Advertising, State Tax Commission Advisory
Opinion, March 3, 1983, TSB-A-83(12)S). Petitioner's total charge to the client is not taxable
whether or not the cost of its purchases is itemized on the bill rendered.
If the same services are performed under a principal-agent agreement, not only must
Petitioner pay sales tax on material and services bought on the clients behalf, but it must also charge
the client sales tax on the value added to the property by the labor of agency employees. (Tax Law
1105[c][2]). See William Estey Company, State Tax Commission Advisory Opinion, September
17, 1984, TSB-A-84(22)S. Commissions and fees relating to Petitioner's services for the acquisition
of property and the placement of advertising are exempt.
Where Petitioner carries out the services described under "B" for a principal who is an
organization exempt from tax under section 1116 of the Tax Law, it is not required to collect tax on
the total charge to the client, nor to pay tax on property purchased on the client's behalf, provided
that conditions 1, 2, and 3, quoted above, are met and Petitioner and its supplier are furnished with
the proper exemption certificate (e.g., Form ST-119.1, Exempt Organization Certificate) executed
by the client.

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Sales Tax
June 17, 1986
C.

The production and placement of advertisements in
publications which are for sale.

Here the agency usually prepares the layout and produces from it the printing plate which it
forwards to the publisher who will print the advertisement. In accordance with Technical Service
Bureau Memorandum TSB-M-79(7.1)S, May 15, 1980, if no principal-agent contract is in force,
Petitioner may claim the manufacturing exemption (Tax Law 1115 [a][12]) on its purchases of
equipment such as typography, artwork, film, offset plates, etc., and also on parts, tools and supplies
used in the production of the advertisement, by obtaining from its client a properly completed
Exempt Use Certificate (Form ST-121) and furnishing to its vendor a properly completed Exempt
Use Certificate prepared by the agency.
If a freelance artist is employed to create illustrations or typography upon material supplied
and used by Petitioner, this service is subject to sales tax under Section 1105(c)(2) of the Tax Law
which imposes the tax on the receipts from every sale, except for resale, of the services of
"[p]roducing, fabricating, processing, printing or imprinting tangible personal property, performed
for a person who directly or indirectly furnishes the tangible personal property, not purchased by him
for resale, upon which such services are performed."
Petitioner's total charge to its client will be exempt from tax as the "services of advertising".
If a principal-agent agreement exists, Petitioner's purchases for the client of equipment, parts,
tools and supplies to be used in the production process of the advertisement qualify for the
manufacturing exemption, provided vendors are supplied with an Exempt Use Certificate (Form ST­
121) executed by the client. The tax liability for services described in Tax Law 1105 (c)(2), supra,
whether purchased by the agent or performed by its employees, passes to the client. Material and
services obtained by the agent must be re-billed to the principal at cost. Separately stated agency
fees for consulting, purchasing, and placement of the advertisement with the media are not taxable.
If, in conjunction with the services discussed under B. and C. above, material purchased by
Petitioner for the purpose of creating advertisements is turned over to the client subsequent to such
use, this transfer of tangible personal property is considered merely incidental to the "services of
advertising" and will not negate the exclusion from tax provided for such services under Tax Law
1105(c)(1). See Matter of Laux Advertising v. State Tax Commission, 67 AD2d 1066.
However, in the event that artwork retained by Petitioner after completion of a contract is
later transferred to the customer for an additional charge, such receipt is subject to tax and Petitioner
may not claim a credit for tax paid on its purchase of the property.
D.

The production for sale of tangible personal property.
For example: brochures, catalogs, logos, posters, mechanicals,
printing plates, etc.

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Sales Tax
June 17, 1986
If no principal-agent agreement is in force, Petitioner may purchase tax exempt any property
or physical components thereof, which will be sold as such (without prior use by the agency) to the
client, by issuing to its vendor a Resale Certificate (Form ST-120).
Material such as artwork and typography, which Petitioner will use to produce property for
sale, may not be purchased for resale by the agency whether or not the property is actually transferred
to the customer upon completion of the contract and regardless of whether the contract between the
advertising firm and the client requires such transfer. However, these purchases may qualify for the
production exemption described under "C" above.
Sales tax is to be collected from the client by the advertising firm on the total selling price
of the finished product without any deduction for fees or commissions or other expenses of the
agency when such finished product is delivered to the client or his designee in New York State.
Under a principal-agent agreement, other than with an exempt organization, Petitioner's
purchases of material for the account of its client will not qualify for exemption if, as in the
production of promotional material, the finished product is not intended for sale. Furthermore,
Petitioner must collect statewide and local sales tax on the receipts from services performed by its
employees upon the client's property. (Tax Law 1105[c][2], quoted above; see also Technical
Services Bureau Memorandum, June 10, 1983, TSB-M-83[16]S).
E.

The direction and production of radio and television commercials.

The creation of a radio or television commercial is considered the production of tangible
personal property. Therefore, sales of television or radio commercials embodied in tangible form
in an original negative film, video tape or sound track are subject to sales tax if the property is
delivered to the customer or its designee within New York State.
Petitioner may purchase tax exempt the raw film stock and other physical component parts
of property actually transferred to the client, and also the services of processing, editing and sound
mixing performed upon such property, by furnishing its suppliers with a Resale Certificate (Form
ST-120). The resale exemption does not apply to raw material and services used in preparing an
intermediate edited version - not intended for sale or transfer to the client - of the original negative
film as a preliminary step in the production for sale of the master positive.
Cameras, projectors, sound recorders, set lights, booms, etc., constitute production machinery
and equipment as defined in Regulation 528.13(a)(1); backdrops, settings, props, wardrobes and
similar articles qualify as manufacturing supplies. (20 NYCRR 528.13[3][i]). If used or consumed
directly and predominantly in the production of a commercial, such machinery, equipment and
supplies may be purchased exempt from statewide and local (except New York City) sales tax
provided Petitioner issues a valid Exempt Use Certificate (Form ST-121) to its vendor.

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Sales and use tax Regulation 528.13(c) defines the terms directly and predominantly:
(1)
a process:

"Directly means the machinery or equipment must, during the production phase of

(i) act upon or effect a change in material to form the product to be sold,
or
(ii)
have an active causal relationship in the production of the product to
be sold, . . . .
(2) Usage in activities collateral to the actual production process is not deemed to be used
directly in production.
(4)
Machinery or equipment is used predominantly in production, if over 50 percent of
its use is directly in the production phase of a process." (Emphasis added).
Under a principal-agent agreement Petitioner's client as the producer and end-user of the
commercial can claim neither resale nor production exemption. Therefore, Petitioner must pay the
appropriate sales tax when purchasing property to be delivered to the client or the advertising agency
within New York State.
Additionally, tax is due on the agent's purchases for its clients account of taxable services
employed within the State, unless such services are performed upon property which is to be sent,
without prior use in the State, to an out-of-state destination. The same tax consequences will arise
if the agency's employees furnish such services; in that instance the Petitioner as the vendor of the
services must collect any applicable sales taxes from its client.
To meet the criteria for establishing a principal-agent relationship the price charged the
principal for property or services purchased on its behalf must be the amount Petitioner paid its
suppliers. Petitioner's fee (including the profit margin) for providing either through its employees
or third parties the functions of purchasing, acquiring story rights, assembling talent and directing
the production of the advertising film is not subject to tax.
If, after producing an original negative film, Petitioner is engaged to convert the commercial
from film to video tape, its purchases of raw tape and third party services will qualify for the resale
exemption. The exemption does not extend to material not actually delivered to the client or to
services performed upon property used in the conversion process which is not incorporated in the
product to be sold. Petitioner's entire charge for the conversion will be subject to tax as the sale of
tangible personal property.
Further post production processing (e.g. film editing, videotape editing and dubbing, audio
recording and mixing) of a client's videotape constitutes services taxed under Section 1105(c)(2) of
the Tax Law.

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If a valid exemption certificate or direct payment permit is not supplied, Petitioner must
collect tax on the price of post production services at the rate in effect where the processed videotape
is delivered to the customer.
F.

The production and arrangement of fashion shows.

If no tangible personal property is transferred to the client or a third party in connection with
this service, Petitioner is not required to collect sales tax on its total charge to the client, since it is
providing a service not enumerated under Section 1105(c) of the Tax Law. Petitioner's purchases
or rentals of tangible personal property are subject to the applicable Statewide and local sales tax.
Generally, it should be noted that whenever an advertising firm renders to its client an invoice
which includes both charges for services excluded from tax and for the sale or servicing of personal
property, the taxable amount must be stated separately thereon, or the entire receipt will be subject
to tax. (20 NYCRR 533.2[a][1]; [b][2]).
Additionally, Section 1132(c) of the Tax Law (as amended by Chapter 765 of the Laws of
1985) provides that a vendor who makes a sale which is tax exempt, either as a sale for resale or
under the provisions of Section 1115 and 1116 of the Tax Law, must have a properly completed
supporting document in his possession no later than 90 days after the delivery of the property sold
or service rendered, or the sale will be deemed a taxable sale at retail.
Finally, Petitioner is referred to Department of Taxation and Finance Publication 842 (4/84)
"Sales Tax Information for Printers" which contains instructions and explanations pertinent to
advertising firms.

DATED: June 17, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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