Are a creative advertising firm's services taxable, and does it owe tax on the materials and production work it buys to make ads and commercials?

Plain-English summary

William J. Young, doing business as Young Ideas, is a one-person creative advertising firm. He works mostly on monthly retainers, developing and placing magazine and newspaper ads, and occasionally helps develop TV or radio commercials (developing the concept, retaining a production company, reviewing the result). He asked whether his services are taxable.

The Department gave a layered answer.

• Advertising services aren't taxable. Consultation, development of advertising campaigns, and placement of ads with the media are excluded from tax (Tax Law § 1105(c)(1); 20 NYCRR § 527.3(b)(5)). So Young's total charge to clients for his advertising services is not taxable, whether or not costs are itemized.
• But the firm pays tax on what it buys — unless it's a true agent. An advertising firm's purchases of materials and taxable services to perform its work are retail purchases on which the firm pays tax (§ 527.3(c)(2)). A firm is treated as its client's agent (so the client bears the tax) only if all three conditions are met: it discloses the client to the supplier; it keeps written evidence of agency obtained before acquiring the property; and it bills the client (apart from its fee) exactly what the supplier charged, without using the property for its own account (William Esty Co., TSB-A-84(22)S). Under a genuine agency, the firm must also charge the client tax on the value added by agency employees' labor (§ 1105(c)(2)); separately stated commissions/fees are exempt.
• Ads in publications that are for sale. If no agency contract is in force, the firm may claim the manufacturing exemption (§ 1115(a)(12)) on production equipment and supplies (typography, artwork, film, offset plates, tools) by giving its vendor an Exempt Use Certificate (Form ST-121) obtained from the client.
• Radio/TV commercials. Concept development plus retaining a production company is exempt advertising (and the production company charges the client tax on the actual production). But if the firm changes the finished commercial (editing, dubbing, mixing), that is taxable production under § 1105(c)(2); and a commercial delivered in tangible form (negative film, videotape, soundtrack) in New York is taxable tangible personal property. If the firm renders both exempt and taxable services, it must tax the entire charge unless the taxable and exempt parts are separately stated.
• Incidental materials vs. later sales. Turning materials created for the ad over to the client afterward is incidental to the advertising service and doesn't defeat the exclusion (Laux Advertising). But later selling retained artwork to the client for a separate charge is taxable (and no credit for the tax the firm paid on that property).

What this means for you

Your creative and placement work is exempt — your inputs usually aren't. New York doesn't tax the advertising service itself (concepting, campaign development, media placement), so your fee to the client is exempt. But you're generally the taxable consumer of the materials and production services you buy to make the ads, unless you set up a genuine agency.

True agency is strict — meet every condition. To push the tax to the client as principal, you must disclose the client to the supplier, have written agency evidence in hand before you buy, and re-bill the client at cost (your fee stated separately). Charging the same item to more than one client, or using it for your own account, breaks the agency.

Commercials have moving parts. Pure concept-and-hire-a-producer is exempt; editing/dubbing/mixing a finished spot is taxable production; and a commercial delivered on film/tape in New York is taxable tangible property. If you mix exempt and taxable work on one bill, separately state them or the whole charge is taxed.

Common questions

Q: Is my fee for developing and placing ads taxable?
A: No. Advertising consultation, campaign development, and media placement are excluded under § 1105(c)(1). Your total charge for those services isn't taxable.

Q: Do I owe tax on the artwork, film, and production I buy to make the ads?
A: Usually yes — you're the consumer of those inputs (§ 527.3(c)(2)) — unless you meet all three principal-agent conditions (disclose the client, written agency evidence before purchase, re-bill at cost). For ads in for-sale publications, you may instead use the § 1115(a)(12) manufacturing exemption with an ST-121.

Q: I develop a commercial concept and hire a production company. Taxable?
A: The concept/placement is exempt advertising. But if you then edit, dub, or mix the finished commercial, that's taxable production (§ 1105(c)(2)); and a commercial delivered on film/tape in New York is taxable tangible property.

Citations and references

Statute, regulation, and case law:

• Tax Law § 1105(c)(1) — taxes information services but excludes the services of advertising or other agents acting in a representative capacity
• Tax Law § 1105(c)(2) — taxes producing, fabricating, processing, printing, or imprinting tangible personal property furnished by the customer
• Tax Law § 1115(a)(12) — manufacturing exemption available on production equipment/supplies for ads placed in publications that are for sale
• 20 NYCRR § 527.3 — advertising services (§ 527.3(b)(5)); an agency's purchases are retail purchases (§ 527.3(c)(2)); the three principal-agent conditions
• William Esty Company, TSB-A-84(22)S (Sept. 17, 1984); Tromson Monroe Advertising, TSB-A-83(12)S (Mar. 3, 1983) — agency conditions and consumer treatment when no agency exists
• Matter of Laux Advertising v. State Tax Commission, 67 AD2d 1066 — incidental transfer of created materials to the client doesn't negate the advertising-service exclusion
• Forms referenced: ST-121 (Exempt Use Certificate); ST-119.1 (Exempt Organization Certificate)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_57s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (57)S
Sales Tax
November 7, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880623B

On June 23, 1988, we received a Petition for Advisory Opinion from William J. Young, 7192
West Main Street, Lima, New York 14485.
The issue raised is whether the creative advertising services rendered by Petitioner are subject
to sales tax.
Petitioner operates a sole proprietorship under the name of Young Ideas. At any given time,
Petitioner has a limited number of clients. Most clients are on a monthly retainer. As part of the
retainer agreement, Petitioner provides creative advertising services, primarily in the development
and placement of magazine and newspaper advertisements.
In the past, Petitioner would occasionally assist in the development of television or radio
commercials for a client. Petitioner would develop the concept and would obtain approval from the
client for the concept. He would also obtain approval from the client for the anticipated costs.
Petitioner would then arrange with a production company to film or tape the commercial. He would
usually attend the filming or taping as an observer. Petitioner would have the right to request
changes or modifications if he did not like the finished product. Before the commercials are aired,
Petitioner would review them with the client and make any changes that the client requested.
Petitioner would bill the client for his retainer and the television or radio air time charges.
All production charges would be billed directly to the client.
Section 1105(a) imposes a tax on receipts from every retail sale of tangible personal property,
except as otherwise provided.
Section 1105(c)(1) of the Tax Law imposes a tax on the services 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(c)(2) of the Tax Law imposes a tax on 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.

TP-9 (9/88)

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November 7, 1988
The Section 527.3(b)(5) of the Sales and Use Tax Regulations states in part, 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 artwork 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 artwork 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.

All purchases of materials [or services taxed under section 1105 of the Tax Law] 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:

A.

1.

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

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 Esty Company, State Tax Commission Advisory Opinion, Sept. 17,
1984, TSB-A-84(22)S.

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.

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Sales Tax
November 7, 1988
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 client's 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 Esty 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 "A" 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.
B.

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 Services
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.

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November 7, 1988
C.

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 in New York State.
If Petitioner's involvement in the production of a commercial is limited to the development
of concepts and the retention of a production company to actually produce the commercial, then
Petitioner is merely selling an advertising service which is not subject to tax. Of course, the amount
billed by the production company directly to the client for the production of the commercial is a
taxable charge on which the production company must collect tax.
However, if after the production of the commercial by the production company Petitioner
makes changes to the commercial (e.g. editing, dubbing or mixing) then Petitioner is engaged in a
service taxable under section 1105(c)(2) of the Tax Law and must collect tax on his charges for all
such services. If Petitioner renders both exempt and taxable services to his client, he must collect
sales and use tax on his entire charge to his client unless he separately states the taxable and exempt
charges on his billings to his clients.
If, in conjunction with the services discussed under A. and B. 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.
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: November 7, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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