Is a cooperative direct-mail advertising program a nontaxable advertising service or a taxable sale of property, and who owes use tax on the mailed materials?

Plain-English summary

A law firm (Cooperman, Levitt and Winikoff, P.C.) asked, on behalf of its client ("Company"), how sales and use tax applies to Company's cooperative direct-mail advertising program. Company produces advertising post cards for its clients, packages each client's card together with cards for other clients, and hires one or more out-of-state printer/mailers to print, package, and deposit the packages in the mail for delivery to potential customers in a chosen locality. Company charges each client a flat fee based on the number of cards distributed (plus extra for design help or color), and it rents mailing lists and buys artwork/mechanicals as needed.

The Department reached a layered result.

• The fees are a nontaxable advertising service. Company's activity — producing an ad card and including it in a co-op mailing to reach potential customers — is an advertising service, not a sale of tangible personal property to clients. The receipts are excluded from sales tax under Tax Law § 1105(c)(1) and 20 NYCRR § 527.3(b)(5).
• But Company is the consumer of its materials. Because Company provides a service (rather than reselling property), its purchases of mailing lists, cards, artwork, mechanicals, and printer/mailer services are purchases at retail. They are taxable where delivered in New York, but not taxable when the items are delivered directly to the out-of-state printer/mailer (delivery deemed to occur outside the state).
• Distributing the packages in New York is a taxable "use." The finished advertising packages are "promotional materials" under § 1101(b)(12), and distributing them to customers in New York is a taxable use under § 1101(b)(7) (as amended by Ch. 61, L. 1989). So Company owes use tax on the total cost of providing the package — artwork, mechanicals, mailing lists, and printer/mailer charges (including any property) — at the rate where the recipients are located. Separately stated charges for folding, inserting, sealing, metering, mailing, and postage are not taxed.
• Out-of-state recipients are exempt. Promotional materials mailed from New York to customers outside the state for use outside the state are exempt under § 1115(n) (and related mailing-list services along with them).
• Agency contracts don't change the result. Where Company contracts as its clients' agent, it is still liable for the tax on these transactions.

What this means for you

An advertising service isn't a sale — but you still pay tax as the consumer

This opinion is the anchor of a recurring New York pattern (see the later TSB-A-90(28)S on coupon booklets and TSB-A-90(26)S on catalogues, both citing this ruling). When you provide advertising services, your fees to clients aren't taxable. But you are the consumer of everything you buy to perform the service, and — since the 1989 amendments — distributing promotional materials to New York recipients is itself a taxable "use." You owe use tax on the whole cost of the in-state distribution.

Where the reader is sets the tax; out-of-state mailings are exempt

Tax is measured by the rate where the recipients are located, and packages mailed to customers outside New York for use outside the state are exempt under § 1115(n). Track your mailing by destination, because the tax follows the reader, not your office.

Separately state the mechanical mailing charges and postage

Folding, inserting, sealing, metering, mailing, and postage escape tax only if separately stated on the printer/mailer's bill to you. Bundled into a lump charge, they get pulled into the taxable cost.

Common questions

Q: Are our advertising fees to clients taxable?
A: No. Producing ads and placing them in a co-op mailing is an advertising service excluded from tax under § 1105(c)(1) and 20 NYCRR § 527.3(b)(5).

Q: Then why do we owe any tax?
A: Because you're the consumer of the materials, and distributing promotional materials to New York recipients is a taxable "use" under §§ 1101(b)(7) and (b)(12). You owe use tax on the total cost of the in-state distribution.

Q: What about packages mailed to people outside New York?
A: Those promotional materials are exempt under § 1115(n), along with related mailing-list services.

Q: Can the printer/mailer's mailing and postage charges avoid tax?
A: Yes, if they're separately stated — folding, inserting, mailing, metering, and postage are not taxed when itemized separately.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(1) — tax on information/advertising services; exclusion for advertising agents
• Tax Law § 1101(b)(7) — "use," including the distribution of promotional materials (as amended by Ch. 61, L. 1989)
• Tax Law § 1101(b)(12) — definition of "promotional materials" (added by Ch. 61, L. 1989)
• Tax Law § 1115(n) — exemption for promotional materials mailed from New York to customers outside the state
• 20 NYCRR § 525.2 — sales tax as a transactions/destination/consumer tax
• 20 NYCRR § 527.3(b)(5), (c) — advertising-agency exclusion; agency as consumer of materials used in its services

Cited authority:

• Bennett Brothers, Inc. v. State Tax Commission, 62 AD2d 614 (1978) — vendor lacked "real control" over catalogs shipped by an out-of-state printer
• D.H. Holmes Company, Ltd. v. McNamara, 486 US 24 — use tax upheld where vendor ordered, paid for, and directed distribution of catalogs

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(14)S
Sales Tax
March 21, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890921B

On September 21, 1989 a Petition for Advisory Opinion was received from Cooperman,
Levitt and Winikoff, P.C., 800 Third Avenue, New York, New York 10022.
The issue raised by Petitioner, Cooperman, Levitt and Winikoff, P.C., is the applicability of
New York State and Local Sales and Use Tax to the co-operative, direct mail advertising program
offered by Petitioner's client.
The instant transaction involves a direct mail advertising program offered by Petitioner's
client (hereinafter referred to as "Company"), a business entity located within New York. Company
obtains clients who desire to have a post card (hereinafter referred to as "card") produced containing
an advertisement of the client's product or service and to have such card included in a package
containing similar cards of other clients which is mailed to potential customers within a particular
locality. The card also serves as a form for requesting information concerning, or for ordering, the
client's product or service. The package in which the cards are mailed contains the name of
Company.
Under its standard contractual agreements with clients, Company arranges for the printing
of a minimum number of cards and the distribution thereof. Company engages one or more
out-of-state printer/mailers which, using supplies purchased directly by them, print the cards,
package the cards, and deposit the packages in the United States mail at a location outside New York
State for mailing to potential customers within a particular geographic locality.
Generally, Company's clients provide the design for the advertisement which is to appear on
the clients' cards. In all instances where the client does not provide the artwork or mechanical,
Company will purchase such items from a third party.
The artwork or mechanicals are either delivered directly to the out-of-state printer/mailer by
the producers thereof or are delivered to Company for subsequent delivery to the out-of-state
printer/mailers.
Company rents mailing lists from third parties for the purpose of obtaining the names and
addresses to be used by the printer/mailers when mailing the packages of cards.
Each contract with a client relates to a particular locality. If the agreement calls for a mailing
to New York City, all of the client's cards which are produced and distributed under that contract
would be mailed to New York City addresses.
TP-9 (9/88)

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Company's charge to a client is generally a flat amount based upon the number of cards to
be distributed for such client. A separate charge is added if Company aids in the design of the
artwork or if the advertising is to be in color.
Section 525.2 of the New York State Sales and Use Tax Regulations states, in relevant part:
(a)...
(2)
The sales tax is a "transactions tax," liability for the
tax occurring at the time of the transaction. Generally speaking, the
taxed transaction is an act resulting in the receipt of consideration for
the transfer of title, or possession or both to property or rendition of
services from one person to another. The time or method of payment
is immaterial, since the tax becomes due at the time of transfer of
property or rendition of service.
(3)
The sales tax is a "destination tax," that is, the point of
delivery or point at which possession is transferred by the vendor to
the purchaser or designee controls both the tax incident and the tax
rate...
(4)
The sales tax is a "consumer tax," that is, the tax is
imposed on the retail sale of tangible personal property and certain
services and is collected from the person who purchases at retail-the
consumer. The consumer cannot shift the liability for payment of the
tax to another person nor otherwise relieve himself of such liability,
although the vendor is personally liable for the tax he was responsible
for collecting.
(b)
The compensating use tax is imposed on the use within the State of
tangible personal property and services which would have been subject to sales tax
if purchased in this State. It is designed to equalize the tax burden and to make the
purchaser of property or services liable for a tax, measured by the purchase price,
where, for various reasons, the sales tax was not paid at the time of purchase. It
protects vendors located in the State from the competition of out-of-state vendors
who are not required to collect tax and makes it unattractive for New York
purchasers to purchase out of the State solely for tax avoidance purposes.
Section 1105 of the Tax Law states in relevant part:
... there is hereby imposed and there shall be paid a tax ... upon:

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(a)
(c)

The receipts from every retail sale of tangible personal property ...
The receipts from every sale, except for resale, of the following services:

(1)...but... excluding the services of Advertising or other agents...
Section 527(3) of the Sales and Use Tax Regulations states in relevant part:
(b)

Exclusions

(5)
Fees for the services of advertising agencies or other persons acting in a
representative capacity are excluded from the tax. 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.
(c)

Purchases by persons providing ... advertising service.

(2)
All purchases of materials by an advertising agency for use in performing its
services are purchases at retail subject to the sales tax.
(3)
The purchase of a service subject to tax under section 1105(c)(1) of the Tax
Law by a vendor who will resell that service as such or as a part of a service also
subject to tax under section 1105(c)(1) is not a purchase at retail and is exempt from
the sales tax.
Section 1101(b)(7) of the Tax Law, amended by Chapter 61, Laws of 1989, states as follows:
Use. The exercise of any right or power over tangible personal property by the
purchaser thereof and includes, but is not limited to, the receiving, storage or any
keeping or retention for any length of time, withdrawal from storage, any installation,
any affixation to real or personal property, or any consumption of such property.
Without limiting the foregoing, use also shall include the distribution of only tangible
personal property, such as promotional materials.
Section 1101(b)(12) of the Tax Law, added by Chapter 61, Laws of 1989, states as follows:
Promotional Materials. Any advertising literature, other related tangible personal
property (whether or not personalized by the recipient's name or other information
uniquely related to such person) and envelopes used exclusively to deliver the same.
Such other related tangible personal property includes, but is not limited to, free gifts,

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complimentary maps or other items given to travel club members, applications, order
forms and return envelopes with respect to such advertising literature, annual reports,
promotional displays and Cheshire labels but does not include invoices, statements
and the like.
Section 1115(n) of the Tax Law, added by Chapter 61, Laws of 1989, states as follows:
(1)
Promotional materials mailed, shipped or otherwise distributed from a point
within the state, by or on behalf of vendors or other persons to their customers or
prospective customers located outside this state for use outside this state shall be
exempt from the tax on retail sales imposed under subdivision (a) of section eleven
hundred five and the compensating use tax imposed under section eleven hundred ten
of this article.
(2)
Services otherwise taxable under paragraph one or two of subdivision (c) of
section eleven hundred five of this article relating to mailing lists or activities directly
in conjunction with mailing lists shall be exempt from tax under this article if such
services are performed on or directly in conjunction with promotional materials
exempt under paragraph one of this subdivision.
Since the inception of the sales tax, it has been recognized that New York vendors are at a
competitive disadvantage if potential New York customers can avoid the tax merely by purchasing
from out-of-state vendors, who could not be required to collect the tax. Accordingly, a sales tax is
always accompanied by a compensating use tax. Thus, a New York business purchasing goods from
an out-of-state vendor for use in New York is required to report such purchases on its sales and use
tax return and pay the appropriate use tax directly to the State.
However, in Bennett Brothers, Inc. v. State Tax Commission, (62 AD2d 614 (1978)) the
court held that a New York Vendor lacked "real control" over a shipment of catalogs produced by
an out-of-state printer once the printer deposited the catalogs with a common carrier outside the State
for delivery to the vendor's customers in New York. Thus the vendor was not subject to the
compensating use tax on the use of catalogs in this State.
In D.H. Holmes Company, Ltd. v. McNamara (486 US 24, 100 LEd 2d 21) the U.S. Supreme
Court in addressing the case of a Louisiana vendor seeking to avoid the use tax in that state in a
situation like that in Bennett Brothers, Inc., held that the vendor's contention that it lacked sufficient
control over the catalogs distribution in Louisiana to subject it to the use tax verged on the
nonsensical. The court pointed out that the vendor ordered and paid for the catalogs and supplied the
list of customers to whom the catalogs were sent. The vendor admitted that it initiated the

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distribution to improve its sales and name recognition among Louisiana residents. The distribution
of catalogs to a large number of in-state customers was directly aimed at expanding and enhancing
its Louisiana business.
Petitioner's contention that Company is selling tangible personal property to its clients and
not distributing promotional materials within New York State, thereby not incurring a New York
State and Local Sales or Use Tax liability is erroneous.
In the instant transaction Company's business activities which consist of providing a post card
advertisement for a client and including such advertisement in a package containing similar post card
advertisements for other clients, for distribution to potential customers within New York State are
considered to result in the performance of an advertising service and not the sale of tangible personal
property. The receipts from the charges to clients for such advertising service are excluded from New
York State and Local Sales Tax under the provisions of Section 1105(c)(1) of the Tax Law and
Section 527(3)(b)(5) of the Sales and Use Tax Regulations.
Whereas Company is performing an advertising service and not making sales of tangible
personal property or services whereby title and possession are transferred to Company's clients,
Company's purchases of mailing lists, cards, mechanicals and artwork are not considered to be
purchases for resale or purchases of physical component parts of tangible personal property for
resale. Accordingly, Company's purchases of such items will be subject to New York State and Local
Sales or Use Tax where delivery occurs within New York State.
In transactions where the mailing lists, cards, artwork and mechanicals purchased by
Company are delivered directly to the out-of-state printer/mailer, delivery is deemed to occur outside
New York State. In those instances, Company will not be liable for New York State and Local Sales
Tax on such purchases.
However, the advertising packages are deemed to be promotional materials as defined
under Section 1101(b)(12) of the Tax Law. When such advertising packages are delivered to
potential customers within New York State, Company will be considered to be distributing
promotional materials within New York State and such distribution will constitute use of such items
within New York State under the provisions of Section 1101(b)(7) of the Tax Law.
Accordingly, Company will be liable for New York State and Local Sales or Use Tax based
on the total costs incurred in providing the advertising package to its clients and on the New York
State and Local Sales and Use Tax rate in effect for the locality or localities in which the potential
customers are located. The total costs incurred will include, but not be limited to, Company's cost
of the artwork, mechanicals, mailing lists and the printer/mailer services including any tangible
personal property sold to Company by the printer/mailer. However, the printer/mailer charges to

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Company for the services of folding written or printed matter for insertion into envelopes, inserting,
sealing, affixing stamps, metering and mailing and the cost of postage will not be subject to the tax
if such charges are separately stated on the billing rendered to Company.
In those instances where Company enters into "agency" contracts with clients, Company will
be considered to be acting on behalf of such clients when entering into any of the transactions
enumerated above and as agent for such clients, Company will also be liable for Sales and Use Tax
on such transactions as discussed above.

DATED: March 21, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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