Does an advertising agency charge sales tax on its coupon-booklet fees, and does it pay tax on the printing, mailing, and materials it buys?

Plain-English summary

Richard Martin Associates, Inc. provides advertising services to merchant and small-retail clients: for a flat fee, it designs and distributes a discount-coupon booklet. It consults on the distribution area and coupon design, creates the artwork and layout, and hires a subcontractor to print the coupons and include them in a booklet that a mailing service mails to thousands of residential recipients free of charge. The client gets no tangible property except a proof with no commercial value (returned or destroyed); the agency keeps all the films, materials, artwork, and ownership rights. The agency asked (1) whether it must collect tax on its charges to clients and (2) whether it must pay tax to its printer and others.

The Department answered in four parts.

• The fees to clients are a nontaxable advertising service. Providing advertisements and packaging them into a booklet for distribution is an advertising service, not a sale of tangible property. The receipts are excluded from sales tax under § 1105(c)(1) and § 527.3(b)(5) (following Cooperman, Levitt and Winikoff, P.C., TSB-A-90(14)S).
• The agency is the consumer of its inputs. Because the agency performs a service and does not transfer title/possession of tangible property to clients, its purchases of mailing lists, booklets, mechanicals, artwork, and the printer/mailer's services (including any tangible property from the printer/mailer) are not purchases for resale. They are subject to New York sales or use tax where the delivery or service occurs in New York. Exception: separately stated charges for folding, inserting, sealing, affixing stamps, metering, mailing, and postage are not taxable.
• Out-of-state delivery of the inputs isn't taxed. If the mailing lists, cards, artwork, and mechanicals are delivered directly to an out-of-state printer/mailer, delivery is deemed to occur outside New York, and the agency owes no New York tax on those purchases.
• But distributing the booklets in New York is a taxable "use." Because the finished advertising packages are delivered to potential customers within New York, the agency is distributing promotional materials in New York — a "use" under § 1101(b)(7). So the agency owes use tax on the total cost of providing the advertising package, at the New York State and local rate for the localities where the recipients are located.

What this means for you

An advertising agency's service fees are excluded from sales tax

The core of the advertising exclusion is that the agency sells a service — consultation, campaign development, creative work, placement — not tangible goods. So the agency doesn't charge its clients sales tax on the service fee, even one that results in printed coupons reaching consumers.

But the agency pays tax on everything it consumes to do the job

The flip side is unavoidable: because the agency is providing a service, it is the end consumer of the mailing lists, artwork, mechanicals, printing, and other inputs it buys, and it owes sales or use tax on them. It cannot buy those inputs for resale. The narrow relief is that separately stated mailing-function charges and postage (folding, inserting, metering, mailing) aren't taxed.

In-state distribution triggers use tax on the whole package cost

This is the trap that catches many direct-mail advertisers. Even if you route materials through an out-of-state printer to avoid tax on the inputs, delivering the finished promotional pieces to New York recipients is a taxable "use" in New York. The tax is measured on the total cost of the advertising package and applied at the rate where the recipients are, not where the agency sits.

Where recipients live sets the local rate

Because the taxable use happens where the booklets land, an agency mailing across multiple New York localities must apply each locality's rate to the packages delivered there. Track your distribution by location.

Common questions

Q: Does an advertising agency charge clients sales tax on a coupon-booklet campaign?
A: No. The fees are a nontaxable advertising service excluded under § 1105(c)(1) and § 527.3(b)(5).

Q: Can the agency buy the printing and materials for resale, tax-free?
A: No. As the provider of a service, the agency is the consumer of those inputs and owes sales or use tax on them (except separately stated mailing charges and postage).

Q: Can I avoid the tax by using an out-of-state printer?
A: Only on the inputs delivered out of state. Once the finished booklets are distributed to New York recipients, that in-state distribution is a taxable "use," and use tax is due on the total cost of the package.

Q: Which local tax rate applies to the distribution?
A: The rate for the New York localities where the recipients of the booklets are located.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(1) — tax on information services, excluding the services of advertising or other agents
• Tax Law § 1101(b)(7) — definition of "use"
• 20 NYCRR § 527.3(b)(5) — exclusion for the services of advertising agencies acting in a representative capacity
• 20 NYCRR § 527.3(c) — purchases of materials by an advertising agency for use in its services are taxable purchases at retail

Cited authority:

• Cooperman, Levitt and Winikoff, P.C., Adv. Op. Comm. T & F, March 21, 1990, TSB-A-90(14)S

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_28s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90 (28)S
Sales Tax
May 29, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900418A

On April 25, 1990 a Petition for Advisory Opinion was received from Richard Martin
Associates, Inc., 53 Canterbury Road, Rochester, New York 14607.
The issues raised by Petitioner, Richard Martin Associates, Inc., are whether it must collect
sales tax on charges paid by merchants who advertise in Petitioner's discount coupon booklet and
whether it must pay sales tax to the printer and others who design and print the booklet.
Petitioner is in the business of providing advertising services to its clients. The clients are
merchants and small retail businesses. The clients pay Petitioner a flat fee to design and distribute
a discount coupon for the client's goods and services. Petitioner consults with the client as to areas
of distribution, the design of the coupon, and the creative aspects of the coupon. After Petitioner and
the client agree on these issues, Petitioner creates the artwork and layout and hires a subcontractor
to print the coupon and include it in the coupon booklet. Petitioner's subcontractor delivers the
booklets to a mailing service, which in turn delivers them to the post office for mailing within the
specified distribution area. The booklets are mailed to thousands of recipients, typically at residential
addresses, who pay no charge. The client will receive a proof of the coupon for its review and
approval before it is mass produced. The proof has no commercial value and is either destroyed by
the client or returned to Petitioner. Petitioner retains all of the films, printing materials, and the like
used in making the coupon and the booklet. Aside from the proof, the client receives no tangible
personal property from Petitioner. Petitioner retains ownership rights to the coupons' layout, artwork
and design.
Section 1105 of the Tax Law states in relevant part:
. . .there is hereby imposed and there shall be paid a tax. . .upon:
(a) The receipts from every retail sale of tangible personal
property. . .
(c) 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

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TSB-A-90 (28)S
Sales Tax
May 29, 1990

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)(l) 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)(l) is not a purchase at retail and is exempt from the sales
tax.
In the instant transaction Petitioner's business activities, which consist of providing
advertisements for a client and including such advertisements in a booklet containing similar
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)(l) of the Tax Law and
Section 527.3(b)(5) of the Sales and Use Tax Regulations. (Cooperman, Levitt and Winikoff, P.C.,
Adv Op Comm T & F, March 21, 1990, TSB-A-(90)14S.)
Since Petitioner is performing an advertising service and not making sales of tangible
personal property or services whereby title and possession are transferred to Petitioner's clients,
Petitioner's purchases of mailing lists, booklets, mechanicals, artwork and the printer/mailer services
including any tangible personal property sold to Petitioner by the printer/mailer, are not considered
to be purchases for resale or purchases of physical component parts of tangible personal property for
resale. Accordingly, Petitioner's purchases of such items will be subject to New York State and Local
Sales or Use Tax where the delivery or service occurs within New York State. However, the
printer/mailer charges to Petitioner 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 Petitioner.
(Cooperman, Levitt and Winikoff, P.C., supra).
In transactions where the mailing lists, cards, artwork and mechanicals purchased by
Petitioner are delivered directly to an out-of-state printer/mailer, delivery is deemed to occur outside
New York State. In those instances, Petitioner will not be liable for New York State and Local Sales
Tax on such purchases.

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TSB-A-90 (28)S
Sales Tax
May 29, 1990

However, the advertising booklets 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, Petitioner 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, Petitioner 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 at the New York State and local sales and use tax rate
in effect for the locality or localities in New York State where the potential customers who are the
recipients of the booklets are located. (Cooperman, Levitt and Winikoff, P.C., supra).

DATED: May 29, 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.