Is an advertising agency's charge for a video tape produced for advertising taxable, or is it an exempt advertising service?

Plain-English summary

An advertising agency developed a promotional video for a client — handling concept, copy, and illustration, then subcontracting a production company to shoot and edit the master, and arranging duplicate copies, labels, and cassette boxes. The client later gave the video to buyers and their agents, and it may have run on cable. The agency asked whether its charge for the video tape is taxable.

New York's answer turns on the difference between an advertising service and a sale of tangible personal property. Consultation, developing an ad campaign, and placing ads with the media — without transferring property — are advertising services that § 1105(c)(1) excludes from tax. But making a commercial embodied in a physical form (a video tape, master, or negative) is producing tangible personal property, and its sale is taxable when the property is delivered to the customer in New York.

How the deal is arranged decides the result:

• Agency does concepts only; client hires the production company directly → the agency is selling an exempt advertising service, and the production company's charge to the client is taxable.
• Client buys both concept work and the video from the agency, with no option to buy the video from a third party → one single taxable transaction (the Crushing Enterprises rule); the whole charge is taxed.
• Client could buy the video from the agency or an unrelated third party, the two are not contingent on each other, and the charges are separately stated → only the video portion is taxed.

The opinion adds two refinements: post-production editing, dubbing, or mixing the agency performs is a taxable service under § 1105(c)(2); and materials the agency buys to create the ad and merely turns over to the client afterward are incidental to the exempt advertising service (the Laux Advertising rule) — but if the agency later transfers retained materials for an additional charge, that charge is taxable and no credit is allowed for tax the agency paid on its own purchase.

What this means for you

Advertising agencies

Your advice and campaign work are exempt, but the moment you sell the client a physical deliverable — a video tape, master, or negative made in or delivered to New York — you are making a taxable sale of tangible personal property. To keep the concept work exempt, let the client buy the tangible video separately (from you or a third party), do not make one purchase contingent on the other, and separately state the charges. Bundle them inseparably and New York taxes the entire bill.

Production companies and video vendors

When a client retains you directly to produce a commercial, your charge for the finished video is taxable and you must collect the tax. The agency's separate concept-only service does not shelter your production charge.

Accountants and tax professionals

The framework is § 1105(c)(1) (advertising service, exempt) versus § 1105(a) (sale of tangible personal property, taxable), with § 1105(c)(2) capturing agency post-production services. The bundling analysis (Crushing Enterprises) and the incidental-transfer rule (Laux Advertising) drive the edge cases — optionality and separate pricing are what preserve the exemption.

Common questions

Q: Is an ad agency's video tape charge taxable?
A: The agency's advertising service (concept, copy, campaign development) is exempt, but selling the video tape is a taxable sale of tangible personal property delivered in New York. Whether the whole charge is taxed depends on how the deal is structured.

Q: When is only part of the charge taxable?
A: When the client could buy the video from the agency or an unrelated third party, the video purchase is not contingent on buying the concept work (or vice versa), and the charges are separately stated — then only the portion for the video itself is taxed.

Q: When is the entire charge taxable?
A: When the client buys both the concept work and the video from the agency under an arrangement with no option to get the video from a third party, the Department treats it as a single taxable transaction.

Q: Is post-production work by the agency taxable?
A: Yes. Editing, dubbing, or mixing the commercial is a taxable service under § 1105(c)(2), and the agency must collect tax on those charges (separately stating taxable and exempt work).

Q: What about materials the agency buys and hands over to the client?
A: If turning them over is merely incidental to the advertising service, it does not defeat the exclusion. But if the agency later transfers retained materials for an additional charge, that charge is taxable, with no credit for tax the agency already paid on the purchase.

Q: Can another agency rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described. It illustrates the Department's reasoning, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(1) (information services; exclusion for services of advertising or other agents)
• Tax Law § 1105(c)(2) (tax on producing, fabricating, or processing tangible personal property furnished by the customer)
• 20 NYCRR § 527.3(b)(5) (advertising services; agency sales of tangible property for its own account are taxable)
• 20 NYCRR § 527.3(c)(2) (agency purchases of materials are taxable retail purchases)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (23)S
Sales Tax
March 31, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S921005A

On October 5, 1992 a Petition for Advisory Opinion was received from Enid Hoffman, Gary
Kahn & Co., 10 Esquire Road, New City, New York 10956.
The issue raised by Petitioner, Enid Hoffman, Gary Kahan & Co., is whether the charge for
a video tape produced for advertising purposes is subject to sales tax.
According to the factual situation presented by the Petitioner an advertising agency developed
a video for their client's use for advertising purposes. The video was eventually given by the
agency's client to buyers and their agents. The video may also have been used on cable television.
The agency provided conceptual and creative development of the video, including copy and
illustration. The agency sub-contracted with a production company to provide additional creative
services, including the actual videotaping and editing of the final master video.
The agency then arranged for duplicate copies of the video and for labels and cassette boxes
to be printed to hold the video.
Section l105(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 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."
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

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TSB-A-93 (23)S
Sales Tax
March 31, 1993
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.

Section 527.3(c)(2) of the Sales and Use Tax Regulations provides that "All purchases of
materials by an advertising agency for use in performing its services are purchases at retail subject
to the sales tax."
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, 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, Adv 0p, St Tx Comm, Sept. 17, 1984, TSB-A-84(22)S.

The creation of a television commercial is considered the production of tangible personal
property. Therefore, sales of television 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.

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Sales Tax
March 31, 1993
If the advertising agency's involvement in the production of the commercial is limited to the
development of concepts without the transfer of any personal property and the client directly retains
the production company to actually produce the commercial, then the agency is merely selling an
advertising service which is not subject to sales tax. 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 sales tax.
In a transaction where the client purchases both the development of concepts and the video
itself from the advertising agency the charges to the client will be considered as receipts from a
single transaction in which the transfer of title to and possession of tangible personal property occurs,
if such tangible personal property is transferred to the client pursuant to a contract or agreement
whereby the client does not have the option of electing to purchase the video tape from the
advertising agency or from an unrelated third party. Crushing Enterprises Inc., Adv Op Comm T&F,
October 10, 1990, TSB-A-90(30.1)S.
In a transaction where the client purchases both the development of concepts and the video
itself from the advertising agency pursuant to a contract or agreement whereby the client has the
option of purchasing the video from the advertising agency or from an unrelated third party and
whereby the purchase of the video by the client from the advertising agency is not contingent upon
the purchase of the development of concepts from the agency or vice versa, and whereby the charges
are separately stated, only the portion of the charges which are applicable to the video itself will be
considered receipts from the sale of tangible personal property and subject to the tax imposed under
Section l105(a) of the Tax Law. Crushing Enterprises Inc., Adv Op Comm T&F, October 10, 1990,
TSB-A-90(30.1)S.
If after the production of the commercial by the production company the advertising agency
makes changes to the commercial (e.g. editing, dubbing or mixing) then the agency is engaged in a
service taxable under section 1105(c)(2) of the Tax Law and must collect tax on its charges for all
such services. If the agency renders both exempt and taxable services to its client, it must collect
sales and use tax on its entire charge to its client unless it separately states the taxable and exempt
charges on its billings to its clients.
If, in conjunction with the services discussed above, material purchased by the advertising
agency 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 Section
1105(c)(1) of the Tax Law. See Matter of Laux Advertising v. State Tax Commission, 67 AD2d
1066.

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Sales Tax
March 31, 1993
However, in the event that materials retained by the advertising agency after completion of
a contract is later transferred to the customer for an additional charge, such receipt is subject to tax
and the agency may not claim a credit for tax paid on its purchase of the property.

DATED: March 31, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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