When an advertising agency has printed folding advertisement cards made and places them in racks at hotels/motels for tourists to take, and charges restaurant clients a flat fee to be featured on the cards, is the agency selling a nontaxable advertising service or a taxable sale of tangible personal property?

Plain-English summary

An advertising agency planned to sell restaurants advertising placement on small, folding 7"x2.5" cards (a name/address/phone number panel, a small menu panel, and a map panel, folded down to 3"x2.5"). Rather than mail the cards to the restaurant clients, the agency itself would keep possession of the cards, placing them in racks at hotels and motels for tourists to pick up, and would be responsible for checking and restocking the racks. Each restaurant would pay a flat annual fee (about 25,000 cards per restaurant per year) for this placement.

The agency asked whether this was a nontaxable sale of an advertising service (in which case it shouldn't collect sales tax from the restaurant but should instead pay sales tax to its printer on the printing) or a taxable sale of tangible personal property (in which case it should collect tax from the restaurant and issue the printer a resale certificate). The Comptroller ruled it is not a nontaxable service — it's a sale of tangible personal property. Under Rule 3.321(c), governing advertising agencies acting as retailers, the agency is considered a retailer of the advertising cards. That means the agency should collect sales tax from the restaurant on its flat fee, and it is correct to issue its printer a resale certificate for the printing rather than paying tax to the printer directly.

What this means for you

Advertising agencies producing printed materials distributed at your own expense/control

If you retain possession and control of printed advertising items (like rack cards) rather than delivering them directly to your client, and you charge the client a fee for the exposure, Rule 3.321(c) can classify you as a retailer of the printed item itself — meaning you collect sales tax from your client and buy the printing tax-free with a resale certificate, the reverse of what many agencies assume for "advertising services."

Printers working with advertising agencies

If your agency client is acting as a retailer under this rule, expect to receive a resale certificate for print jobs like this rather than being asked to charge sales tax — confirm which role your client is playing before invoicing.

Accountants and tax professionals

This letter is a clean example of how the "who controls/possesses the item" fact pattern (agency keeps the cards, places and restocks them in third-party racks, rather than delivering to the client) pushes a transaction from "advertising service" into "retail sale of tangible personal property" under Rule 3.321(c).

Common questions

Q: Is advertising on printed cards or brochures always a nontaxable service in Texas?
A: Not necessarily. This letter treats it as a taxable sale of tangible personal property because the agency itself produces, possesses, and distributes the physical cards — Rule 3.321(c) classifies the agency as a retailer of the cards in this fact pattern.

Q: Who should charge and collect sales tax here — the printer or the advertising agency?
A: The advertising agency, on its flat fee charged to the restaurant client. The agency in turn issues its printer a resale certificate rather than paying tax on the printing.

Q: Does it matter that the cards are placed at third-party hotel/motel racks rather than delivered to the restaurant client?
A: Yes — the letter specifically notes the cards are not mailed to the client but remain in the agency's possession, since the agency is the one checking and restocking the racks, which is part of what supports treating the agency as the retailer.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.321(c) (advertising agencies acting as retailers)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200006406L

Original ruling text

June 12, 2000

From: Gilbert Zamora

To: "**"

Subject: Taxability Question

Dear **:

Thank you for your e-mail inquiry.

Tax Policy Division, I would like a written opinion letter concerning the
following taxability question.

I have a client who will be expanding its advertising business. They are
considering selling to various restaurants in their area an advertisement that
will be imprinted on small 7X2.5 inch cards. The cards will be folded so that
on the front side is their name, address and telephone number. In the middle
would be a small menu and then on the back would be a map. After it is folded
it will reduced to a 3x2.5 card. These cards will be placed in a rack at hotels
and motels for visiting tourist to pick up and take with them. The rack will
contain numerous cards for various restaurants in the area. These cards will
not be mailed to their client but remain in their possession, since they are
the ones who will be checking the racks and replenishing the stock when
necessary. The restaurant will pay a flat fee for the advertisement on the
cards at various hotels and motels for a period of one year. A stock of 25,000
cards per restaurant will usually last one year.

1. Would this be considered a sale of a non-taxable service (advertisement)?

Response: No.

2. Would this be considered a sale of tangible personal property?

Response: Yes. Your client is considered a retailer of the advertising cards.
See rule 3.321 (c), concerning advertising agencies acting as retailers.

3. If it is considered the sale of a non-taxable service, then my client should
   not collect sales taxes from the advertising restaurant but pay sales taxes to
   the printer on the printing of the cards. Is this statement correct?

Response: See response to question #1.

4. If it is considered the sale of tangible personal property, then my client
   should collect sales tax from the advertising restaurant and issue the printer
   a resale certificate. Is this statement correct?

Response: This is correct.

Tax rules can be accessed online at:
http://www.window.state.tx.us/taxinfo/rulendx/rulelist3.html#sst

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Tax Policy Division