Which advertising-agency charges were taxable when the agency sold finished art, commissions, placement work, preliminary concepts, royalties, and photographs?
Apply this to your situation
This page answers the general question as of 1986. Ezel answers yours, under current Texas tax law, with citations.
Plain-English summary
Assuming the advertising agency was the seller, the Comptroller separated taxable sales of finished creative work from nontaxable preliminary or stand-alone services.
Charges forming part of finished art were taxable, including a service charge on purchased copy. A sale to another agency could be made without collecting tax if that agency provided a resale certificate. Printing commissions were taxable along with the comprehensive, mechanical, and printing charges. An illustration or art-direction concept became taxable when the client approved it, because it was then finished art. A photographer's charge for a photo and one-time use was also taxable.
By contrast, a separately documented fee for placing an ad was not taxable. Preliminary art rejected or not yet approved by the client was not taxable, although the agency owed tax on supplies used to produce it. Meeting time during the preliminary-art stage was not taxable. Time, postage, and long-distance charges connected with a news release were not taxable. Royalties on artwork used for bronzes were not taxable, although the retail sale of the bronzes was taxable to the agency's client.
Common questions
Was a service charge for copy used in finished art taxable? Yes. It was part of the cost of the finished art.
Could work sold to another advertising agency be treated as a resale? Yes, if the other agency provided a resale certificate.
Were ad-placement fees taxable? No, if the records clearly showed what the fee was for.
When was concept or illustration work taxable? When the client approved the concept, making it finished art. Unapproved preliminary art was not taxable if properly documented.
Were printing commissions taxable? Yes.
Were royalties taxable? The artwork royalties were not, but the client's retail sales of the bronzes were taxable.
Were news-release time, postage, and calls taxable? No, when connected with the news release.
Source
- STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
- Opinion: https://star.comptroller.texas.gov/view/8608L0766A10
Original ruling text
August 21, 1986
Dear ***:
I have received your letter of August 11, 1986, concerning tax on
products and services you provide as an advertising agency.
I have restated your questions below and all responses are based on the
assumption that the agency is the seller.
Situation #1: We design and produce mechanicals for an ad to be placed
in the newspaper. We retain ownership of the finished art.
Design time - $***
Mechanical time - $**
Copy:
Actual cost - $*
Our service charge - $*
Material cost - $****
Amount taxable $***. We do not pay tax on the copy or the materials
because it is for resale. Question Is the service charge for the copy
($**) not taxable? and therefore the total taxable would be $****?
Response: The service charge is part of the cost of the finished art to
the customer and subject to tax.
Situation #2: We produce the ad as outlined in Situation #1; however, we
do it for another agency who then adds their commission and sells it to a
client. Charge no sales tax because it is for resale.
Response: If the other agency provides you with a resale certificate,
you will not collect tax.
Situation #3: We take responsibility of placing the ad in the newspaper
and receive a placement fee of $***. The $***** is not taxable.
Response: (Correct, this fee is not subject to tax. Please the sure
your records clearly reflect what the fee is for.
Situation #4: Three logos are designed for a client and comprehensives
are presented for their approval. Cost $***. Client does not like
any designs. Not taxable because it is "preliminary art."
Response: No tax is due on charges for preliminary art. You should pay
tax on any supplies used to produce the art and your records should clearly
reflect the charge is for preliminary art.
Situation #5: Three logos are designed for a client and comprehensives
are presented for their approval. Cost $***. Client likes one design.
Mechanicals are produced for a paper system at an additional cost of $**.
Letterhead and envelopes are printed at an actual cost of $*. We
add a commission of $* for printing. The items that sales tax applies
are: $* comprehensive cost, $* mechanicals, $*
for printing. The commission of $**** is not taxable.
Response: Tax is also due on the commission.
Situation #6: An illustration is produced for an ad. Client runs out of
money and can not pay to produce the ad. Cost of illustration $***.
Not taxable because it is preliminary art." If used in an ad it is taxed.
Response: If the client has approved the concept, this illustration produced
is finished art and subject to tax.
Situation #7: Client is promoting a running race. We design and print a
poster (all charges taxable). We write and mail a views release and follow up
with phone calls. We charge for
- Time
- Postage
- Long distance phone calls.
What charges does sales tax apply?
Response: If these charges are in connection with the news release, they
are not subject to tax.
Situation #8: We attend meetings with the client to discuss their
advertising plans and needs. A fee of $*** per hour is assessed for
our meeting time. Is the fee taxable?
Response: This fee is not taxable during the preliminary art stage.
Situation #9: We design the artwork which is then produced into bronzes.
Client pays us $*** per bronze in royalties. Does sales tax apply
to the royalties?
Response: Royalties are not subject to tax.
The retail price of the bronzes will be subject to tax. Your client
should collect that tax from their customers.
Situation #10: We hire a photographer to shoot a photo of the Capitol to
be used in an ad. He charges us $*** for his work and one time use
of the photo. The $***** is taxable.
Response: Correct, the charge for the photo is subject to tax.
Situation #11: The Art Director spends four hours conceptualizing a design
for a brochure. Client charged $*** per hour for, Art Direction time.
Not taxable because it is a nontangible service creative concept development.
Response: If the client has approved the concept the charge is subject
to tax. If the client has not approved the concept and your records reflect
this is preliminary art, the charge would not be subject to tax.
This opinion is based upon the facts you presented. If there are
additional or different facts, this opinion may change.
Please feel free to contact us if you have additional questions. You may
write us, call toll free 1-800-252-5555 from anywhere in Texas or phone
512/463-4600.
Sincerely,
Tax Policy Section
Tax Administration Division
Get today's answer for your situation
You just read a 1986 ruling on this question. Ezel checks current Texas tax law and answers your specific situation, with citations.
Opens in Ezel Pro. Every answer cites the authority it relies on.