When were an advertising agency's art-direction and postage charges taxable depending on whether it acted as a seller or disclosed agent?

Plain-English summary

An internal Texas Tax Policy response said art direction could be taxable or nontaxable depending on the advertising agency's role.

When the agency acted as seller, art direction associated with its sale or employee fabrication of tangible property was taxable. The example had the agency issue a resale certificate to a photographer, supervise the photo session, and bill the client for the photographer and art director; the entire charge was taxable. The same treatment applied to in-house production of finished art.

When the agency acted as a disclosed agent, art direction not associated with its own sale or employee fabrication of property was nontaxable. In the example, the agency disclosed that it acted for the client, paid tax to the photographer, and billed the client for the photographer, tax reimbursement, and art direction; no tax was due from the client.

Postage for delivering negatives followed the same distinction. Postage was taxable when the negatives were produced in-house or bought under a resale certificate. It was nontaxable when an outside supplier provided the negatives, the agency relationship was disclosed, and tax was paid to the supplier. The memo states that a transportation charge required an underlying taxable sale or service to be taxable.

What this means for you

The agency's disclosed legal and tax role controlled more than the label “art direction.” Resale-certificate treatment and in-house production signaled a retailer transaction, while disclosed agency and supplier-level tax supported nontaxable reimbursement and service treatment.

Common questions

When was art direction taxable? When associated with the agency's sale or employee fabrication of personal property.

Was in-house finished art taxable? Yes.

When was art direction nontaxable? When the agency acted as a disclosed agent and the art direction was not connected to its own sale or employee fabrication of property.

When was postage for negatives taxable? When the negatives were produced in-house or purchased under a resale certificate as part of a taxable transaction.

When was the postage nontaxable? When an outside supplier provided the negatives, tax was paid under the disclosed agency relationship, and there was no underlying taxable sale or service by the agency.

Citations and references

• No statute or administrative rule is cited in the internal response.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8704L0810G13

Original ruling text

DATE: April 21, 1987

TO: Robert Wood, Legal Services

FROM: F. Wayne McDonald, Tax Policy

SUBJECT: ****

The following represents your questions and our section's response concerning charges
by an advertising agency.

1) When would Art Direction be taxable?

Answer: Art Direction is a service and is taxable or non-taxable depending on what is
occurring.

Acting As Seller: Art Direction when associated with the sale or employee fabrication
of personal property is taxable.

Example: Agency's Art Director supervises a photo session for a client brochure.
Agency is acting as a seller and issues resale certificate to photographer. Agency
bills client for photographer and Art Director. Total charge is taxable.

The same would be true for any in-house production of finished art.

Acting As Agent: Art Direction not associated with the sale or employee fabrication
of personal property is not taxable.

Example: Agency's Art Director supervises a photo session for a client brochure.
Agency discloses they are acting on behalf of their client and should pay tax to
the photographer on his charges. Agency bills client for photographer, plus tax
reimbursement and Art Direction. No tax is due from the client.

2) Is postage taxable for negatives delivered by the developer to magazines and
newspapers with the charges billed to ****, who then bill
the client?

Answer: The answer to this is basically the same as above. Postage is considered
a delivery or transportation charge and if it is for negatives that were produced
in-house or purchased under a resale certificate, then it would be taxable. If
the negatives are purchased from an outside supplier and tax is paid according to
the agency relationship, then no tax is due on the postage charge. There must be
a taxable sale or service in order for a transportation charge to be taxable.

March 27, 1987

TO: ***, Legal Services

FROM: ***, Auditor, **

SUBJECT: **
TP# **
Hearing: 20752

Enclosed you will find the items remaining in the audit after the taxpayer provided
clarifying information for all other items.

****, taxpayer representative, has questions about the following:

1) When would Art Direction be taxable?

2) Is postage taxable for negatives delivered by the developer to magazines and
newspapers with the charges billed to Craig and Associates who then bills the client.