How did Texas tax advertising-agency work related to finished art, and how should fixed-price billing adjustments affect collected tax?

Plain-English summary

An advertising agency tracked project time by categories, but those categories did not appear to separate preliminary art from work on the final product. The Comptroller said the services listed in Rule 3.321(a)(5) were taxable when connected with finished art or other in-house goods sold to the client, as well as taxable items bought for resale to the client.

Copywriting illustrated the timing rule. Writing or editing copy for a print ad after the client approved the concept was part of creating finished art and therefore part of the taxable item's sales price.

For fixed-sum contracts, taxable and nontaxable items did not have to be separately shown to the client, but the invoice had to indicate that tax was included on taxable items and internal records had to reflect tax collected and paid on the corrected taxable amount. If the agency separately billed $300 of tax and later reduced the taxable charges, it had to reduce the client's tax bill or remit the $300 collected.

What this means for you

Advertising agencies needed records that separated preliminary work from post-approval finished-art work. Billing adjustments also had to flow through to the tax charged or remitted.

Common questions

When could copywriting be taxable? When writing or editing copy occurred after the client approved the print-ad concept, making it part of finished art.

Did taxable and nontaxable items have to appear separately on the client invoice? No, but the invoice had to indicate that tax was included on taxable items.

What records did the agency need? Internal records reflecting tax collected and paid on the corrected or adjusted taxable amount.

What if separately billed tax exceeded the amount due after an adjustment? The agency had to adjust the client's tax charge or remit at least the amount it had billed and collected.

Citations and references

• 34 Tex. Admin. Code § 3.321(a)(5) (advertising-agency services related to finished art and taxable goods)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9101L1072F07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

January 31, 1991

Dear **:

Mr. Poole asked me to answer your letter concerning sales tax calculation
on services provided by an advertising agency.

The agency keeps track of the amount of time spent on each project by
categories. On the surface, these categories do not appear to distinguish time
spent on preliminary art versus time spent preparing the final product. The
services listed in Rule 3.321(a)(5) are taxable when related to the sale of
finished art and other goods created in-house and sold to the client, as well
as items purchased from retailers for resale to the client.

For example, under certain conditions, copywriting is taxable. Tax is
due on charges for writing or editing copy for a print ad after the client has
approved the concept. This service is part of the process to create the
"finished art" and, therefore part of the sales price of the taxable item.

I understand your primary concern is the effect of adjustments to the
agency's billing because of a fixed-sum contract. Under Rule 3.321, taxable
and nontaxable items need not be separately identified to the client. The
invoice should indicate tax has been included on taxable items. The agency's
internal records should reflect tax collected and paid on the corrected or
adjusted amount billed for taxable items. If the agency elects to itemize tax
on billings to their client, the agency must send us at least the amount of tax
the agency billed and collected from the client. In other words, if the agency
bills $300 in tax one month and adjusts the taxable charges downward, the
agency should either adjust their Customer's bill to reflect the lesser amount
of tax, or send the $300 to the Comptroller.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call me. The
toll-free number is 1-800-531-5441. The regular number is 512/463-4614. Or
you may write me at the Tax Administration Division. [(fax) 512-475-0900]

Sincerely,
Adina Whittemore
Tax Administration Division