When were an advertising agency's internal-work commissions and radio or television production charges taxable in Texas?

Plain-English summary

In guidance to an auditor, the Comptroller separated an advertising agency's in-house work into nontaxable preliminary art and taxable finished art. A commission charged on taxable goods created in-house was also taxable.

The agency had been collecting tax on all internal work without distinguishing preliminary art. The letter said work before the final client-approval meeting was preliminary and nontaxable, while work after that point was finished art. Tax already collected on all internal work could be applied against tax due on commissions tied to taxable internal work, with any difference potentially refunded to the client.

The Comptroller did not recommend taxing commissions on all internal work. It also cited Hearing No. 25,516 for the rule that charges to acquire taxable items from third parties were not taxable, placing those fees in the same category as commissions. Producing a radio or television commercial was described as a nontaxable service, so related miscellaneous charges were not taxable unless they reimbursed purchases of taxable goods used in the commercials.

What this means for you

An advertising agency's commission followed the underlying in-house work: a commission on taxable finished art was taxable, while preliminary-art treatment required time records showing when final client approval occurred. Third-party acquisition fees and commercial-production services received different treatment under the letter.

Common questions

Was all internal agency work taxable? No. Preliminary work was nontaxable; finished art was taxable.

When was the agency commission taxable? When assessed on taxable goods created in-house.

How could the agency identify preliminary work? The letter said work done before the last approval meeting was preliminary art.

Were commissions for acquiring taxable items from third parties taxable? No, according to the letter's discussion of Hearing No. 25,516 and Rule 3.321.

Were radio and television commercial-production charges taxable? The production service itself was described as nontaxable, unless a charge actually reimbursed the purchase of taxable goods used in the commercial.

Citations and references

• 34 Tex. Admin. Code § 3.321 (advertising agencies)
• Comptroller Hearing No. 25,516 (third-party acquisition charges)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9101L1073A09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller January 31, 1991

Dear *****:

I understand you are auditing an advertising agency. The agency
collects tax on all internal or in-house work without regard to
preliminary art. The agency does not collect tax on the standard
agency commission.

You list two types of internal work. The first category is pre-
liminary work and not taxable. The second appears to be finished
art and taxable.

The agency commission is taxable when it is assessed on charges
for taxable goods created in-house - the second category of in-
ternal work described in your letter.

I think we should explain to the agency why it's important that
the agency keep up with time spent on preliminary art. The agen-
cy should begin collecting tax on all charges for finished art
plus tax on the associated commission.

However, I hesitate to advise you to assess tax on commission
charged on all internal work. Let me explain why.

First, under Rule 3.321, the agency is not required to separate-
ly identify tax or taxable items to their customers. Based on the
invoices you sent, it appears this agency is exercising this priv-
ilege. The client only knows they are paying tax on taxable items.
And the agency is collecting tax on all charges for internal work,
i.e. we are getting tax on items which are not taxable. The agen-
cy could easily determine what charges were for preliminary art
by merely looking at dates. There will be a final presentation
before finished art begins - all work done before the last approv-
al meeting is preliminary art and not taxable. The tax collected
on all internal work can be applied to the tax due on commissions
charged on taxable internal work - the difference could be a re-
fund to the client.

Second, under the rule, it commissions are not taxable. In hear-
ing number 25,516, the judge held no tax is due on charges for
acquisition of taxable items from third parties. And in the rule,
these fee are in the same category as commissions.

Apparently, the agency is collecting tax on miscellaneous radio -
T.V. charges. Since producing a commercial is a non-taxable ser-
vice, these charges should not be taxable unless the charges are
actually reimbursements for purchases of taxable goods used in
the commercials.

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