Which direct-mail-firm charges are taxable in Connecticut -- the mailing service, the advertising, the printing, or the postage?

Plain-English summary

DRS looked at a direct mail firm ("Company A") in two situations and sorted out what is taxable.

Situation 1 — pure mailing service (not taxable). The client hires a printer separately; the printed advertisements are delivered to Company A, which only sorts, folds, inserts, and mails them, billing the client for the mailing service and postage. Following Ruling 90-10, DRS confirmed that mailing services (addressing, sorting, folding, inserting, mailing preprinted materials) are not subject to tax.

Situation 2 — develop + print + disseminate the ads (advertising service). Here Company A works with the client to develop the advertisements, arranges the printing itself, and then mails them. That production-and-dissemination package is an "advertising service" under Conn. Gen. Stat. § 12-407(2)(i)(W). But the statute was amended (Public Act 91-3, June Spec. Sess.) to exempt "cooperative direct mail advertising" — direct mail advertising for more than one business delivered in a single package — for sales on or after October 1, 1991. Because Company A's work is primarily cooperative direct mail advertising, its advertising services were taxable before October 1, 1991 and exempt after.

The printing is taxable even when the service is exempt. Company A must either pay use tax to the printer or buy the printing on resale (issue a resale certificate under Conn. Agencies Regs. § 12-426-1). If bought on resale, the printing charge must be separately stated on the bill to the client and tax collected on it — even though the advertising service itself may be exempt. (When printing is done in Connecticut and at least part of the printed material will be mailed for use outside the state within 30 days, Company A may accept a Printed Material Certificate under Conn. Agencies Regs. § 12-426-20.)

Postage. For sales before October 1, 1991, postage had to be included in the tax measure unless the client had primary liability to the U.S. Postal Service. Because Company A was primarily liable for postage, it had to include postage in the tax base for its taxable advertising services (before the exemption date).

What this means for you

"Just mailing" is not taxable; "creating the ad" can be

A firm that only handles the mechanics of mailing preprinted materials isn't performing a taxable service. A firm that develops and produces the advertising is performing an advertising service — the tax turns on how far up the value chain the firm goes.

Cooperative direct mail advertising has been carved out since October 1, 1991

Direct mail advertising bundling multiple businesses into one mailed package is exempt for sales on or after that date. Before it, the same service was taxable — a clean example of how an effective-date amendment can flip the answer for otherwise-identical work.

The printing bill is its own taxable transaction

Even when the advertising service is exempt, the tangible printed material is taxable. Decide up front whether to pay use tax to the printer or buy on resale — and if on resale, separately state the printing and collect tax on it from the client.

Common questions

Q: Is a direct mail firm's mailing service taxable?
A: No. Sorting, folding, inserting, and mailing preprinted materials is not taxable (Ruling 90-10).

Q: Is developing and sending out the advertising taxable?
A: It's an advertising service under § 12-407(2)(i)(W), but "cooperative direct mail advertising" is exempt for sales on or after October 1, 1991 — taxable before, exempt after.

Q: If the advertising service is exempt, is the printing exempt too?
A: No. The printing is taxable regardless. The firm pays use tax to the printer or buys on resale and separately states and collects tax on the printing charge.

Q: Does postage get taxed?
A: For sales before October 1, 1991, postage was included in the tax measure unless the client was primarily liable to the Postal Service. Here the firm was primarily liable, so postage was included in the tax base for its then-taxable services.

Citations and references

Statutes, regulations, and guidance:

• Conn. Gen. Stat. § 12-407(2)(i)(W) (advertising or public relations services; cooperative direct mail advertising excluded), as amended by Public Act 91-3, § 103 (June Spec. Sess.), effective for sales on or after October 1, 1991
• Conn. Agencies Regs. § 12-426-1 (resale certificates); § 12-426-20 (Printed Material Certificate)
• TSSN-30 (DRS Special Notice on Sales and Use Taxes on Advertising and Public Relations Services)

Related DRS ruling (described, not linked):

• Ruling 90-10 (mailing services -- addressing, sorting, folding, inserting, mailing preprinted materials -- are not taxable).

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 92-2

Original ruling text

Ruling 92-2, Sales and Use Taxes / Direct Mail Firms

Ruling 92-2

Sales and Use Taxes Direct Mail Firms

FACTS:

Situation 1: A company wishing to advertise (hereinafter "client") contracts with a printer to print advertising inserts and then deliver the inserts to Company A, a direct mail firm. The contract between the client and printer is separate and apart from any contractual arrangement between Company A and the client. Upon delivery of the advertisements to Company A, Company A provides a mailing service, consisting of sorting, folding and inserting the preprinted advertisements into a package for mailing. Company A charges the client for the mailing service and postage only.

Situation 2: Same facts as Situation 1, except the client does not contract with a printer to have preprinted advertisements delivered to Company A. Instead, Company A works directly with the client on the development of the advertisements. Company A then contracts with the printer, which bills Company A for the printing. Company A performs the same mailing service as in Situation 1, and bills the client, separately stating the sales price of the printed material, service charges and postage charges.

ISSUES:

(a) Whether services consisting of sorting, folding, inserting and mailing preprinted advertisements are taxable;

(b) Whether services consisting of developing advertisements for clients, having the advertisements printed, and disseminating the advertisements are taxable; and

(c) Whether postage charges are includable in the measure of any applicable tax.

DISCUSSION:

With respect to Issue (a), the Department has previously held, in Ruling No. 90-10 , that mailing services involving addressing, sorting, folding and inserting preprinted materials into packages for mailing, and the mailing of such packages, are not subject to tax.

With respect to Issue (b), and the facts in Situation 2, Conn. Gen. Stat. §12-407(2)(i)(W), as most recently amended by Public Act 91-3, §103, (June Spec. Sess.), provides, in pertinent part, as follows:

(2) "Sale" and "selling" mean and include: . . . (i) the rendering of certain services for a consideration, exclusive of such services rendered by an employee for his employer, as follows: . . . (W) advertising or public relations services, including layout, art direction, graphic design, mechanical preparation, or production supervision, not related to the development of media advertising or cooperative direct mail advertising . .

The Department's Special Notice on Sales and Use Taxes on Advertising and Public Relations Services, TSSN-30, addresses a number of issues relating to advertising services. In TSSN-30, "advertising services" is defined to include "all services related to the creation, preparation, production or the dissemination of advertisements."

The services performed by Company A for the client in producing advertisements, having them printed and disseminating them, constitute "advertising services," as that phrase is used in Conn. Gen. Stat. §12-407(2)(i)(W). However, the statute has been amended, effective for sales occurring on or after October 1, 1991, to exempt "cooperative direct mail advertising" from the taxable service category. TSSN-30, p. 2, defines "cooperative direct mail advertising" to mean

direct mail advertising for more than one business delivered by mail in a single package or bundle to potential customers of such businesses participating in the advertising.

Based on information provided by Company A, its advertising activities consist primarily of "cooperative direct mail advertising." Thus the advertising services of Company A were taxable prior to October 1, 1991 and are exempt thereafter, to the extent they are "cooperative direct mail advertising services."

The printing costs incurred by Company A in the preparation of the advertising are taxable, even if the service is not. Company A may either pay use tax to the printer or purchase the printing on a resale basis, if Company A issues a resale certificate pursuant to Conn. Agencies Regs. 12-426-1 to the printer (TSSN-30, p. 4). The taxable printing charges purchased on resale by Company A should be separately stated on its bill to the client.

In addition, when Company A obtains, on behalf of the client, printed material printed in Connecticut, Company A may accept a Printed Material Certificate, pursuant to Conn. Agencies Regs. §12-426-20, from the client if at least a portion of the printed material will be mailed by Company A for use outside this state within 30 days following its delivery.

With respect to Issue (c), for sales occurring prior to October 1, 1991, the cost of postage must be included in the measure of the tax on advertising services unless the client has primary liability for the payment of such postage to the United States Postal Service. Based upon information provided by Company A, it appears that it does have primary liability for postage costs, and so it must include postage in the measure of the tax in connection with its taxable advertising services.

RULING:

The amount charged by a direct mail firm for the production and dissemination of a finished advertisement is subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(W) for sales occurring prior to October 1, 1991, and is exempt thereafter, provided the advertising is "cooperative direct mail advertising." Printing may be purchased by the direct mail firm on either a tax paid or a resale basis. If printing is purchased on a resale basis, the charges therefore must be separately stated to the client and tax must be collected, notwithstanding the fact that the services provided are exempt. Postage charges for which the direct mail firm is primarily liable and which are not directly passed through to the client on a dollar for dollar basis must be included in the measure of the tax for sales occurring prior to October 1, 1991.

LEGAL DIVISION

March 23, 1992