Which of an advertising agency's services and sales are taxable in New York, and how does a principal-agent agreement change the result?

Plain-English summary

Greenstone & Rabasca Advertising Inc. asked how New York sales tax applies to the full range of an advertising agency's work — and how forming a principal-agent (agency) relationship with a client changes the answer. The Department gave a long, category-by-category opinion. The organizing principle: "the essence of the services performed will determine the tax consequences." Pure advertising services are exempt; selling tangible personal property is taxable.

The core rules.

• Advertising services are exempt. Section 1105(c)(1) excludes the "services of advertising or other agents" from the information-services tax. Consulting, developing campaigns, and placing ads with the media — with no transfer of tangible property — are not taxable to the client (20 NYCRR 527.3(b)(5), Example 5). But the agency generally pays sales tax on what it buys to perform those services (527.3(c)(2)).
• Selling tangible property is taxable. When the agency sells finished goods — brochures, catalogs, logos, printing plates, photographic prints, or a commercial embodied in film/tape — delivered in New York, that is a taxable sale under § 1105(a) on the whole selling price, with no deduction for fees or commissions (only separately stated delivery charges come out).

The principal-agent test (strict — all three required). New York recognizes an agency relationship for sales-tax purposes only if (1) the agency discloses the client's name to the supplier, (2) it obtains and keeps written evidence of agency status before buying anything, and (3) it re-bills purchases to the client at exact cost (no markup, and no using the item for more than one client). Greenstone & Rabasca's six sample contracts all failed condition 3 because they let the agency add a profit margin when re-billing — so none created a principal-agent relationship (following William Estey Company, TSB-A-84(22)S).

How the categories break down.

• A — Consulting/PR, budgets, news releases, campaigns: not taxable to the client if no property is transferred; the agency pays tax on its own purchases. Same for a project canceled before any property is produced.
• B — Producing ads placed in publications not for sale: the agency's total charge is not taxable (it's advertising), whether or not costs are itemized (Tromson Monroe, TSB-A-83(12)S). Without an agency relationship, the agency pays tax on its purchases even for an exempt-organization client. Under a valid agency relationship, the agency pays tax on materials and must charge the client tax on the value its employees add (§ 1105(c)(2)) — unless the client is a § 1116 exempt organization that furnishes Form ST-119.1.
• C — Producing ads for publications that are for sale: without an agency relationship, the agency can claim the manufacturing exemption (§ 1115(a)(12)) on typography, film, plates, and production supplies used directly and predominantly in producing the ad, using Exempt Use Certificate Form ST-121. A freelance artist's work on the agency's material is taxable under § 1105(c)(2). The agency's total charge remains exempt as advertising, and material later turned over to the client is treated as incidental to the advertising service (Laux Advertising, 67 AD2d 1066) — but if retained artwork is later sold for a separate charge, that sale is taxable.
• D — Producing tangible property for sale (brochures, catalogs, plates, annual reports, prints): the agency may buy components that are resold as-is tax-free with a Resale Certificate (ST-120), but not artwork/typography it uses up to make the product (those may instead qualify for the production exemption). It must collect tax on the full selling price of the finished product delivered in New York.
• E — Radio/TV commercials: creating a commercial is producing tangible personal property — sales of the film/tape/soundtrack delivered in New York are taxable. Raw stock and processing that go into the delivered product can be bought for resale (ST-120); cameras and production gear can qualify for the production exemption (ST-121), exempt from state and local tax except New York City. Post-production editing/dubbing of a client's tape is a taxable § 1105(c)(2) service.
• F — Mailing lists and mailing services: a mailing list (tape or labels) is either a taxable sale of property or a taxable information service; tax applies at the in-state delivery point (Alan Drey). Addressing is taxable at the delivery/mailing point; collating, folding, inserting, sealing, and posting are not taxable if separately stated (Capital District Mailing, TSB-A-85(58)S). Promotional material delivered to an in-state customer is fully taxable at the point of transfer, subject to a § 1119(a) refund/credit for property later reshipped out of state.
• G — Xerox/other document reproduction: duplicated printed matter delivered in state is a taxable sale under § 1105(a).
• H — Retouching photographs: taxable under § 1105(c)(2) when done on the customer's property (unless a resale certificate is given); retouching photos the agency will sell must be included in the taxable receipt, even if separately stated.

Two overarching cautions. (1) On a mixed invoice, the taxable amount must be stated separately, or the entire charge is taxed (20 NYCRR 533.2). (2) For any exempt or resale sale, the agency must hold the supporting document within 90 days of delivery, or the sale is deemed taxable (§ 1132(c)).

What this means for you

Tax follows substance, not the "advertising agency" label. Selling the idea and placement is exempt advertising; selling stuff — printed pieces, plates, commercials, duplicates — is a taxable sale. The same agency can be exempt on one line and taxable on the next.

A principal-agent arrangement only works if you charge exact cost. The single most common failure is marking up re-billed purchases. Any profit margin on pass-through costs breaks the agency relationship — along with failing to disclose the client to suppliers or to paper the agency status in advance. Get all three right or the pass-through treatment disappears.

Separate your invoice, and keep your exemption paperwork. Break out non-taxable advertising services from taxable property/services on every bill, or the whole invoice becomes taxable. And collect resale/exempt certificates (ST-120, ST-121, ST-119.1) and hold them within 90 days of delivery. Remember production-exemption purchases are still taxable in New York City.

Common questions

Q: Is what my ad agency does taxable?
A: Part of it. True advertising services (strategy, creative development, placing ads) are exempt to the client, but selling tangible property — printed pieces, plates, finished commercials — delivered in New York is a taxable sale on the full price.

Q: We buy materials for a client and bill them through. Do we owe tax?
A: Unless you have a valid principal-agent relationship, you pay tax on your purchases and your advertising charge is exempt. To pass the tax through, you must disclose the client to the supplier, keep written agency proof beforehand, and re-bill at exact cost with no markup. A profit margin voids the arrangement.

Q: We list an advertising fee and a printing charge on one invoice. How is it taxed?
A: State the taxable amount (the property/taxable services) separately. If you don't break it out, the entire invoice is taxed.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(1) — taxes information services but excludes advertising services and persons acting in a representative capacity
• Tax Law § 1105(a) — taxes retail sales of tangible personal property
• Tax Law § 1105(c)(2) — taxes producing/fabricating/processing property the customer furnishes and didn't buy for resale
• Tax Law § 1115(a)(12) — production/manufacturing exemption (except New York City for the local tax)
• Tax Law § 1101(b)(3); § 1119(a); § 1132(c) — taxable receipt; reshipment refund/credit; 90-day exemption-document rule
• 20 NYCRR 527.3 (advertising agencies), 527.4 (processing), 528.13 ("directly and predominantly"), 533.2 (separately stating taxable charges)

Forms: ST-120 (Resale), ST-121 (Exempt Use), ST-119.1 (Exempt Organization), AU-297 (Direct Payment Permit), ST-152 (printers/mailers)

Decisions cited: William Estey Company, TSB-A-84(22)S; Tromson Monroe Advertising, TSB-A-83(12)S; Laux Advertising v. State Tax Commission, 67 AD2d 1066; Alan Drey Company, TSB-H-78(3)S; Capital District Mailing Co., TSB-A-85(58)S; George Silver, TSB-A-86(15)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_35s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(35)S
Sales Tax
September 9, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S851212A

On December 12, 1985, a Petition for Advisory Opinion was received from Greenstone &
Rabasca Advertising Inc., One Huntington Quadrangle, Melville, New York 11747.
The issues raised are whether various advertising services provided by Petitioner are subject
to sales tax, and how any such tax liability would be affected by the formation of a principal-agent
relationship between Petitioner and its client.
Section 1105(c)(1) of the Tax Law imposes a tax on the services of furnishing information
by printed or mimeographed matter, including the services of collecting, compiling or analyzing
information of any kind or nature and furnishing reports thereof to other persons. However, that
section excludes ". . . . the services of advertising or other agents, or other persons acting in a rep­
resentative capacity . . .".
Section 1105(a) imposes a tax on receipts from every retail sale of tangible personal property,
except as otherwise provided.
The Sales and Use Tax Regulations state that "Advertising services consist of consultation
and development of advertising campaigns, and placement of advertisements with the media without
the transfer of tangible personal property . . . . Sales of tangible personal property such as layouts,
printing plates, catalogs, mailing devices or promotional handouts, tapes or films by an advertising
agency for its own account are taxable sales of tangible personal property . . . .
Example 5: An advertising agency is hired to design an advertising
program and to furnish art work and layouts to the media. The fee
charged by the agency to its client for this service is not subject to the
tax. However, if the layout and art work is sold by the advertising
agency prior to use by it to the customer for his use, the advertising
agency is making a sale of tangible personal property which is subject
to the sales tax." (20 NYCRR 527.3[b][5]).
All purchases of materials [or services taxed under Tax Law 1105] by an advertising agency
for use in performing its services are purchases at retail subject to the sales tax. (20 NYCRR
527.3[c][2]).
An advertising firm does not necessarily act as an agent for its client when it purchases
property for use in creating advertisements. A principal-agent relationship for such purpose will be
recognized for sales tax application only if the following conditions are met:

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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1.

the advertising agency must clearly disclose to the supplier the name of
the client for whom the agency is acting as agent, and

2.

the advertising agency must obtain and retain written evidence of agency
status with the client prior to the acquisition of any tangible personal
property or service, and

3.

the price billed to the client, exclusive of any agency fee, must be the
same as the amount paid to the supplier. The advertising agency may not
use the property for its own account, such as by charging the item to the
account of more than one client. See William Estey Company, State Tax
Commission Advisory Opinion, Sept. 17, 1984, TSB-A-84(22)S.

Appended to the Petition are examples of six agreements Petitioner consummated with
clients, none of which constitute principal-agent contracts according to the above quoted
requirements, because they allow the agent to add a profit margin when re-billing purchases of
material and outside services to the client. Thus, the agreements fail to satisfy condition 3. above.
Whether or not conditions 1. and 2. are fulfilled has not been addressed herein, since noncompliance
with any one of the three criteria will negate the existence of a principal-agent relationship.
The essence of the services performed will determine the tax consequences of transactions
between an advertising agency and its customers.
Petitioner's services fall within the following categories:
A.

Consulting and public relations services; planning and preparing advertising
budgets, news releases, and publicity campaigns.

Petitioner is not required to collect tax on its charges to the client, provided no tangible
personal property is transferred to the customer or its designees in connection with this service. All
purchases by Petitioner, either for its own account or as agent for a principal, of material or taxable
services to be used in performing these services are subject to sales tax. This ruling also applies to
any advertising project canceled or abandoned before the production of tangible personal property.
B.

The production or revision of advertisements and their placement in
publications which are not for sale.

If no principal-agent relationship exists, Petitioner must pay tax on its purchases of property
and taxable services necessary to fulfill its agreement with the client, even if the customer is an
exempt organization. (See: Tromson Monroe Advertising, State Tax Commission Advisory
Opinion, March 3, 1983, TSB-A-83(12)S). Petitioner's total charge to the client is not taxable
whether or not the cost of its purchases is itemized on the bill rendered.

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If the same services are performed under a principal-agent agreement, not only must
Petitioner pay sales tax on material and services bought on the clients behalf, but it must also charge
the client sales tax on the value added to the property by the labor of agency employees. (Tax Law
1105[c][2]). See William Estey Company, TSB-A-84(22)S, supra. Commissions and fees relating
to Petitioner's services for the acquisition of property and the placement of advertising are exempt.
Where Petitioner carries out the services described under "B" for a principal who is an
organization exempt from tax under section 1116 of the Tax Law, it is not required to collect tax on
the total charge to the client, nor to pay tax on purchases on the client's behalf, provided that
conditions 1, 2, and 3, quoted above, are met and Petitioner and its supplier are furnished with the
proper exemption certificate (e.g., Form ST-119.1, Exempt Organization Certificate) executed by
the client.
C.

The production or revision of advertisements to be placed in publications
which are for sale.

Here the agency usually prepares the layout and produces from it the printing plate which it
forwards to the publisher who will print the advertisement. In accordance with Technical Service
Bureau Memorandum TSB-M-79(7.1)S, May 15, 1980, if no principal-agent contract is in force,
Petitioner may claim the manufacturing exemption (Tax Law 1115[a][12]) on its purchases of
equipment such as typography, artwork, film, offset plates, etc., and also on parts, tools and supplies
used and consumed directly and predominantly in the production of the advertisement, by obtaining
from its client a properly completed Exempt Use Certificate (Form ST-121) and furnishing to its
vendor a properly completed Exempt Use Certificate prepared by the agency.
Regulation 528.13(b)(1), in part, defines the terms "directly and predominantly":
(1) "Directly means the machinery or equipment must, during the
production phase of a process:
(i) act upon or effect a change in material to form the product to be sold,
or
(ii) have an active causal relationship in the production
of the product to be sold, or
(iii) be used in the handling, storage, or conveyance of
materials or the product to be sold,
*
*
*
(2) Usage in activities collateral to the actual production process is not
deemed to be used directly in production.

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(4) Machinery or equipment is used predominantly in production, if
over 50 percent of its use is directly in the production phase of a process."
If a freelance artist is employed to create illustrations or typography upon material supplied
and used by Petitioner, this service is subject to sales tax under Section 1105(c)(2) of the Tax Law
which imposes the tax on the receipts from every sale, except for resale, of the services of
"[p]roducing, fabricating, processing, printing or imprinting tangible personal property, performed
for a person who directly or indirectly furnishes the tangible personal property, not purchased by him
for resale, upon which such services are performed."
Petitioner's total charge to its client will be exempt from tax as the "services of advertising".
When in conjunction with the services discussed under B. and C. above, material purchased
by Petitioner for the purpose of creating advertisements is turned over to the client subsequent to
such use, this transfer of tangible personal property is considered merely incidental to the "services
of advertising" and will not negate the exclusion from tax provided for such services under Tax Law
1105(c)(1). See Matter of Laux Advertising v. State Tax Commission, 67 AD2d 1066.
However, in the event that artwork retained by Petitioner after completion of a contract is
later transferred to the customer for an additional charge, such receipt is subject to tax and Petitioner
may not claim a credit for tax paid on its purchase of the property.
If a principal-agent agreement exists, Petitioner's purchases for the client of equipment, parts,
tools and supplies to be used in the production process of the advertisement qualify for the
manufacturing exemption, provided vendors are supplied with an Exempt Use Certificate (Form ST­
121) executed by the client. The tax liability for services described in Tax Law 1105(c)(2), supra,
whether purchased by the agent or performed by its employees, passes to the client. Material and
services obtained by the agent must be re-billed to the principal at cost. Separately stated agency
fees, including charges for pre-production discussions and for placing advertisements with the media,
are not taxable.
D.

The production for sale of tangible personal property; for example:
brochures, catalogs, logos, posters, mechanicals, printing plates, annual
reports, photographic prints, etc.

If no principal-agent agreement is in force, Petitioner may purchase tax exempt any property
or physical components thereof, which will be sold as such (without prior use by the agency) to the
client, by issuing to its vendor a Resale Certificate (Form ST-120).
Material such as artwork and typography, which Petitioner will use to produce property for
sale, may not be purchased for resale by the agency whether or not the property is actually transferred
to the customer upon completion of the contract and regardless of whether the contract between the

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advertising firm and the client requires such transfer. However, these purchases may qualify for the
production exemption described under "C" above.
Sales tax is to be collected from the client by the advertising firm on the total selling price
of the finished product without any deduction (except for separately stated transportation or delivery
charges) for fees or commissions or other expenses of the agency when such finished product is
transferred to the client or his designee in New York State. (Tax Law 1101[b][3]; 20 NYCRR
526.5[g]).
Under a principal-agent agreement, other than with an exempt organization, Petitioner's
purchases of material for the account of its client will not qualify for exemption if, as in the
production of promotional material, the finished product is not intended for sale. Furthermore,
Petitioner must collect statewide and local sales tax on the receipts from services performed by its
employees upon the client's property. (Tax Law 1105[c][2], quoted above; see also Technical
Services Bureau Memorandum, June 10, 1983, TSB-M-83[16]S).
E.

The direction and production of radio and television commercials.
1.

Creation of commercials

The creation of a radio or television commercial is considered the production of tangible
personal property. Therefore, sales of television or radio commercials embodied in tangible form
in an original negative film, video tape or sound track are subject to sales tax if the property is
delivered to the customer or its designee within New York State.
Petitioner may purchase tax exempt the raw film stock and other physical component parts
of property actually transferred to the client, and also the services of processing, editing and sound
mixing performed upon such property, by furnishing its suppliers with a Resale Certificate (Form
ST-120). The resale exemption does not apply to raw material and services used in preparing an
intermediate edited version of the original negative film as a preliminary step in the production for
sale of the master positive.
Cameras, projectors, sound recorders, set lights, booms, etc., constitute production machinery
and equipment as defined in Regulation 528.13(a)(1); backdrops, settings, props, wardrobes and
similar articles qualify as manufacturing supplies. (20 NYCRR 528.13[3][i]). If used or consumed
directly and predominantly in the production of a commercial, such machinery, equipment and
supplies may be purchased exempt from statewide and local (except New York City) sales tax
provided Petitioner issues a valid Exempt Use Certificate (Form ST-121) to its vendor.
Under a principal-agent agreement, Petitioner's client as the producer and end-user of the
commercial can claim neither resale nor production exemption. Therefore, Petitioner must pay the
appropriate sales tax when purchasing property to be delivered to the client or the advertising agency
within New York State.

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Additionally, tax is due on the agent's purchases for its clients account of taxable services
employed within the State, unless such services are performed upon property which is to be sent,
without prior use in the State, to an out-of-State destination. The same tax consequences will arise
if the agency's employees furnish such services; in that instance the Petitioner as the vendor of the
services must collect any applicable sales taxes from its client.
2.

Post production processing

If, after producing an original negative film, Petitioner is engaged to convert the commercial
from film to video tape, its purchases of raw tape and third party services will qualify for the resale
exemption. The exemption does not extend to material not actually delivered to the client or to
services performed upon property used in the conversion process which is not incorporated in the
product to be sold. Petitioner's entire charge for the conversion will be subject to tax as the sale of
tangible personal property.
Further post production processing (e.g. film editing, videotape editing and dubbing, audio
recording and mixing) of a client's videotape constitutes services taxed under Section 1105(c)(2) of
the Tax Law, Supra. (20 NYCRR 527.4[d], example 3.)
If a valid exemption certificate or direct payment permit is not supplied, Petitioner must
collect tax on the price of post production services at the rate in effect where the processed videotape
is delivered to the customer.
F.

Providing mailing lists to clients and performing mailing services.

Mailing lists usually are available in the form of magnetic tape or cheshire labels.
Transactions between list owner and list user therefore constitute either sales of tangible personal
property as defined in Tax Law 1101 (b)(5) or, in the alternative, services taxed under section
1105(c)(1) of the Tax Law, quoted above. Accordingly, the list owner or the list broker must collect
State and local sales tax from the user if the property is delivered to an in-State destination. Alan
Drey Company, Decision of the State Tax Commission, Jan. 27, 1978, TSB-H-78(3)S, affd 67 AD2d
1055.
Receipts from addressing envelopes, manually or mechanically, are taxable at the locality
where the property is delivered to the customer or at the point from which the mailing service occurs.
Charges for collating, folding, inserting, sealing and posting are not taxable if segregated from the
taxable amount on the customer's bill. See Capital District Mailing Co., State Tax Commission
Advisory Opinion, Oct. 28, 1985, TSB-A-85(58)S.

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It is assumed that question 2. in the Petition refers to receipts from the sale of promotional
material Petitioner delivers to an in-State customer who afterwards sends some of the matter to out­
of-State recipients. In that instance Petitioner is required to collect, on its entire taxable charge, the
statewide and local sales tax in effect at the point where possession of the property is transferred to
the customer. Tax Law 1119(a) provides that a refund or credit shall be allowed the customer for
tax paid "(2) on the sale or use of tangible personal property purchased in bulk, or any portion
thereof, which is stored and not used by the purchaser or user within this state if that property is
subsequently re-shipped by such purchaser or user to a point outside this state for use outside this
state".
Only the furnishing, by Petitioner's client, of a valid Exempt Organization Certificate (Form
ST-119.1) or a Direct Payment Permit (Form AU-297) will exempt charges for promotional mailings
from tax. Such documentation also will relieve Petitioner from collecting sales tax when it
dispatches advertising material from within New York State directly to addressees designated by its
client. Should Petitioner perform the latter services for non-exempt customers, review of
Department of Taxation and Finance Form ST-152 (5/17 and 5/77), Collection and Reporting
Instructions for Printers and Mailers, and George Silver, State Tax Commission Advisory Opinion,
April 24, 1986, TSB-A-86(15)S, is recommended.
Petitioner states it engages in "writing letters to various parties advising them of our clients
products". If these letters contain promotional information which is duplicated or interchangeable
with other recipients on a mailing list, Petitioner is producing tangible personal property for sale, as
discussed in section D above.
G.

Reproduction of documents by Xerox or other methods.

The sale of duplicated written or printed matter constitutes the sale of tangible personal
property taxable under Section 1105(a) of the Tax Law, if the duplicated material is delivered to an
in-State destination.
H.

Retouching Photographs.

When performed upon property furnished by the customer, this service is taxable pursuant
to Section 1105(c)(2) of the Tax Law unless Petitioner has received a Resale Certificate (Form ST­
120). A charge for retouching photographs intended for sale by the Petitioner is an expense which,
even if stated separately on the invoice, must be included in the "taxable receipt", as such term is
defined in Tax Law 1101(b)(3).
Generally, it should be noted that whenever an advertising firm renders to its client an invoice
which includes both charges for services excluded from tax and for the sale or servicing of personal
property, the taxable amount must be stated separately thereon, or the entire receipt will be subject
to tax. (20 NYCRR 533.2[a][1]; [b][2]).

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Furthermore, section 1132(c) of the Tax Law (as amended by Chapter 765 of the Laws of
1985) provides that a vendor who makes a sale which is tax exempt, either as a sale for resale or
under the provisions of section 1115 and 1116 of the Tax Law, must have a supporting document
in his possession no later than 90 days after the delivery of the property sold or service rendered, or
the sale will be deemed a taxable sale at retail.
Finally, Petitioner is referred to Department of Taxation and Finance Publication 842 (4/84)
"Sales Tax Information for Printers" which contains instructions and explanations pertinent to
advertising firms.

DATED: September 9, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.