Is an advertising agency that buys media and materials for the U.S. Army a purchasing agent for the federal government (so its buys are tax-exempt), or a taxable contractor selling to the Army?

Plain-English summary

Young & Rubicam Inc. is the advertising agency for the U.S. Army Recruiting Command (USAREC). It argued that because it was the Army's agent, all its purchases of property and services under the contract were really purchases by the federal government — and thus exempt from New York state and local sales/use tax.

The Department held there was no principal-agent relationship: Y&R is a taxable contractor selling to the Army.

• The constitutional frame. Y&R relied on Kern-Limerick v. Scurlock (finding an agency where the contractor needed prior approval, had no purchasing independence, and title passed to the government). But United States v. New Mexico is the controlling guide: tax immunity applies only when the contractor is so closely connected to the Government that the two can't be viewed as separate, and immunity is defeated where the contractor (1) purchases in its own name, (2) vendors aren't told the government is the only party with an independent interest, (3) the government doesn't formally name the contractor a purchasing agent, and (4) no advance approval is required.
• Y&R's contract and paperwork. The contract contained no language delegating agency — it was a cost-plus-fixed-fee contract — and Y&R's purchase orders were in Y&R's own name, identifying USAREC only as a "client."
• The three-condition test. Under TSB-M-83(16)S (building on TSB-M-78(3)S), an ad agency has principal-agent status only if it (1) discloses the client's full name and identifies itself as agent for that client on the purchase order, (2) has a properly executed written agency agreement before buying, and (3) bills the client the exact supplier price (apart from the agency fee). Y&R failed conditions 1 and 2 — the purchase order called the Army a "client," not a disclosed principal, and there was no written agency agreement.
• Result. For New York sales and use tax, Y&R is a contractor selling goods and services to USAREC, so its purchases are not exempt federal-government buys.

What this means for you

Working "for" the federal government doesn't make your purchases tax-exempt — being its formal agent does. An advertising agency (or any contractor) that buys media, materials, or services for a government client is generally a taxable purchaser unless it has genuinely stepped into the government's shoes as a disclosed purchasing agent.

Paperwork decides it. To claim agency status in New York, your purchase orders must name the client and identify you as agent for that client, you must have a written agency agreement in place before buying, and you must pass the client the exact supplier price without markup (your fee is separate). Calling the client a "client," buying in your own name, or lacking a written agency agreement defeats the claim — as it did here.

Title passing to the government isn't enough. Even where title runs to the government, immunity fails if you buy in your own name, vendors aren't told the government is the real party in interest, and you weren't formally designated an agent.

Common questions

Q: My agency buys advertising for a government client. Are those purchases tax-exempt?
A: Not unless you're the government's formal purchasing agent. If you buy in your own name and merely call the government a "client," New York treats you as a taxable contractor selling to it.

Q: What does New York require to establish principal-agent status?
A: The three conditions in TSB-M-83(16)S: disclose the client's full name and identify yourself as its agent on the purchase order; have a properly executed written agency agreement before you buy; and bill the client the exact supplier price (your agency fee separate, no markup).

Q: Title to the goods passes to the government — isn't that enough?
A: No. Under United States v. New Mexico, buying in your own name, not informing vendors the government is the sole interested party, lacking a formal agent designation, or not needing advance approval all defeat immunity.

Citations and references

Guidance and cases:

• TSB-M-83(16)S (Advertising Agencies) — sets the three conditions for an advertising agency's principal-agent status (disclosure of client as principal on the purchase order; prior written agency agreement; billing the client the exact supplier price without markup), building on TSB-M-78(3)S
• Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 — found a principal-agent relationship where the contractor needed prior approval, lacked purchasing independence, and title passed to the government
• United States v. New Mexico, 455 U.S. 720 — tax immunity applies only when the contractor is so closely connected to the Government that the two can't be viewed as separate; immunity defeated where the contractor buys in its own name, vendors aren't informed the government is the only interested party, the government doesn't formally denominate the contractor an agent, and no advance approval is required

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (18)S
Sales Tax
February 29, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S871014A

On October 14, 1987, a Petition for Advisory Opinion was received from Young & Rubicam
Inc., 285 Madison Avenue, New York, New York.
The issue raised is whether Petitioner has established a principal-agency relationship with
its client, the United States Army Recruiting Command, or is acting as a vendor of tangible personal
property to the United States Army Recruiting Command.
Petitioner is an advertising agency which is being retained by the United States Army
Recruiting Command (hereinafter "USAREC") as its advertising agency. Petitioner asserts that it is
the agent for USAREC and, therefore, that all of Petitioner's purchases of tangible personal property
and services used in performance of its contract with USAREC are actually purchases by the federal
government and thus exempt from all state and local sales or use tax.
Petitioner cites as authority for this position the case of Kern-Limerick v. Scurlock,
Commissioner of Revenue for Arkansas, 347 US 110, 98 L Ed 546, 74 S Ct 403. In this case, the
court found a principal-agent relationship between the U.S. government and its contractor since the
contractor was obligated to obtain prior approval before procuring any goods or services, the
contractor had no independence when purchasing any property and title passed to the government
upon purchase of the goods. Moreover, Petitioner states that the case of United States v. New
Mexico, 455 US 720, 71 L Ed 2d 580, 102 S Ct 1373 (1982), is inapplicable because Petitioner avers
only that it is an agent of the government and not an instrumentality of the government.
Notwithstanding Petitioner's assertion, United States v. New Mexico is particularly
instructive with respect to the contract here at issue. As Petitioner correctly states, the court explored
the circumstances where immunity from tax existed by virtue of being an agency or instrumentality
of the government. The court determined that "tax immunity is appropriate in only one circumstance:
when the levy falls on the United States itself, or on an agency or instrumentality so closely
connected to the Government that the two cannot realistically be viewed as separate entities, at least
insofar as the activity being taxed is concerned." Id. 455 US at 735, 71 L Ed 2d at 592. Moreover,
the court stated that in the case of a sales tax, such as that at issue in this advisory opinion, "it is
arguable that an entity serving as a federal procurement agent can be so closely associated with the
Government, and so lack an independent role in the purchase, as to make the sale-in both a real and
a symbolic sense - a sale to the United States, even though the purchasing agent has not otherwise
been incorporated into the Government structure." Id. 455 US at 742, 71 L Ed 2d 597 citing KernLimerick, supra.

RODERICK G. W. CHU, COMMISSIONER

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

TP-8 (3/83)

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TSB-A-88 (18)S
Sales Tax
February 29, 1988

Nevertheless, the court found that the principles enunciated in Kern-Limerick did not
invalidate New Mexico's sales tax as applied to purchases by the contractors even though the
government was directly liable to the vendors for the purchase price because (1) the contractors made
purchases in their own names, (and presumably were themselves liable to the vendors); (2) the
vendors were not informed that the government was the only party with an independent interest in
the purchase; (3) the government failed to formally denominate the contractors as purchasing agents
and (4) the contractors were not required to obtain advance government approval for purchases.
The contract between Petitioner and USAREC contains no provision which can be construed
as formally or explicitly delegating agency status to Petitioner. It seems obvious that if the
government intended to make Petitioner its agent, it would have manifested some explicit intention
to do so in its contract. Furthermore, the purchase order used by Petitioner appears to be in the name
of Petitioner with USAREC identified only as a "client". Clearly, vendors are not informed that the
government is the only party with an independent interest in the purchase; nor could vendors
conclude from the purchase order that Petitioner is not liable to them for its purchases
notwithstanding that title passes to the U.S. Army. Again, it seems obvious that if the government
intended to make Petitioner its agent, it would have manifested its intention in some manner in its
purchase order.
Additionally, Petitioner cites Technical Services Bureau Memorandum TSB-M-83(16)S
as further support for its position.
Technical Services Bureau Memorandum TSB-M-83(16)S provides:
A.

Principal-agent Relationship

In order for a principal-agent relationship to exist for sales tax
purposes, the conditions set forth in TSB-M-78(3)S must be met.
Those conditions are:
1.

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

2.

the advertising agency must obtain and retain written
evidence of agent 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.

Condition 1 above will be met only where the complete name

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TSB-A-88 (18)S
Sales Tax
February 29, 1988

of the client is disclosed on any purchase order given to a supplier and
the advertising agency is identified as agent acting for and on behalf
of the disclosed client (e.g., X advertising agency as agent for Y,
name of client). The mere listing of the client's account number or
name or the statement "for the account of" are deemed to be
insufficient for meeting condition 1.
Condition 2 above will be met only where there exists a
properly executed written agency agreement which clearly sets forth
that the advertising agency is appointed to act as agent for and on
behalf of the client with respect to making purchases.
Condition 3 above will be met when any expenditures by the
firm as agent for a client are billed to the client without being marked
up.
Petitioner states that it meets the three conditions necessary to establish a principal-agent
relationship based upon the following:
1)

Y&R discloses to the dealer/supplier that the property or
services are purchased for the government and

2)

The price billed the government, exclusive of its agency
fee, is the same amount paid to the supplier.

Petitioner states that it believes that the requirement of written evidence of agent status is met
for the following reasons:
1)

Y&R has a written contract, and receives a "Delivery Order"
prior to commencement of each project.

2)

Y&R does not initiate any project. It may act only upon an
order from the government.

3)

It must strictly adhere to the federal guidelines and
procurement regulations set forth in the contract and the
FAR's referred to therein.

4)

Y&R has no independence in selecting which goods and
services will be used in performing and fulfilling the contract.
It must submit an estimate which includes three bids. The
government selects which goods and services are used. Y&R
may only make recommendations.

5)

Title to the goods passes directly from the vendor to the
government.

6)

Y&R may not proceed with a project until funding has been
obligated and approval is granted.

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7)

TSB-A-88 (18)S
Sales Tax
February 29, 1988

Once the project has commenced, the government still retains
control. It may have the project changed or stopped at any
time (termination for convenience) FAR 52.249-04.

The Technical Services Bureau Memorandum states that an agency agreement "...will be met
only where there exists a properly executed written agency agreement..." (Condition 2) As previously
discussed, the contract which Petitioner submitted does not contain any language which indicates
the intention of the government to name Petitioner as an agent for USAREC. On the contrary,
language in the contract indicates that it is a cost-plus-fixed-fee type of contract. The contract
provides:
SECTION B SUPPLIES/SERVICES AND PRICES
B-2

PAYMENT
a.
For provisions of supplies and/or services in
compliance with delivery orders issued under this contract,
contractor shall be paid
(1) For in house labor by the contractor's employees, a
fixed price determined in accordance with paragraph H-8
of this contract, and
(2) For subcontracted supplies or services, the lesser of
contractor's actual costs or the ceiling price negotiated in
accordance with paragraph H-8 of this contract, subject to
price revision in accordance with paragraphs H-10 and H-11
of this contract. Contractor shall not be paid profit, fee,
overhead or commission on subcontract cost.

Moreover, Condition 1 is not met since the purchase order does not identify Petitioner as
agent acting for and on behalf of USAREC. On the contrary, it merely identifies the U.S. Army as
a "client."
The contract and purchase order supplied by Petitioner is in all respects consistent with the
status of Petitioner as contractor to USAREC whereby it will sell goods and services to USAREC.
Accordingly, it is concluded that such is Petitioner status for New York sales and use tax purposes.
The contract and purchase order are found to contain no language which could be construed as
creating a principal-agent relationship for New York sales and use tax purposes.
DATED:

February 29, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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