Does a direct-response advertising firm charge sales tax to its clients, or pay tax on its own purchases?

Plain-English summary

Names in News/Direct Response Inc. puts together card-deck mass mailings: it signs up advertisers, collects each client's printing "mechanical," sends them all to a printer (disclosing each client's name on the purchase order), rents a mailing list, and has the printer print and mail the ads. It then bills each client a service fee plus a pro rata share of the mailing-list rental and printing costs (not separately stated). It asked whether it must collect sales tax on its charges.

The Department's answer: it collects no tax from clients, but pays tax on its own purchases.

• It doesn't qualify as a sales-tax "agent." To be a principal-agent for sales-tax purposes, all three TSB-M-83(16)S conditions must be met: (1) fully disclose the client's name to the supplier and identify itself as agent for that client; (2) have a written agency agreement in place before buying any property/service; and (3) bill the client (excluding the agency fee) the same amount paid to the supplier — no markup, no using the property for its own account. On these facts, Petitioner does not meet the requirements.
• But it's still selling an exempt advertising service. Even without agent status, Petitioner is not selling tangible personal property to its clients — it is selling an advertising service, which is exempt (Tax Law § 1105(c)(1) excludes the services of advertising agents).
• So Petitioner is the consumer. It is the retail purchaser of everything it buys to perform the service. It must pay sales tax on its own taxable purchases (for example, mailing lists), but it is not required to collect tax from its advertising clients.
• Same result even if it were an agent. Had Petitioner qualified as an agent, it would still owe tax on those taxable purchases (as agent for its principals) and still not collect tax from clients.

What this means for you

An advertising agency is usually a consumer, not a reseller. In New York, advertising services are exempt, so the agency generally doesn't charge its clients sales tax. Instead, it pays tax on the taxable things it buys to do the work — mailing lists, and other taxable property or services.

Don't assume "agent" status saves tax — it usually doesn't change the bottom line. The strict three-part principal-agent test (disclosure, prior written agreement, no markup) is hard to meet, and even meeting it doesn't let the agency buy taxable inputs tax-free: the tax gets paid either way, either by the agency as consumer or by the agency as agent for its principals.

Where tax is actually owed: your inputs. Budget for sales tax on mailing-list rentals and other taxable purchases you make to produce a client's campaign — that's the taxable event, not your fee to the client.

Common questions

Q: Do I charge my advertising clients sales tax on my fee?
A: Generally no. You're selling an exempt advertising service (§ 1105(c)(1) excludes advertising agents), so you don't collect tax from clients. You instead pay tax on your own taxable purchases.

Q: If I set myself up as my clients' agent, can I buy the mailing lists and printing tax-free?
A: No. Even a qualifying agent must pay the sales/use tax due on taxable purchases — as agent for its principals. And meeting the three-condition test (full disclosure, prior written agency agreement, no markup) is strict; this firm didn't meet it.

Q: So where is the tax actually paid?
A: On your taxable inputs. For a card-deck mailer, the Department pointed to the mailing-list rental as a taxable purchase on which you (the consumer) owe sales tax.

Citations and references

Statute and memorandum:

• Tax Law § 1105(a) — imposes tax on sales of tangible personal property
• Tax Law § 1105(c)(1) — imposes tax on furnishing information by printed matter, but excludes the services of advertising or other agents (advertising services are exempt)
• TSB-M-83(16)S (June 10, 1983) — three conditions for a sales-tax principal-agent relationship: (1) the agency clearly discloses the client's full name to the supplier and identifies itself as agent for that disclosed client; (2) a properly executed written agency agreement exists before acquiring any property or service; and (3) the price billed to the client, exclusive of the agency fee, equals the amount paid to the supplier (no markup, no using the property for the agency's own account)

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_39s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(39)S
Sales Tax
August 8, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870812A

On August 12, 1987, a Petition for Advisory Opinion was received from Names in
News/Direct Response Inc., 1 Penn Plaza, New York, New York 10119.
The issue raised is whether Petitioner is required to collect tax on its charges for direct
response advertising.
Petitioner states that it solicits advertisers (clients) to be included in a mass mailing (Card
DEC) to a selected market. Upon acquiring a client, Petitioner executes a written agreement.
Petitioner states that it is appointed to act as agent for the client with respect to making purchases
by this written agreement. Petitioner's client then provides Petitioner with the mechanical needed to
print the advertising material. Upon acquiring a number of clients, Petitioner sends all of the
mechanicals to a printer. On the printer's purchase order, each client's full name is disclosed.
Petitioner rents a mailing list which he forwards to the printer. After the printer prints the
advertising material, he mails the advertising using the mailing list. The printer bills Petitioner for
his services and returns the mechanicals. Petitioner then bills his clients a fee for his service and a
pro rata share of the mailing list rental and the printers' fees. Neither of these fees are separately
stated on Petitioner's invoice to his client. Petitioner then returns the mechanicals to his clients.
Section 1105(a) of the Tax Law imposes a tax on the sale of tangible personal property.
Section 1105(c)(1) of the Tax Law imposes a tax upon the furnishing of information by printed
matter but excluding the services of advertising or other agents.
In order for a principal - agent relationship to exist for sales tax purposes, three conditions
must be met. Technical Services Bureau Memorandum, TSB-M-83(16)S, June 10, 1983 sets forth
these conditions as follows:
1.

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

2.

the advertising agent 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.

-2­
TSB-A-88(39)S
Sales Tax
August 8, 1988
Condition 1 above will be met only where the complete name 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.
Under the circumstances described by Petitioner, it does not appear that Petitioner meets the
requirement, as specified in TSB-M-83(16)S, for establishing a principal-agent relationship.
However, under such described circumstances, Petitioner is not considered to be selling tangible
personal property to its clients, but rather is considered to be selling an exempt advertising service.
As such, Petitioner is considered to be the retail purchaser of the tangible personal property and
services it acquires in performing its services. Accordingly, when Petitioner purchases taxable
tangible personal property or services, e.g. mailing lists, Petitioner must pay sales tax on such
purchases. However, Petitioner is not required to collect tax from its advertising clients under such
circumstances.
It should be noted that if Petitioner were to qualify as an agent within the meaning of TSB-M­
83(16)S, it would nevertheless be required to pay sales and use tax on its taxable purchases. Under
such circumstances, such purchases are considered to be taxable purchases by Petitioner's principals
and Petitioner, as their agent, would be required to pay any sales or use tax due. Of course, Petitioner
would not be required to collect sales tax from its clients when it bills its clients for reimbursement.

DATED: August 8, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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