Is designing a bank's retail interior a taxable design service or an exempt advertising service?

Plain-English summary

Michael Grossman's client designs the interior space of commercial retail establishments -- almost exclusively bank branches. The client isn't a licensed architect. The point of the design is to make the bank interior more inviting and user-friendly so customers are drawn in to use the bank's various services (investment accounts, credit cards, trust services, and so on). Grossman asked the Department whether this counts as a taxable interior decorating and design service, or as an exempt advertising service since the end goal is essentially promotional.

The Department said it's taxable design work. New York's regulations define advertising services narrowly: consultation and development of advertising campaigns, and placement of ads with the media, without any transfer of tangible personal property. Designing a bank's physical interior doesn't fit that definition -- it's still interior decorating and design, one of the services specifically listed as taxable under Tax Law § 1105(c)(7). The fact that the redesigned space might display promotional materials, or that the ultimate business goal is to attract more customers, doesn't convert the service into "advertising" for tax purposes. Because the client isn't a licensed architect, the narrow exclusion for licensed architects' professional services doesn't apply either.

The Department also flagged the applicable rate: as of this ruling, New York City's separate 4% local tax on interior decorating and design services had been repealed, so services delivered in New York City are taxed at the 4% statewide rate plus the 1/4% Metropolitan Commuter Transportation District (MCTD) tax (4.25% total). Services delivered elsewhere in the state are taxed at the 4% state rate plus the applicable local rate (plus MCTD tax where it applies), and services delivered entirely outside New York are exempt.

What this means for you

Interior designers, decorators, and design consultants (unlicensed)

If you're not a licensed architect or engineer, your interior design services are taxable under § 1105(c)(7) regardless of the client's ultimate business purpose. Emphasizing that the design serves a marketing or customer-experience goal doesn't shift it into the advertising-services exclusion -- the test looks at what service was actually performed (designing physical space), not why the client wanted it.

Advertising agencies and marketing consultants

The advertising-services exclusion under 20 NYCRR § 527.3(b)(5) is narrow: consultation on ad campaigns and media placement without transferring tangible property. If your engagement drifts into physically designing or redesigning a client's retail space, that portion of the work is design services, not advertising, and is taxable.

Accountants and tax professionals

Note the rate mechanics called out here: since the 1995 repeal of New York City's separate 4% design-services tax, interior decorating and design delivered in NYC is taxed at 4.25% (4% state + 0.25% MCTD), not the old combined city-plus-state rate -- worth double-checking on any older design-services engagement letters still referencing pre-1995 rates.

Common questions

Q: Does an unlicensed designer's work ever qualify as exempt advertising?
A: Only if the actual service is developing ad campaigns or placing ads with media, without transferring tangible property. Designing physical retail space is taxable design work even when the client's goal is promotional.

Q: Would the answer differ for a licensed architect?
A: Yes -- § 1105(c)(7) excludes services that consist of the actual practice of licensed architecture or engineering. This ruling applies because the client here was not a licensed architect.

Q: Does this ruling apply to my design business?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. It shows how the Department reasons, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(7) (interior decorating and designing services; architect/engineer exclusion)
• Tax Law § 1109 (Metropolitan Commuter Transportation District tax)
• 20 NYCRR § 527.3(b)(5) (advertising services exclusion)
• Laws of 1995, ch. 297, 298 (repeal of separate NYC interior decorating/design tax)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_35s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(35)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S971231A

On December 31, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Michael Grossman, 295 Madison Avenue, Room
804, New York, New York, 10017.
The issue raised by Petitioner, Michael Grossman, is whether the service
of designing interior space in commercial retail establishments is subject to
sales and compensating use tax or exempt as an advertising service.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner’s client is in the business of designing interior space in
commercial retail establishments, almost exclusively banks. The client is not
a licensed architect under the New York State Education Law. The end product of
the design is intended mainly to attract customers into using the various
services of the bank (i.e. investment, charge card, trust services, etc.) and
make the overall bank interior user friendly.
Applicable Law and Regulations
Section 1105(c) of the Tax Law imposes a tax on the following:
The receipts of every sale, except for resale, of the following services:
*

*

*

(7) Interior decorating and designing services, (whether or not in
conjunction with the sale of tangible personal property), by
whomsoever performed, including interior decorators and designers,
architects or engineers; notwithstanding the foregoing, such
services shall not include services which consist of the practice of
architecture, as defined in section seventy-three hundred one of the
education law, or the practice of engineering, as defined in section
seventy-two hundred one of the education law, if the services are
performed by an architect or engineer having a license or permit
under the education law.
Section 527.3(b)(5) of the Sales and Use Tax Regulations provides, in part:
Fees for the services of advertising agencies or other persons
acting in a representative capacity are excluded from the tax.
Advertising services consist of consultation and development of
advertising campaigns, and placement of advertisements with the
media without the transfer of tangible personal property....

-2­
TSB-A-98(35)S
Sales Tax

Opinion
Petitioner’s client provides design services to commercial retail
establishments. The end result of the services provided is a more user friendly
interior designed to attract customers into using various services of the bank,
such as investment, charge card and trust services.
Interior decorating and design services are specifically enumerated
services subject to sales tax under Section 1105(c)(7) of the Tax Law. These
services do not include services which consist of the practice of architecture
or engineering by a person licensed to practice architecture or engineering under
the Education Law. Petitioner’s client is not licensed to practice architecture
under the Education Law.
There is no suggestion that the services involve
engineering or that Petitioner’s client is licensed to practice engineering.
Therefore, Petitioner’s client’s design services are taxable interior decorating
and design services under Section 1105 of the Tax Law.
Section 527.3(b)(5)of the Sales and Use Tax Regulations states that
advertising services consist of consultation and development of advertising
campaigns and placement of advertising with the media without the transfer of
tangible personal property. The service of designing interiors of commercial
retail establishments does not come within this definition. The fact that the
interior space may be used to display materials of an advertising nature does not
change the service from a design service to an advertising service. Therefore,
the fees received by Petitioner’s client would not be considered fees for the
services of advertising, but rather fees for interior decorating and design
services.
Chapters 297 and 298 of the Laws of 1995 amended Articles 28 and 29 of the
Tax Law and the Administrative Code of New York City to repeal the 4 percent
sales and compensating use tax imposed by New York City on interior decorating
and design services.
As a result, interior decorating and design services
delivered in New York City are subject to tax at the rate of 4 and 1/4% (the 4%
statewide tax and the 1/4% Metropolitan Commuter Transportation District (MCTD)
tax imposed by Section 1109 of the Tax Law). Any services delivered within New
York State but outside New York City will be subject to the 4% statewide sales
and use tax and the applicable local sales and use tax rate in effect in the
jurisdiction where the services are delivered (including the 1/4% MCTD tax where
applicable). Any services delivered by Petitioner’s client outside New York
State will be exempt from sales and compensating use tax.

DATED: May 19, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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