Can a centralized advertising subsidiary buy and resell promotional materials to its affiliated retail companies tax-free when the materials are mailed free to customers in New York?

Plain-English summary

A national retail group planned to consolidate its advertising and promotional work in a new subsidiary ("Adco"), based in New York, that would produce printed promotional materials -- catalogs, mailers, and similar advertising literature -- for the group's various retail companies ("Clients") and mail them directly to those Clients' customers and prospective customers nationwide, free of charge. Adco would handle everything: design, printing, postage, and mailing-list management, paying all production costs itself. For the portion of materials going to Clients' New York customers, Adco would sell (transfer title to) the finished materials to the Clients for a fee before mailing them out, while Clients never actually took physical possession.

The law firm representing the group asked the Department whether this structure -- Adco's purchases to create the materials, and Adco's sales of the materials to its Clients -- qualified for New York's sales and use tax exemptions. The Department said yes, on both ends of the transaction:

• Adco's own purchases (printing, design work, materials) qualify for the resale exemption, since Adco buys these items and services intending to sell the finished promotional materials to its Clients.
• Adco's sales to Clients of materials destined for New York customers are exempt under Tax Law § 1115(n)'s promotional-materials exemption, because the materials are mailed to customers or potential customers free of charge, by common carrier or postal service, and are printed materials (or have had exempt production services performed on them). Related mailing-list purchases and mailing-list services are exempt too.

The Department did flag one carve-out: Adco must still collect and remit tax on the "store copies" of promotional materials shipped to Clients for use in their own retail stores, since those aren't being mailed free to customers -- they're materials the Client itself uses.

What this means for you

Advertising and marketing companies serving affiliated retail groups

If you operate a centralized advertising subsidiary that produces and mails promotional materials on behalf of related companies, you can generally buy production inputs tax-free for resale (using a Resale Certificate, Form ST-120) and sell the finished materials to your affiliates tax-free under the promotional-materials exemption -- provided the materials are actually mailed or shipped free of charge to end customers by a qualifying delivery method, and you obtain a properly completed Certificate of Exemption for Purchases of Promotional Materials (Form ST-121.2) within 90 days.

Retail corporate groups restructuring advertising operations

Consolidating advertising into one subsidiary doesn't create extra sales tax exposure on the mailed materials themselves, but remember the store-copy carve-out: any promotional materials that actually end up on your own retail premises (rather than mailed to customers) are taxable, and you'll owe tax on those store copies even though the bulk mailing is exempt.

Accountants and tax professionals

The ruling walks through both halves of a resale-then-exempt-resale structure: § 1101(b)(4)(i)/20 NYCRR § 526.6(c)(1) resale treatment on Adco's inbound purchases, then § 1115(n)(1) and (4) exemption (as explained in TSB-M-97(6)S) on Adco's outbound sales, plus § 1115(n)(2)/(5) exemptions for related mailing-list services and production services performed directly on exempt promotional materials. The proper certificates (ST-120 for resale, ST-121.2 for the promotional-materials exemption) are essential paperwork, not optional formalities.

Common questions

Q: Does an advertising subsidiary have to pay sales tax on materials it buys to produce customer mailers?
A: Not if it's buying those materials and services intending to resell the finished promotional materials to its affiliated clients -- those purchases qualify for the resale exemption with a proper Resale Certificate.

Q: Are the subsidiary's sales of the finished materials to its affiliates taxable?
A: Not when the materials are mailed or shipped free of charge to the affiliate's customers or potential customers by common carrier, U.S. mail, or a similar service, and are printed promotional materials (or exempt services were performed directly on them) -- Tax Law § 1115(n) exempts these sales.

Q: What about materials kept for use in the company's own stores?
A: Those "store copies" aren't mailed free to customers, so they don't qualify for the promotional-materials exemption -- sales/use tax applies to them.

Q: Can another company relying on a similar advertising-subsidiary structure use this ruling directly?
A: Not automatically. This is an advisory opinion binding the Department only as to the petitioner and the facts presented. A different corporate structure or distribution method could change the analysis.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(4)(i) (definition of retail sale)
• Tax Law § 1101(b)(12) (definition of promotional materials)
• Tax Law § 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law § 1115(n) (promotional materials exemption, paragraphs 1, 2, 4, 5)
• 20 NYCRR § 526.6(c)(1) (resale)
• TSB-M-97(6)S, Expanded Sales and Compensating Use Tax Exemption for Promotional Materials (Aug. 20, 1997)

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_79s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(79)S
Sales Tax
December 2, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980527A

On May 27, 1998, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Jones, Day, Reavis & Pogue, 599 Lexington Ave., New York, NY 10022. Petitioner,
Jones, Day, Reavis & Pogue, submitted a modified Petition on October 15, 1998.
The issue raised by Petitioner is whether in-state purchases by an advertising firm of
promotional materials and related services, and transfers of title, for a consideration, to the
promotional materials to affiliated clients of the advertising firm, are exempt from sales and use
taxes where the promotional materials are distributed to the New York addresses of customers or
potential customers of such affiliated clients.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Parent is a corporation and is the parent of a group of wholly owned subsidiaries engaged
in national retail businesses. Parent is incorporated in State A with its principal place of business
in New York. Members of the group actively market merchandise in retail stores located in New
York and numerous other states through extensive advertising campaigns which include the
distribution of printed promotional materials via U.S. mail and common carrier to customers and
potential customers, at no cost to such recipients, in the states from which the retail stores draw their
customers.
Members of the group desire to consolidate the advertising and promotional activities of the
group in a newly formed subsidiary of Parent (“Adco”). Adco will be incorporated in a state other
than New York and will have its principal office located in New York. Adco will hire a full-time
staff of employees and will engage in the advertising business in New York. Adco will provide
advertising services and promotional materials to one or more members of the group pursuant to
written contracts, for an arm’s length fee (each such member that contracts with Adco being herein
referred to as “Client”). Pursuant to its contracts, Adco will handle all aspects of producing
promotional materials, from the creation and design stage through delivery of the promotional
materials to the Client’s customers or potential customers.
Contracts with photographers, models, color separators, printers, mailing services, media and
the like, who are retained in connection with production of promotional materials will be negotiated
by Adco and will be in Adco’s name. Adco will pay all of its expenses to create the promotional
materials for its Clients, such as printing costs, postage, design costs, etc. Charges for Adco’s
advertising services and for the cost of producing “store copies” of promotional materials will be
separately stated on invoices sent to Clients by Adco. All employees performing work with respect
to the promotional materials prepared for the Clients will be employees of Adco. Promotional

-2TSB-A-98(79)S
Sales Tax
December 2, 1998

materials (other than store copies) will be mailed or shipped by Adco to Client’s customers or
potential customers, without charge to such customers or potential customers, by means of a
common carrier, United States postal service or like delivery service. Pursuant to its contracts with
Clients, Adco will not be the agent of, nor will its activities be controlled by, Parent or any member
of the group. Although in some cases title to finished promotional materials produced by Adco will
be transferred to Clients, in most cases Adco will retain title to the materials. However, it is
anticipated that, with respect to the promotional materials distributed to Clients’ New York
customers and potential customers, title to promotional materials will be transferred to Clients by
Adco, for a consideration, before the materials are sent to Clients’ customers or prospective
customers.
Adco will own, or have a license agreement to use, all mailing lists owned or used by its
Clients and will, as needed for each Client engagement, acquire such additional mailing lists as the
Clients may direct. Once Adco has produced promotional materials for a Client and sold them to
the client, Adco will arrange for the distribution of the materials to the customers or potential
customers of the Client through mailing service providers, without charge to such customers.
Promotional materials will be distributed to the Client’s customers or potential customers that are
located both inside and outside of New York. The Client will never take possession of the
promotional materials, with the exception of a limited number of “store copies” shipped to Clients
for use in their retail stores. The Client will pay applicable sales or use taxes to Adco with respect
to such “store copies,” and Adco will remit such taxes to the Department.
Applicable Laws and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
*

*

*

(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible
personal property . . .
*

*

*

(12) Promotional materials. Any advertising literature, other related tangible
personal property (whether or not personalized by the recipient’s name or other
information uniquely related to such person) and envelops used exclusively to
deliver the same. Such other related tangible personal property includes, but is not
limited to, free gifts, complimentary maps or other items given to travel club

-3TSB-A-98(79)S
Sales Tax
December 2, 1998

members, applications, order forms and return envelopes with respect to such
advertising literature, annual reports, promotional displays and Cheshire labels but
does not include invoices, statements and the like.
Section 1105(a) of the Tax Law imposes sales tax on the receipts of every retail sale of
tangible personal property, except as otherwise provided.
Section 1115(n) of the Tax Law provides, in part:
(1) Promotional materials mailed, shipped or otherwise distributed from a
point within the state, by or on behalf of vendors or other persons to their customers
or prospective customers located outside this state for use outside this state shall be
exempt from the tax imposed under subdivision (a) of section eleven hundred five
and the compensating use tax imposed under section eleven hundred ten of this
article.
(2) Services otherwise taxable under paragraph one or two of subdivision (c)
of section eleven hundred five of this article relating to mailing lists or activities
directly in conjunction with mailing lists shall be exempt from tax under this article
if such services are performed on or directly in conjunction with promotional
materials exempt under paragraph one of this subdivision.
*

*

*

(4) Notwithstanding any contrary provisions of paragraph one of this
subdivision, promotional materials which are printed materials and promotional
materials upon which services described in paragraph two of subdivision (c) of
section eleven hundred five have been directly performed shall be exempt from tax
under this article where the purchaser of such promotional materials mails or ships
such promotional materials, or causes such promotional materials to be mailed or
shipped, to its customers or prospective customers, without charge to its customers
or prospective customers, by means of a common carrier, United States postal
service or like delivery service.
(5) Services otherwise taxable under paragraph two of subdivision (c) of
section eleven hundred five performed on promotional materials exempt under
paragraph four of this subdivision shall be exempt from tax under this article.
Section 526.6(c)(1) of the Sales and Use Tax Regulations provides:
Where a person, in the course of his business operations, purchases tangible
personal property or services which he intends to sell, either in the form in which
purchased, or as a component part of other property or services, the property or

-4TSB-A-98(79)S
Sales Tax
December 2, 1998

services which he has purchased will be considered as purchased for resale, and
therefore not subject to tax until he has transferred the property to his customer.
Opinion
Technical Service Bureau Memorandum, Expanded Sales and Compensating Use Tax
Exemption for Promotional Materials, August 20, 1997, TSB-M-97(6)S, provides, in part:
Promotional Materials Exempt Under Section 1115(n)(4) of the Tax Law
Printed Promotional Materials
Effective March 1, 1997, printed promotional materials mailed or shipped to
destinations in the state are exempt from tax when all of the conditions listed below
are met.
•

The printed promotional materials are ultimately mailed or shipped to
customers or prospective customers of the purchaser of the printed
promotional materials.

•

The printed promotional materials are mailed or shipped by the purchaser of
the materials using a common carrier, the U.S. Postal Service or a like
delivery service. (This requirement is also met if the mailing or shipping is
arranged by a third party (such as a printer/mailer) on behalf of the
purchaser of the promotional materials.)

•

There is no charge to the purchaser's customer or prospective customer
(ultimate recipient) for the promotional materials, or for mailing or shipping
them.

•

The purchaser of the promotional materials gives a properly completed Form
ST-121.2, Certificate of Exemption for Purchases of Promotional Materials,
to the seller of the promotional materials.

In this case, pursuant to its contracts, Adco will handle all aspects of producing promotional
materials, from the creation and design stage, through sale to the Client and delivery of the
promotional materials to the Client’s customers or potential customers. Such promotional materials
will be mailed or shipped to the Client’s customers or potential customers located inside and outside
New York, without charge to such customers or potential customers, by means of a common carrier,
United States Postal Service or like delivery service. Adco will pay all of its expenses to create the
promotional materials for its Clients, such as printing costs, postage, design costs, etc. Adco will
own, or have a license agreement to use, all mailing lists owned or used by its Clients and will, as
needed for each Client engagement, acquire such additional mailing lists as the Clients may direct.

-5TSB-A-98(79)S
Sales Tax
December 2, 1998

Pursuant to its contracts with Clients, Adco will not be the agent of, nor will its activities be
controlled by, Parent or any member of the group of subsidiaries owned by Parent.
Adco will, for a consideration, transfer title to its Clients to those promotional materials
which Adco will distribute to Clients’ customers in New York. Such a transfer, for consideration,
constitutes a sale of tangible personal property. Since Adco will sell the promotional materials to
its Clients, Adco may purchase the promotional materials for resale. Accordingly, in such instances,
Adco’s purchases of the promotional materials will not be subject to sales and compensating use
taxes. See Section 1101(b)(4)(i) of the Tax Law and Section 526.6(c) of the Sales and Use Tax
Regulations.
Adco’s sales to its Clients of those promotional materials which Adco will distribute, on its
Clients’ behalf, to Clients’ customers or potential customers in New York, without charge to such
customers or potential customers, by means of common carrier, United States Postal Service or like
delivery service will be exempt from sales and compensating use taxes under Section 1115(n)(4) of
the Tax Law, if the promotional materials are printed promotional materials or have had services
described in Section 1105(c)(2) of the Tax Law performed directly upon them. Likewise, Adco’s
sales of such promotional materials to its Clients will be exempt where such promotional materials
are delivered outside New York for use outside New York.
In addition to Adco purchasing the promotional materials exempt from sales and
compensating use taxes, Adco may also purchase the services described under Section 1105(c)(2)
of the Tax Law consisting of producing, fabricating, processing, printing, or imprinting exempt from
sales tax under Section 1115(n)(5) of the Tax Law, when these services are performed on such
exempt promotional materials. Mailing lists and mailing list services relating to such exempt
promotional materials are exempt from tax under Section 1115(n)(2).
In order for Adco to purchase the promotional materials for resale, Adco should present a
properly completed Resale Certificate (Form ST-120) to the vendor within 90 days of delivery of
the property. In order for Adco to purchase promotional materials and related services exempt from
tax in cases where all of the conditions for exemption under Section 1115(n) of the Tax Law have
been met, Adco should present a properly completed Certificate of Exemption for Purchases of
Promotional Materials (Form ST-121.2) to the vendor within 90 days of the purchase. Adco’s
Clients should present a properly completed Form ST-121.2 to Adco on their purchases of exempt

-6TSB-A-98(79)S
Sales Tax
December 2, 1998

promotional materials from Adco. See Section 1132(c) of the Tax Law and Section 532.4 of the
Sales and Use Tax Regulations.

DATED: December 2, 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.