When a Tennessee advertising agency develops a brochure through consultation, research, design, and production phases, which of those phases and charges are taxable, and which are exempt under Tennessee's 2009 advertising-materials law?

Plain-English summary

A Tennessee advertising agency builds brochures for clients in phases: consultation (developing strategy, budgeting), research and development (concepts), design (brochure mock-ups with art, copy, and purchased or created images), and production (revising based on client feedback into a final proof, then printing — either by the agency through a third-party printer, passed through to the client, or by the client elsewhere). The agency asked the Department to sort out how Tennessee's 2009 "advertising materials" statute (§ 67-6-312, with related definitions in § 67-6-102) taxes each piece of this process.

The framework has three buckets, each taxed differently:

1. Advertising materials (the finished brochures) — fully taxable. Printed brochures made from the agency's final proof are "advertising materials" (tangible personal property produced to advertise something, not preliminary artwork). Their taxable sales price includes the entire cost of the transaction — design, development, final artwork, and all advertising services baked into the process — unchanged from pre-2009 law. If the agency coordinates printing through a third-party printer, the agency can buy the printed brochures tax-free with a resale certificate (since it's reselling them to the client), but the printing charges it passes through to the client, plus its own print-coordination fee, are taxable as part of the brochure's sales price — regardless of markup or separate itemization.

2. Final artwork (the final proof used for printing) — taxable, but on a narrower base. This is where the 2009 law changed things: final artwork is still taxable, but only on costs "directly allocable to the production of final artwork" — meaning printing, paper/ink, and photography/stock-image costs tied directly to creating that final proof. Advertising-service fees are excluded from this base, a real departure from the old Crescent line of cases that used to pull the entire "crucial/essential/integral" service cost into the tax base. The agency also cannot use a resale certificate to buy artwork or images that get incorporated into final artwork — those purchases are taxed directly to the agency (per Kingsport Publ'g Corp. v. Olsen, copied-in artwork doesn't become a literal "component part" of the finished product).

3. Preliminary artwork and pure advertising services (mock-ups, preliminary proofs, consultation/research/design work) — NOT taxable. This is the other big 2009 change: the transfer of preliminary artwork by an agency to its client, and the agency's own use of preliminary artwork to provide advertising services, are both now exempt — even though pre-2009 case law would have taxed them as "crucial" to the transaction. Brochure mock-ups and preliminary proofs (created solely to convey ideas/concepts to the client, not yet ready for printing) qualify as exempt "preliminary artwork," and the underlying consultation, research, and design services qualify as nontaxable "advertising services" (since advertising isn't an enumerated taxable service). These costs only become taxable later, folded into the sales price of whatever final advertising materials eventually get sold.

What this means for you

Tennessee advertising agencies producing brochures, catalogs, or similar materials

Track your costs by phase: preliminary mock-ups/proofs and the underlying consultation/design/research services are tax-free to transfer or use, final artwork (the print-ready proof) is taxable on a narrower "directly allocable" cost base excluding service fees, and the finished printed materials are taxable on the full cumulative cost. Don't use a resale certificate for artwork/images you incorporate into final artwork — that purchase is taxable to you directly, even though the brochures themselves can be bought resale-certificate-free from your printer.

Businesses hiring advertising agencies

Expect your invoice to potentially separate three components with different tax treatment: nontaxable strategy/concept work, taxable final-artwork production costs, and taxable finished-materials/printing costs — itemization on the invoice doesn't change what's legally taxable, since pass-through printing and coordination charges are taxable "regardless of any separate itemization."

Accountants and tax professionals

This is the leading TN ruling working through the 2009 advertising-materials trifurcated statute (§ 67-6-312(a)/(b)/(c)) in detail, displacing the old Crescent "crucial/essential/integral" bundling line of cases (Thomas Nelson, Inc. v. Olsen; AT&T Corp. v. Johnson; Rivergate Toyota, Inc. v. Huddleston) specifically for preliminary and final artwork, while leaving that bundling doctrine's logic intact for the broader "advertising materials" sales-price calculation. Note the geographic limit too: even with all costs folded into the sales price, Tennessee sales/use tax only reaches the portion of materials where title/possession transfers in Tennessee.

Out-of-state distribution context

Compare to RR 12-31 (printed advertising materials shipped through a TN distribution center) — both rulings confirm that only the in-Tennessee portion of advertising-material distribution is taxed, even though the full production cost is the tax base for whatever portion is taxable.

Common questions

Q: Are brochure mock-ups and concept sketches taxable when handed to a client for review?
A: No — since 2009, transferring "preliminary artwork" (mock-ups, concept sketches, preliminary proofs produced solely to convey ideas) is exempt, a reversal from pre-2009 law.

Q: If my agency marks up the printing cost it passes through to me, does that change the tax treatment?
A: No — the full passed-through printing charge (marked up or not) is taxable as part of the brochure's sales price, regardless of separate invoice itemization.

Q: Can an advertising agency use a resale certificate to buy stock photos or artwork used in the final brochure design?
A: No — artwork/images incorporated into final artwork must be purchased with sales/use tax paid directly by the agency; resale certificates can't be used for items the agency itself consumes in production (as opposed to literally reselling).

Q: Can another advertising agency rely on this letter ruling for its own brochure production process?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes and rules (Tenn. Code Ann. / Tenn. Comp. R. & Regs.):

• § 67-6-312 (2011) (advertising materials/final artwork/preliminary artwork framework, enacted by 2009 Tenn. Pub. Acts ch. 530)
• § 67-6-102(2) (definition of "advertising materials"); § 67-6-102(40) (definition of "final artwork"); § 67-6-102(65) (definition of "preliminary artwork"); § 67-6-102(3) (definition of "advertising services," including enumerated examples at (3)(A)(i)-(xiv)); § 67-6-102(1) (definition of "advertising agency")
• § 67-6-102(78) (definition of "retail sale"); § 67-6-102(80)(A), (C) (definition of "sale," services taxable)
• § 67-6-102(77)(A) (definition of "resale"/"sale for resale"); § 67-6-102(81)(A), (81)(A)(ii), (81)(A)(vi) (definition of "sales price," bundling provision); § 67-6-102(74) (purchase price = sales price); § 67-6-102(91)(A) (tangible personal property); § 67-6-102(26) (digital equivalent)
• § 67-6-201(a)(3); § 67-6-205(c); §§ 67-6-226 to -227 (cable/satellite TV tax); §§ 67-6-101 to -907 (2011) (Retailers' Sales Tax Act)
• § 67-6-202(a) (2011) (sales price tax base); § 67-6-203 (2011) (use tax)
• Tenn. Comp. R. & Regs. 1320-5-1-.67(2) (2008) (printing/binding taxable fabrication unless part of manufacturing for resale)
• Tenn. Comp. R. & Regs. 1320-5-1-.68(1), (3) (2008) (resale certificates)
• Tenn. Comp. R. & Regs. 1320-5-1-.99(2) (1974) (advertising agency markup tax treatment)

Case law:

• Nashville Clubhouse Inn v. Johnson, 27 S.W.3d 542, 544 (Tenn. Ct. App. 2000) (elements of a taxable sale)
• Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994) (only enumerated services taxable)
• Tomkats Catering, Inc. v. Johnson, 2001 WL 1090516, at *2 (Tenn. Ct. App. Sept. 19, 2001) (bundled taxable/nontaxable charges fully taxable)
• Crescent Amusement Co. v. Carson, 213 S.W.2d 27 (Tenn. 1948); Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 625 (Tenn. 1987); AT&T Corp. v. Johnson, 2002 WL 31247083, at 7-9 (Tenn. Ct. App. Oct. 8, 2002); Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720, at 4 (Tenn. Ct. App. Feb. 27, 1998) ("Crescent line of cases" — crucial/essential/integral bundling doctrine, partly superseded by § 67-6-312(b) for final artwork)
• Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 407 (Tenn. 1976); Nashville Mobilphone Co. v. Woods, 655 S.W.2d 934, 935-37 (Tenn. 1983) ("merely incidental" property transfer not taxable)
• Kingsport Publ'g Corp. v. Olsen, 667 S.W.2d 745, 746-47 (Tenn. 1984) (copied-in artwork not a resold component part)
• Byrant v. Genco Stamping & Mfg. Co., 33 S.W.3d 761, 765 (Tenn. 2000) (usual/accepted meaning of undefined statutory terms)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/12-33.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-33
WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
The application of the exemption found under TENN. CODE ANN. § 67-6-312 (2011) to an
advertising agency’s creation of brochures.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS
[TAXPAYER] (the “Taxpayer”) is [ENTITY TYPE] with its principal place of business located
in [TENNESSEE]. The Taxpayer is engaged in the business of providing advertising services,
including the development of advertising brochures. When an advertising strategy involves the
creation of a brochure, the Taxpayer will produce the brochure in several phases.

1

When the Taxpayer is hired by a customer, it spends a substantial amount of time during the
“consultation phase” consulting with the customer in order to develop a general advertising
strategy. The Taxpayer also provides account planning services, such as budgeting. Such
consultation usually starts at the beginning of a client project, but oftentimes carries forward
throughout the client relationship.
Next, the Taxpayer engages in the “research and development” phase, whereby it conducts
research and develops a concept (or multiple concepts) for the brochure.
After developing one or more potential concepts, the Taxpayer next engages in the “design
phase” whereby it produces brochure mock-ups for the customer’s review. This phase involves
art direction, design, and drafting of copy text. The Taxpayer also creates or purchases necessary
photographs, graphic designs, artwork, or other images (collectively referred to as the “artwork
or images”) needed to develop the mock-up or mock-ups. It is not known at the time a mock-up
is created whether any copy text, artwork, or other images included in such mock-up will be
included in a final brochure proof.
After the customer approves an initial mock-up, the Taxpayer begins the “production phase” of
brochure development. During this phase, based on customer comments or critique, the Taxpayer
makes necessary modifications to the design, copy text, or artwork or images and will often
prepare additional preliminary proofs for customer review. Once all customer critiques are
incorporated, the Taxpayer produces a final proof. The customer will either take the final proof
and have it printed elsewhere, or contract with the Taxpayer to have it printed. When the
customer chooses to have the Taxpayer handle the printing, the Taxpayer contracts with a thirdparty printer to perform the printing. The Taxpayer passes the printing charge through to the
customer, along with a charge for the Taxpayer’s print coordination and management services.
Less than five percent of the time, clients provide artwork or images to the Taxpayer for use in
creating a brochure. The rest of the time, the Taxpayer purchases artwork and images from third
parties.
RULINGS

1. When customers choose to have the Taxpayer coordinate the printing of brochures, do the
   brochures printed utilizing the final proof produced by the Taxpayer constitute “advertising
   materials” for purposes of TENN. CODE ANN. § 67-6-312 (2011)?
   Ruling: Yes. The brochures printed utilizing the final proof produced by the Taxpayer
   constitute “advertising materials” for purposes of TENN. CODE ANN. § 67-6-312 (2011).
2. When customers choose to have the Taxpayer coordinate the printing of brochures, do the
   printing charges that the Taxpayer passes through to its customers constitute taxable charges?
   Ruling: Yes. When customers choose to have the Taxpayer coordinate the printing of
   brochures, the printing charges that the Taxpayer passes through to its customers are subject
   to the Tennessee sales and use tax.

2

3. When customers choose to have the Taxpayer coordinate the printing of brochures, are the
charges levied by the Taxpayer for its service of coordinating and managing the brochure
printing process subject to the Tennessee sales and use tax?
Ruling: Yes. When customers choose to have the Taxpayer coordinate the printing of
brochures, the charges levied by the Taxpayer for its service of coordinating and managing
the brochure printing process are subject to the Tennessee sales and use tax as part of the
sales price of the brochures.

4. Does the final proof created by the Taxpayer during the production phase constitute “final
   artwork” for purposes of TENN. CODE ANN. § 67-6-312 (2011)?
   Ruling: Yes. As described in the Facts section, the final proof created by the Taxpayer during
   the production phase constitutes “final artwork” for purposes of TENN. CODE ANN. § 67-6312 (2011).
5. Does the sales price of final artwork include only costs attributable to the preparation of a
   final proof after receiving customer critique from any additional preliminary proofs provided
   by the Taxpayer to its clients?
   Ruling: The sales price of final artwork includes all costs directly allocable to the production
   of final artwork, excluding advertising services. There could be costs incurred prior to the
   customer critiquing the final proof that are not advertising services and are directly allocable
   to the production of final artwork.
6. May the Taxpayer use a resale certificate to purchase artwork and images that are
   incorporated into final artwork?
   Ruling: No. The Taxpayer may not use a resale certificate to purchase artwork and images
   that are incorporated into final artwork.
7. Do the brochure mock-ups and preliminary proofs produced by the Taxpayer, including
   artwork or images created or purchased by the Taxpayer and incorporated therein, constitute
   “preliminary artwork” for purposes of TENN. CODE ANN. § 67-6-312 (2011)?
   Ruling: The brochure mock-ups and the preliminary proofs produced by the Taxpayer
   constitute “preliminary artwork” for purposes of TENN. CODE ANN. § 67-6-312 (2011).
   Artwork or images purchased by the Taxpayer are not “preliminary artwork,” and the
   Taxpayer must pay Tennessee sales or use tax on its purchase of those items.
8. Do the Taxpayer’s services provided during the creation of the brochure mock-ups and
   preliminary proofs constitute nontaxable “advertising services” for purposes of TENN. CODE
   ANN. § 67-6-312 (2011)?
   Ruling: The Taxpayer’s services provided during the creation of the brochure mock-ups and
   preliminary proofs constitute “advertising services” for purposes of TENN. CODE ANN. § 676-312 (2011). Such services are not taxable at the time they are rendered, but they are

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included in the sales price of any “advertising materials” ultimately created and sold in the
course of providing such services.
ANALYSIS
Under the Retailers’ Sales Tax Act, 1 the retail sale in Tennessee of tangible personal property
and specifically enumerated items and services is subject to the sales and use tax, unless an
exemption applies. The sales tax is levied on the “sales price” 2 of tangible personal property or
taxable services, while the use tax is levied on the “purchase price” 3 of tangible personal
property not sold within Tennessee but “used, consumed, distributed, or stored for use or
consumption” in Tennessee. 4
TENN. CODE ANN. § 67-6-102(78) (2011) defines the term “retail sale” as “any sale, lease, or
rental for any purpose other than for resale, sublease, or subrent.” Moreover, TENN. CODE ANN.
§ 67-6-102(80)(A) defines the term “sale” in pertinent part to mean “any transfer of title or
possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or
by any means whatsoever of tangible personal property for a consideration.” 5
Tangible personal property, as defined in the Retailers’ Sales Tax Act, means “personal property
that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible
to the senses.” 6
Services are also taxable under the Retailers’ Sales Tax Act. 7 But the sales tax does not apply to
all services; rather, it only applies to retail sales of those services specifically enumerated by the
Retailers’ Sales Tax Act. 8
There are two ways that even non-enumerated services may, however, be included in the sales
price of a given transaction, despite not being directly subject to tax. First, a nontaxable service
or item may be subject to taxation when charges for the nontaxable service or item are combined
1

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN.
CODE ANN. §§ 67-6-101 to -907 (2011)).
2

The “sales price” generally means “the total amount of consideration . . . for which personal property or services
are sold, leased, or rented.” TENN. CODE ANN. § 67-6-102(81)(A) (2011).
3

Although appearing to apply a different measure in the use tax context, “‘[p]urchase price’ has the same meaning
as sales price.” TENN. CODE ANN. § 67-6-102(74).

4

TENN. CODE ANN. § 67-6-203 (2011).

5

Accord Nashville Clubhouse Inn v. Johnson, 27 S.W.3d 542, 544 (Tenn. Ct. App. 2000) (“[T]here are three
elements necessary to constitute a taxable sale: (1) the transfer of title or possession or both, (2) of tangible personal
property, and (3) for a consideration.”).

6

TENN. CODE ANN. § 67-6-102(91)(A).

7

TENN. CODE ANN. § 67-6-201(a)(3) (2011); see also TENN. CODE ANN. § 67-6-102(80)(C).

8

See Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder Truck Rental, Inc. v.
Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994); see also TENN. CODE ANN. §
67-6-205(c) (enumerated services) (2011); TENN. CODE ANN. §§ 67-6-226 to -227 (tax on cable and satellite
television services) (2011).

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with charges for a taxable good or service into a single price. Specifically, TENN. CODE ANN.
§ 67-6-102(81)(A) provides that the sales price of a good or service equals the “total amount of
consideration . . . for which personal property or services are sold.” Thus, if taxable goods or
services and nontaxable goods or services are sold together for a single charge, the entire charge
is generally subject to taxation, with the bundled sales price as the measure of the tax. 9
The second manner in which a non-enumerated service will be included in the sales price of a
transaction is where the service is intertwined with the sale of taxable tangible personal property.
The definition of “sales price” provides in pertinent part that there will be no deductions for
“labor or service” cost by the seller, and also includes “[c]harges by the seller for any services
necessary to complete the sale, other than delivery and installation charges.” 10
A line of cases, beginning with Crescent Amusement Co. v. Carson, 213 S.W.2d 27 (Tenn.
1948), expand this concept, establishing that 1) where a sale of a non-enumerated service is
accompanied by tangible personal property that is a “crucial,” “essential,” or “integral” element
of the transaction, the sales price will include the entire cost of the transaction, including the
value of the non-enumerated service, 11 and conversely, 2) where a sale of tangible personal
property is accompanied by non-enumerated services that are a “crucial,” “essential,” or
“integral” element of the transaction, the sales price will include the entire cost of the
transaction, including the value of the non-enumerated services. 12
In contrast, where a transfer of tangible personal property is “merely incidental” to a sale of a
non-enumerated service, the transaction would not be subject to sales tax. 13
In 2009, the Tennessee General Assembly created limited exemptions for certain transactions
involving property transferred during an advertising agency’s provision of advertising services. 14
The new exemptions are codified in a trifurcated statute that is heavily dependent on new

9

See Tomkats Catering, Inc. v. Johnson, No. M2000-03107-COA-R3-CV, 2001 WL 1090516, at *2 (Tenn. Ct. App.
Sept. 19, 2001); cf. TENN. CODE ANN. § 67-6-102(81)(A)(vi) (“Sales price” includes “[t]he value of exempt personal
property given to the purchaser where taxable and exempt personal property have been bundled together and sold by
the seller as a single product or piece of merchandise.”).
10

TENN. CODE ANN. § 67-6-102(81)(A)(ii).

11

See, e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 625 (Tenn. 1987).

12

See, e.g., AT&T Corp. v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at 7-9 (Tenn. Ct. App.
Oct. 8, 2002); see also Rivergate Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL 83720, at 4
(Tenn. Ct. App. Feb. 27, 1998).
For convenience, the four (4) cases cited in this paragraph will be referred to as the “Crescent line of cases.”
13

See Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 407 (Tenn. 1976) (citing Washington Times-Herald, Inc.
v. District of Columbia, 213 F.2d 23 (1954)); cf. Nashville Mobilphone Co. v. Woods, 655 S.W.2d 934, 935-37
(Tenn. 1983) (holding that the renting out of radio equipment was merely incidental to the taxpayer’s principal
business of “furnishing services as a ‘radio common carrier system,’” and therefore the taxpayer’s purchase of the
radio equipment was subject to sales or use tax).

14

See Act of June 17, 2009, ch. 530, § 55, 2009 Tenn. Pub. Acts 780, 799 (codified at TENN. CODE ANN. § 67-6-312
(2011)).

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terminology, also defined within the legislation. 15 The particular nuances of this legislation will
be addressed in the responses to the Taxpayer’s questions below.
Tax Treatment of Brochures and Associated Printing Charges.
The 2009 legislation did not change the application of prior Tennessee jurisprudence as to the
final products of advertising that are actually sold or used, with TENN. CODE ANN. § 67-6-312(c)
(2011) declaring that “[t]he sale or use of advertising materials” is subject to the Tennessee sales
and use tax.
“Advertising materials” is a term of art incorporated into the 2009 legislation, statutorily defined
in TENN. CODE ANN. § 67-6-102(2) as “tangible personal property or its digital equivalent
produced to advertise a product, service, idea, concept, issue, place or thing, including, but not
limited to, brochures, catalogs and point-of-purchase materials, but not including preliminary
artwork” 16 and not including certain original sound recordings or video recordings.
Accordingly, for the Taxpayer’s brochures to constitute “advertising materials,” the following
requirements must be met: 1) the brochures must be tangible personal property or its digital
equivalent; 2) the brochures must be produced to advertise a product, service, idea, concept,
issue, place or thing; and 3) the brochures must not be preliminary artwork. 17
First, the facts indicate that the brochures are tangible personal property because the Taxpayer
has stated that its clients will have either the Taxpayer, or another firm, print the brochures.
Printed brochures can be “seen, weighed, measured, felt, or touched,” and are consequently
tangible personal property. 18
Second, the brochures are produced to advertise a product, service, idea, concept, issue, place or
thing. Brochures are in fact expressly included in the examples of “advertising materials” listed
in TENN. CODE ANN. § 67-6-102(2).
Third, the brochures are not preliminary artwork. Although the characteristics of “preliminary
artwork,” another term of art in the 2009 legislation, will be discussed below, the primary
distinction between preliminary artwork and advertising materials is that preliminary artwork is
created to convey ideas to the client of an advertising agency, while advertising materials are
created to sell products and services to the client’s potential customers. 19 The brochures here are
15

See Act of June 17, 2009, ch. 530, § 56, 2009 Tenn. Pub. Acts at 799-800 (codified at TENN. CODE ANN. § 67-6102(1)-(3), (40), (65) (2011)).
16

(Emphases added).

17

The brochures are clearly not sound or video recordings, so this ruling does not explore that aspect of the TENN.
CODE ANN. § 67-6-102(2) definition of “advertising materials.”
18

See TENN. CODE ANN. § 67-6-102(91)(A). Note also that, under TENN. CODE ANN. § 67-6-102(2), even if the
Taxpayer’s clients do not physically print the brochures but instead create a digital brochure, that would be the
digital equivalent to a printed brochure. Cf. TENN. CODE ANN. § 67-6-102(31) (treating, for purposes of the TENN.
CODE ANN. § 67-6-233 tax on “specified digital products,” a “digital book” as “works that are generally recognized
in the ordinary and usual sense ‘books’ that are transferred electronically.”).
19

Compare TENN. CODE ANN. § 67-6-102(65) (defining “preliminary artwork), with TENN. CODE ANN. § 67-6102(2) (defining “advertising materials”).

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produced to advertise the Taxpayer’s client’s product or service to potential customers, and thus
cannot be properly characterized as preliminary artwork.
Accordingly, brochures printed utilizing the final proof produced by the Taxpayer constitute
“advertising materials” for purposes of TENN. CODE ANN. § 67-6-312.
The calculation of the sales price of advertising materials was not altered by the General
Assembly’s enactment of the 2009 legislation. 20 The sales price of such advertising materials
consequently includes the total amount of consideration given for the advertising materials, 21
without any deduction for the “cost of materials used, labor or service cost, interest, losses, all
costs of transportation to the seller, all taxes imposed on the seller, and any other expense of the
seller.” 22 Consequently, the sales price of such advertising materials would include the “entire
cost of the transaction,” including charges for final artwork and all advertising services provided
during the entire process of designing and developing the advertising materials. 23
In addition, if the client chooses to have the Taxpayer coordinate the printing of the client’s
brochures, any fees the Taxpayer charges for such services, though not an enumerated service
under TENN. CODE ANN. § 67-6-205(c) (2011), would also be included in the sales price of the
brochures for the reasons just discussed.
Finally, the Taxpayer has indicated that it contracts with a third-party printer to perform the
printing of the brochures and then passes the printing charges through to its client. The printing
of brochures is generally subject to sales and use tax, unless such printing is “part of a
manufacturing process for resale.” 24
Here, the third-party printer is fabricating the brochures so that the Taxpayer may resell them to
its client. 25 Because the fabrication is for resale, the Taxpayer will not be subject to sales and use
tax on its purchase of the brochures, provided that it presents a valid resale certificate to the
third-party printer. 26
The charges that are passed along to the Taxpayer’s client for the printing of the brochures will
be subject to sales and use tax as a component of the sales price of the brochures. This is the
20

Cf. TENN. CODE ANN. § 67-6-312(c).

21

See TENN. CODE ANN. §§ 67-6-102(81)(A), -202(a).

22

TENN. CODE ANN. § 67-6-102(81)(A)(ii) (emphases added).

23

See generally Thomas Nelson, Inc., 723 S.W.2d at 622-24; AT&T Corp., 2002 WL 31247083, at 8-9; Rivergate
Toyota, Inc., 1998 WL 83720, at 4 (advertising brochures taxable based on the “‘entire cost of the transaction’”).
Note that advertising services would also be included in the sales price because advertising services are a “crucial”
or “integral” element of the transaction, without which no advertising materials could be developed.
24

See TENN. COMP. R. & REGS. 1320-5-1-.67(2) (2008) (The “printing and binding of paper, books, forms, letters,
and the like is a fabrication thereof, and is subject to the Sales or Use Tax unless the fabrication is a part of a
manufacturing process for resale.”).
25

See generally TENN. CODE ANN. § 67-6-102(77)(A) (“‘Resale’ means a subsequent, bona fide sale of the property,
services, or taxable item by the purchaser.”). Observe that all “sales for resale” must be in “strict compliance with
[the] rules and regulations promulgated by the [Commissioner of Revenue].” TENN. CODE ANN. § 67-6-102(77)(A).
26

See TENN. COMP. R. & REGS. 1320-5-1-.68 (2008) (resale certificates).

7

case, regardless of whether the Taxpayer chooses to mark up the printing costs. 27 Additionally,
such charges are part of the sales price of the brochures, regardless of any separate itemization
on the invoice given to the client.
In summary, the brochures produced by the Taxpayer from the final proof constitute “advertising
materials” for the purposes of TENN. CODE ANN. § 67-6-312. The sales price of the brochures,
both under Tennessee law prior to and following the 2009 legislation, is comprised of all the
costs incurred in developing the brochures, including any materials or services necessary to
produce the brochures throughout the entire advertising design process, and including any
printing fees or print coordination fees charged by the Taxpayer to its client, regardless of
whether the Taxpayer marks up the fees.
Note, however, that even though all of the costs involved in creating the brochures are included
in the sales price of the brochures, the Tennessee sales and use tax still only applies to those
brochures where “title or possession” transfers to the Taxpayer’s client in Tennessee. 28 As a
general example, if a client hires the Taxpayer to produce brochures of which 25% are for use in
Tennessee and the remaining 75% are shipped outside of Tennessee without the client taking title
or possession in Tennessee, the Tennessee sales and use tax only applies to the 25% of the
brochures sold or used in Tennessee. 29
Tax Treatment of Final Proof and Associated Services
Although the taxation of advertising materials under TENN. CODE ANN. § 67-6-312(c) is identical
to their taxation prior to the 2009 legislation, the same is not true for final artwork. Before
discussing how final artwork is treated differently under the law enacted in 2009, it is first
necessary to explain why the final proof created by the Taxpayer constitutes “final artwork”
within the meaning of TENN. CODE ANN. § 67-6-102(40).
“Final artwork” means “tangible personal property or its digital equivalent that is suitable for use
in producing advertising materials and includes, but is not limited to, photographs, illustrations,
drawings, paintings, calligraphy, models and similar works that are used to produce advertising

27

Cf. TENN. COMP. R. & REGS. 1320-5-1-.99(2) (1974) (“In the event an advertising agency . . . obtains tangible
personal property for a client and charges the client more for the property than the agency pays for the property[,]
the agency shall collect, report and pay the Sales or Use Tax on the amount actually charged or received for the
tangible personal property.”).
28

See TENN. CODE ANN. § 67-6-102(80)(A) (defining “sale” in part as “any transfer of title or possession, or both
. . . of tangible personal property for a consideration”).
29

Although the result would be the same prior to 2009 regarding advertising materials, a different result would have
been reached for preliminary or final artwork prior to 2009. If, for example, a company based in Tennessee had an
advertising campaign designed entirely out of state but concept models were sent into Tennessee for approval, the
company would owe sales or use tax on the entire cost of creating the concept models, even if none of the
advertising materials ultimately created from those models were ever used in Tennessee. Cf. Thomas Nelson, Inc.,
723 S.W.2d at 622. After the 2009 legislation, however, such a transfer would either be exempt, if falling under
TENN. CODE ANN. § 67-6-312(a), or subject to a smaller base, if falling under TENN. CODE ANN. § 67-6-312(b).

8

materials, but does not include preliminary artwork” or certain original sound recordings or
video recordings. 30
Hence to be considered “final artwork” for purposes of TENN. CODE ANN. § 67-6-312(b), the
final proof: 1) must be tangible personal property or its digital equivalent; 2) must be suitable for
use in producing advertising materials; 3) must not be preliminary artwork; and finally 4) the
brochures produced from the final proof must constitute “advertising materials.”
First, although the Taxpayer has not indicated whether the final proof is provided to its client in
physical or digital form, the final proof would nevertheless constitute either tangible personal
property if given in physical form or a digital equivalent if, for example, “delivered
electronically” as a PDF file. 31
Second, the Taxpayer’s final proof is suitable for use in producing advertising materials. The
Taxpayer has stated that once all customer critiques are incorporated, the Taxpayer produces a
final proof that is used to print the brochure. The final proof is necessarily suitable for use in
producing the brochure since that is what is actually used to print the brochure.
Third, the final proof is not preliminary artwork. As will be discussed in more detail below, to be
considered preliminary artwork, an item has to satisfy three requirements: 1) it must be tangible
personal property or digital equivalents; 2) it must be produced by an advertising agency in the
course of providing advertising services; and 3) it must be produced solely for the purpose of
conveying concepts or ideas or demonstrating an idea or message to a client. 32
Here, the final proof is not produced solely for the purpose of conveying concepts or ideas or
demonstrating an idea or message to a client. Instead, the final proof is produced for the purpose
of printing the brochures, and is meant to convey ideas to potential customers of the client rather
than to the client itself. The final proof therefore cannot be characterized as preliminary artwork.
Fourth, the brochures produced from the final proof constitute “advertising materials,” for
reasons that were explained above.
Accordingly, the final proof created by the Taxpayer constitutes “final artwork” for purposes of
TENN. CODE ANN. § 67-6-312(b).
As final artwork, the sales price of the final proof is determined in accordance with TENN. CODE
ANN. § 67-6-312(b). In enacting TENN. CODE ANN. § 67-6-312(b), the General Assembly
established that while final artwork is subject to the sales and use tax, the tax base is limited to

30

TENN. CODE ANN. § 67-6-102(40). Materials used to make a printed brochure do not likely include any sound or
video recordings, so that aspect of the definition of “final artwork” is not discussed further within this ruling.
31

See generally TENN. CODE ANN. § 67-6-102(26).

32

See TENN. CODE ANN. § 67-6-102(65).

9

“only the charges made by the advertising agency that are directly allocable to the production of
final artwork,” not including “any fees paid for advertising services.” 33
This statute supersedes the principles set out in the Crescent line of cases. Previously, advertising
services were clearly an essential and crucial element of creating a final proof ready for printing.
The final proof would therefore be taxed based on the entire cost of the transaction. 34 Following
the enactment of TENN. CODE ANN. § 67-6-312(b), however, the sales price of final artwork is
limited to those charges that are “directly allocable to the production of [the] final artwork.”
“Directly allocable” is a unique phrase in Title 67 of the Tennessee Code Annotated, lacking a
statutory definition. When a word or phrase is not defined, the Tennessee Supreme Court has
looked to its “usual and accepted meaning” to determine the Legislature’s intent. 35
“Directly” means “in a direct way.” 36 BLACK’S LAW DICTIONARY 88 (9th ed. 2009) defines
“allocable” as “capable of being allocated,” with “allocation” being defined as “[a] designation
or apportion for a specific purpose; esp., the crediting of a receipt or the charging of a
disbursement to an account.” 37
“Production” is also not defined in the statute, but means “the action of producing something or
the process of being produced.” 38 To “produce” something means to “make, manufacture, or
create something.” 39
Consequently, the sales price of the final proof will only include those costs directly designated
for the specific purpose of creating or making the final proof. These costs would typically
include any printing costs, the costs of paper and ink, the costs of purchasing stock or custom
photography that is used in the final artwork, any fees paid to models who are photographed, etc.

33

See TENN. CODE ANN. § 67-6-102(3)(B) (“‘Advertising services’ does not include the production of final
artwork.”).
Note that the final artwork must be “provided by an advertising agency to its client pursuant to an agreement for
providing advertising services” in order for advertising services to be excluded from the sales price of any final
artwork. See TENN. CODE ANN. § 67-6-312(b). The Taxpayer has represented that it meets the statutory definition of
advertising agency contained in TENN. CODE ANN. § 67-6-102(1) (An “advertising agency” is “a business, more
than eighty percent (80%) of whose gross receipts in the previous taxable year were, or in the first taxable year are
reasonably projected to be, from charges for advertising services.”). The Tennessee Code Annotated does not
explain what “an agreement for providing advertising services” is. The Department will assume in this ruling that
the Taxpayer’s agreements with its clients are for advertising services because the facts as presented do not indicate
otherwise.
34

Cf. Thomas Nelson, Inc., 723 S.W.2d at 622.

35

See Byrant v. Genco Stamping & Mfg. Co., 33 S.W.3d 761, 765 (Tenn. 2000).

36

COMPACT OXFORD ENGLISH DICTIONARY OF CURRENT ENGLISH 279 (3d rev. ed. 2008).

37

See also COMPACT OXFORD ENGLISH DICTIONARY OF CURRENT ENGLISH 23 (3d rev. ed. 2008) (defining
“allocation” as the “amount of a resource given to someone”).
38

COMPACT OXFORD ENGLISH DICTIONARY OF CURRENT ENGLISH 812 (3d rev. ed. 2008).

39

Id.

10

Some of these costs may have been incurred during what the Taxpayer has coined as earlier
“phases” of the advertising process. For example, while creating a preliminary proof, the
Taxpayer may hire a photographer to take a picture for the background image in the preliminary
proof. It is true, as the Taxpayer has stated in the Facts section, that at the time such picture is
created, the Taxpayer will not know whether that picture will be incorporated into the final
artwork. But at the time when the Taxpayer’s client decides on all of the elements to include in
the final proof, the Taxpayer will know which elements ultimately will be incorporated into the
final artwork. The Taxpayer should then include all of the costs for each of those elements into
the sales price of the final artwork, as these costs would be directly allocable.
As stated above, TENN. CODE ANN. § 67-6-312(b) excludes fees paid for advertising services
from the sales tax base of final artwork. “Advertising services” are “services provided by an
advertising agency to promote a product, service, idea, concept, issue, place or thing.” 40 These
services include providing marketing and advertising advice and counseling, strategic planning,
consumer research, design and layout services, and development of preliminary artwork. 41 Thus
any fees falling within the aforementioned categories will be excluded from the sales price of the
final proof.
The final proof created by the Taxpayer is properly considered “final artwork” for purposes of
TENN. CODE ANN. § 67-6-312(b), and the sales price of the final proof includes all costs directly
allocable to the production of such proof, but excludes any fees paid for advertising services.
Resale Certificates
The Taxpayer has also raised a corollary issue relating to the final proof but not affected by the
2009 legislation, which is whether it may use a resale certificate to purchase artwork and images
that are incorporated into final artwork. The Taxpayer may not.
The retail sale in Tennessee of tangible personal property is generally subject to sales and use
taxation. 42 The term “retail sale” means “any sale, lease, or rental for any purpose other than for
resale, sublease, or subrent.” 43 Moreover, a “sale for resale” is “the sale of the property, services,
or taxable item intended for subsequent resale by the purchaser,” and a “resale” is “a subsequent,
bona fide sale of the property, services, or taxable item by the purchaser.” 44
TENN. CODE ANN. § 67-6-102(77)(A) requires that all “sales for resale” be in strict compliance
with the rules and regulations promulgated by the Commissioner of Revenue. TENN. COMP. R. &
REGS. 1320-5-1-.68(1) (2008) provides that for Tennessee sales and use tax purposes, a dealer
must receive a resale certificate from a purchaser in order to make an exempt sale for resale of
tangible personal property or taxable services in Tennessee.

40

TENN. CODE ANN. § 67-6-102(3).

41

See TENN. CODE ANN. § 67-6-102(3)(i)-(xiv).

42

See TENN. CODE ANN. § 67-6-202(a) (2011).

43

TENN. CODE ANN. § 67-6-102(78) (emphasis added).

44

TENN. CODE ANN. § 67-6-102(77)(A).

11

The Tennessee Supreme Court has held that artwork, graphic designs, and other items that are to
be incorporated in a finished product by means of being copied, rather than being directly
incorporated, do not become component parts of a finished product but rather are purchased for
use and consumption. 45 It follows that these items, when used by an advertising agency, cannot
also be resold.
TENN. COMP. R. & REGS. 1320-5-1-.68(3) provides that “[c]ertificates of resale may not be used
to obtain tangible personal property or taxable services to be used by the purchaser, and not for
resale.” 46 The artwork and images incorporated into final artwork are thus purchased for use and
not for resale, and the Taxpayer may not use a resale certificate to purchase such artwork and
images.
Brochure Mock-Ups, Preliminary Proofs, and Associated Services
TENN. CODE ANN. § 67-6-312(a) is the final statutory addition resulting from the 2009 legislation
and represents a complete departure from the Crescent line of cases. TENN. CODE ANN. § 67-6312(a) operates to exempt from the Tennessee sales and use tax both “the transfer of preliminary
artwork by an advertising agency to its client” and “[t]he use by an advertising agency of
preliminary artwork created by the advertising agency to provide advertising services.”
TENN. CODE ANN. § 67-6-102(65) defines the term “preliminary artwork” to mean “tangible
personal property and digital equivalents that are produced by an advertising agency in the
course of providing advertising services solely for the purpose of conveying concepts or ideas or
demonstrating an idea or message to a client and includes, but is not limited to concept sketches,
illustrations, drawings, paintings, models, photographs, storyboards or similar materials.” 47
In order to be considered “preliminary artwork” for purposes of TENN. CODE ANN. § 67-6-312(a),
the following requirements must be satisfied: 1) the item must be tangible personal property or
digital equivalents; 2) the item must be produced by an advertising agency in the course of
providing advertising services; and 3) the item must be produced solely for the purpose of
conveying concepts or ideas or demonstrating an idea or message to a client.
The Taxpayer has described its activities in “phases,” which ultimately result in the creation of
brochure mock-ups that its clients use to choose which advertising concept they wish to move
forward with, and preliminary proofs that its clients use to refine the brochure mock-up idea into
a suitable piece of final artwork. Both brochure mock-ups and preliminary proofs qualify as
preliminary artwork.
The process of creating a brochure mock-up involves art direction, design, and drafting of copy
text. The Taxpayer also creates or purchases the necessary photographs, graphic designs,
45

Kingsport Publ’g Corp. v. Olsen, 667 S.W.2d 745, 746-47 (Tenn. 1984).

46

Such use shall be grounds for the revocation of the registration certificate of the dealer wrongfully making use of
the resale certificate. TENN. COMP. R. & REGS. 1320-5-1-.68(3). In addition, it is a misdemeanor to misuse a resale
certificate for the purpose of obtaining tangible personal property or taxable services without the payment of the
sales or use tax when it is due. Id.
47

(Emphasis added).

12

artwork, or other images needed to develop a mock-up. 48 It is not known at the time a mock-up is
created whether any copy text, artwork, or other images included in such mock-up will be
included in a final brochure proof.
First, although the Taxpayer has not indicated whether the brochure mock-ups and preliminary
proofs are provided to its customers in physical or digital form, they would nevertheless
constitute either tangible personal property if given in physical form or a digital equivalent if, for
example, “delivered electronically” as a PDF file. 49
Second, the brochure mock-ups and preliminary proofs are produced by an advertising agency in
the course of providing advertising services. The Taxpayer has represented that it meets the
requirements to be an “advertising agency” under TENN. CODE ANN. § 67-6-102(1). Moreover, as
will be explained in more detail below, the Taxpayer’s services provided during the process of
creating brochure mock-ups and preliminary proofs constitute “advertising services” under
TENN. CODE ANN. § 67-6-102(3).
Finally, both the brochure mock-ups and the preliminary proofs are produced “solely for the
purpose of conveying concepts or ideas or demonstrating an idea or message” to a client. The
Taxpayer has indicated that the brochure mock-ups created during the “design phase” are the
culmination of the research and consultation it had already performed in earlier “phases.” As
such, the brochure mock-ups are intended to memorialize and convey the Taxpayer’s concepts
and ideas to its customer for review and approval. These brochure mock-ups therefore qualify as
“preliminary artwork” for the purposes of TENN. CODE ANN. § 67-6-312.
Similarly, the preliminary proofs are also produced “solely for the purpose of conveying
concepts or ideas or demonstrating an idea or message” to the Taxpayer’s client. The Taxpayer
has indicated that the preliminary proofs are used to solicit customer comments and critiques,
with the end goal of producing a final proof for printing. Thus the preliminary proofs are used to
hone and refine the different aspects of the advertising concept selected by the customer into
final artwork suitable for printing and distribution, and each preliminary proof is produced solely
to convey an idea or concept related to the overall goal of the advertising project.
Accordingly, the brochure mock-ups and preliminary proofs created by the Taxpayer constitute
“preliminary artwork” for purposes of TENN. CODE ANN. § 67-6-312.

48

Note that, under TENN. CODE ANN. § 67-6-102(65), “preliminary artwork” must be “produced” by an advertising
agency. To “produce” something means to “make, manufacture, or create” it. COMPACT OXFORD ENGLISH
DICTIONARY OF CURRENT ENGLISH 812 (3d rev. ed. 2008). Any photographs, graphic designs, artwork, or other
images purchased rather than created by the advertising agency would not constitute preliminary artwork because it
is not produced by the advertising agency. The Taxpayer is responsible for paying the sales or use tax on those
purchases, and as explained above, the Taxpayer cannot use a resale certificate for those purchases. Cf. Kingsport
Publ’g Corp., 667 S.W.2d at 746-47.
The same reasoning applies to exclude any photographs, graphic designs, artwork, or other images provided by the
Taxpayer’s client to the Taxpayer. Since the Taxpayer did not produce such materials, they would not constitute
preliminary artwork and the Taxpayer must remit use tax for those items.
49

See generally TENN. CODE ANN. § 67-6-102(26).

13

In addition, the Taxpayer’s services rendered to create the brochure mock-ups and the
preliminary proofs are properly considered “advertising services.”
As stated above, “advertising services” are “services provided by an advertising agency to
promote a product, service, idea, concept, issue, place or thing.” 50 These services include
providing marketing and advertising advice and counseling, strategic planning, consumer
research, design and layout services, and development of preliminary artwork. 51
During the initial consultation, the Taxpayer consults with the client and lays the foundation for
the general advertising strategy, in addition to creating a budget and additional account planning.
These activities are enumerated examples of advertising services under TENN. CODE ANN. § 676-102(3)(A)(i), (ii), (iv).
The Taxpayer next engages in the “research and development phase,” where the Taxpayer
conducts market research and begins developing concepts for its client’s brochure. These
activities are also enumerated advertising services. 52
During the “design phase,” the Taxpayer produces brochure mock-ups for its client’s review.
The Taxpayer usually oversees the creation of any necessary photographs, graphic design, and
artwork, as well as any drafting of copy text in its development of brochure mock-ups. Many of
these activities are enumerated advertising services. 53
Finally, during the “production phase,” the Taxpayer makes necessary modifications to the
design, 54 the copy text (editing the wording), 55 and prepares additional preliminary proofs for
customer review. 56
As a result of the services provided by the Taxpayer during the creation of brochure mock-ups
and preliminary proofs being enumerated in the statute, these services are properly considered
“advertising services.”
Standing alone, the provision of these advertising services is not subject to Tennessee sales and
use tax because advertising is not an enumerated service under TENN. CODE ANN. § 67-6-205(c).
Even though the transfer of preliminary artwork used to be taxable, under TENN. CODE ANN. §
67-6-312(a), such a transfer is now exempt from the Tennessee sales and use tax. Consequently,
the Crescent analysis is inapplicable because both the transfer of preliminary artwork and the
provision of advertising services are not taxable, regardless of whether either the preliminary
artwork or the advertising services are a “crucial,” “essential,” or “integral” element of the
50

TENN. CODE ANN. § 67-6-102(3).

51

See TENN. CODE ANN. § 67-6-102(3)(i)-(xiv).

52

See TENN. CODE ANN. § 67-6-102(3)(A)(iii); cf. TENN. CODE ANN. § 67-6-102(3)(A)(vi)-(xi).

53

See TENN. CODE ANN. § 67-6-102(3)(A)(vi)-(xi).

54

See TENN. CODE ANN. § 67-6-102(3)(A)(vi)-(vii).

55

See TENN. CODE ANN. § 67-6-102(3)(A)(x)-(xi).

56

See TENN. CODE ANN. § 67-6-102(3)(A)(viii).

14

transaction. Likewise, bundling principles are inapplicable because bundling two independently
non-taxable items or services together results in a single charge that remains non-taxable.
Thus these advertising services are not subject to the Tennessee sales and use tax at the time
rendered, but they do become a component of the sales price of any “advertising materials” used
or distributed within Tennessee, in accordance with Tennessee’s longstanding jurisprudence. 57

R. John Grubb II
Tax Counsel
APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

December 19, 2012

57

See TENN. CODE ANN. §§ 67-6-102(81)(A), -202(a), -312(c); Thomas Nelson, Inc., 723 S.W.2d at 622-24; AT&T
Corp., 2002 WL 31247083, at 8-9; Rivergate Toyota, Inc., 1998 WL 83720, at 4.

15