How did an advertising agency's role as agent, seller, or consumer affect Texas sales tax?

Plain-English summary

The Comptroller could not determine the taxability of the agency's many listed activities without first knowing whether it acted as its client's agent, as a seller, or as a consumer.

Under the quoted Rule 3.321, an agency buying taxable items as its client's agent was neither buyer nor seller; title passed directly from the supplier to the client, the client owed tax on the supplier's net charge, and the agency's handling or service fee was nontaxable. An agency could not act as agent for employee-fabricated property.

As a seller, the agency taxed employee-fabricated property and could issue resale certificates for qualifying items resold before use or incorporated into the taxable item sold. As a consumer, it owed sales or use tax on business property such as office furniture, equipment, stationery, and supplies.

Common questions

Did the letter decide every listed charge? No; the agency's role was not established.

Was an agent's handling or service fee taxable? No, under the quoted rule for purchases made as the client's agent.

Was employee-fabricated property taxable to the client? Yes.

What tax applied when the agency was the ultimate user? Sales tax on Texas purchases or use tax on out-of-state purchases brought into Texas for use.

Citations and references

• 34 Tex. Admin. Code Rule 3.321(b)-(d) — provisions reproduced for agencies acting as agents, sellers, and consumers.
• 34 Tex. Admin. Code Rule 3.285 — sales-for-resale rule referenced in the reproduced text.
• 34 Tex. Admin. Code Rule 3.346 — use-tax rule referenced in the reproduced text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8509L0663A01

Original ruling text

September 11, 1985

Dear ***:

Thank you for your letter of August 30, 1985, concerning the taxability
of numerous charges made by an advertising agency.

The taxability or exempt status of the many activities you listed depends
on a number of unknown factors, therefore I am unable to assist until it is
determined whether you are acting as a consumer, seller or agent of your client.

Rule 3.321 (b), copy enclosed, states:

(b) Advertising agency acting as agent of client.

(1) An advertising agency may act as the agent of its client-principal in dealing
with others. To the extent that it acts as an agent in acquiring taxable items,
the advertising agency is neither the purchaser of the property nor is it a seller
of the property to its client-principal. When the advertising agency acquires taxable
items as agent, title to the property passes directly from the supplier to the
client-principal.

(2) When an advertising agency acts as an agent of its client in the purchase of
taxable items, the supplier will add the tax to the net amount billed to the agency.
The client-principal is liable for payment of the tax on the net amount billed. The
handling or service fee charged for these purchases is considered nontaxable.

(3) An advertising agency may not act as the agent of its client-principal when
providing employee fabricated property. The agency is the seller of such property and
the provisions of subsections (c)(2) and (c)(3) apply.

(c) Advertising agency acting as a seller to a client.

(1) When an advertising agency purchases a taxable item with the intent to resell it
to its client, the agency is a seller of such property and acts as a retailer.

(2) All employee fabricated property will be taxable to the client. Examples: Finished
artwork for print advertising, photographs, records or supplies used in broadcast.
Sales tax is applicable to the charge to the client by the advertising agency for
employee fabricated property.

(3) An advertising agency may issue a resale certificate to suppliers in lieu of tax
for any item that the agency resells before use or that becomes physically an
ingredient or component part of the taxable item sold. Examples: Illustration board,
paint, ink, rubber cement, flap paper, wrapping paper, photographs, photostats or
art purchased from other artists. See Rule 3.285 concerning Sales for Resale;
Resale Certificate.

(4) Sales tax is due on the charge to the customer for employee fabrication and on
the cost of items purchased for resale to the customer.

d) Advertising agency as a consumer. The advertising agency is the consumer and
ultimate user of taxable items utilized in the customary conduct of its business
operations. This category includes property such as office furniture, equipment,
stationery and other office supplies. The agency owes sales tax on the property
purchased in Texas or use tax if purchased outside the state and brought into Texas
for use. See Rule 3.346 concerning Use Tax.

This opinion is based upon the facts you presented. If there are additional
or different facts, this opinion may change.

Please feel free to contact us if you have additional questions. You may write us,
call toll free 1-800-252-5555 from anywhere in Texas.

Sincerely,

Tax Policy Section
Tax Administration Division