Did a free advertising publication owe tax on its in-house work and purchased production services?

Plain-English summary

A company sold advertising space in publications distributed free to residences. Work performed for itself by its own employees did not create sales-and-use-tax liability.

Outside printing, photography, illustration, typesetting, color-separation, and photo-reproduction services were taxable. The company had to accrue use tax on out-of-state services used for publications distributed in Texas.

Texas-purchased services for publications distributed outside the state were also taxable unless the service seller delivered the service outside Texas. Manufacturing exemptions did not apply because the company sold advertising space rather than the publications themselves.

Common questions

Was the company's in-house production work taxable? No.

Were purchased production services taxable? Yes.

Why did the manufacturing exemption fail? The company gave away the publications and sold advertising space instead of selling the publications.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8905L0933F02

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller May 1, 1989

Dear ***:

Thank you for your letter confirming your understanding of our telephone
conversation early this year. Your letter correctly summarizes our discussion
as I recall it.

The *** sells advertising space in publications that are
distributed free of charge to residences in the retailers' market areas. The
publications are not sold to the advertisers. The ** *
performs some of the publishing tasks in-house with its own employees and
purchases some of the services from outside sources. The **** does not
incur a sales and use tax liability for services performed for itself.

Those services purchased from other sources, however, such as printing,
photography, illustrations, typesetting, color separations and
photo-reproduction are subject to a sales and use tax. The ***
should accrue use tax on any services purchased out of state for publications
distributed in Texas. Sales tax is also due on services purchased in Texas for
publications to be distributed out of state unless the service is delivered by
the seller of the service out of state. The manufacturing exemptions do not
apply because The ***** does not sell the publications but sells only
advertising space.

If you have any questions or need more information please call our
toll-free number
1-800-531-5441; the regular number if (512) 463-4861. You may write me
at the Taxability Section of Legal Services Division.

Sincerely,
Tom Soto
Taxability Section
Legal Service Division