Tax Type
Retail Sales and Use Tax
Description
Advertising business
Topic
Taxability of Persons and Transactions
Date Issued
08-18-1988
August 18, 1988
Re: Ruling Request/ Sales and Use Tax
Dear ******************
This will reply to your letter of December 31, 1987 to a member of my staff seeking information on the application of the sales and use tax to a variety of transactions engaged in by **************.
FACTS
The taxpayer is an advertising agency which provides marketing and visual communication services to clients. Based on examples provided of the type of work it performs for clients, the taxpayer asks the department to distinguish between instances when it is the taxable user and consumer of all items purchased in providing media advertising services, and those instances when it may purchase items exempt of the tax for resale to clients.
RULING
GENERALLY
In accordance with Virginia Code §§ 58.1-608(57) and 58.1-602(23), § 2 of Virginia Regulation (VR) 630-10-3, copy enclosed, provides that:
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- The tax does not apply to charges by an advertising business for professional services in the planning, creating or placing of advertising in newspapers, magazines, billboards, direct mail, radio, television or other media regardless of how such charges are computed ... and whether or not such [advertising] business actually places the advertising in the media.
- The tax does not apply to charges by an advertising business for professional services in the planning, creating or placing of advertising in newspapers, magazines, billboards, direct mail, radio, television or other media regardless of how such charges are computed ... and whether or not such [advertising] business actually places the advertising in the media.
Accordingly, when an advertising agency provides concept, writing, graphic design, etc., for use in newspapers, magazines, billboards, etc., it is providing an exempt media advertising service and all tangible personal property purchased in providing such service is taxable.
However, not all concept, writing, graphic design, etc., provided by an advertising agency may be intended for use in exempt media advertising. For example, an ad agency may be asked to design a logo for use in a client's employee newsletter or to create an in-house training film. In these instances, the ad agency is not providing an exempt media advertising service, and must therefore charge the tax on the total charge to its client for the provision of the logo or training film, including any creative design charges in connection with the development of such items. In addition, on those rare occasions when an advertising agency provides such non-media related services, it may purchase under a resale certificate of exemption, (Form ST-10), any items which it knows at the time of purchase will be resold to clients subject to the tax.
CORPORATE IMAGE PROGRAMS
When an ad agency designs and develops a new image for a client, including such items as a new corporate logo, identifying symbol or slogan, for use by its client for general promotional purposes, such as in print or broadcast media, on billboards, exterior signs, brochures, annual reports, direct mail, etc., it is providing an exempt media advertising service.
STATIONERY
Under the heading "stationery", you include such items as business cards, mailing labels, envelopes, memo pads, letterhead, statements and invoices. When an ad agency provides graphic design, mechanical art, etc., for use on its clients stationery, it is not providing a media advertising service. Unlike the development of a new corporate image, stationery is typically used for non-promotional administrative purposes. In addition, the fact that some of these stationery items may at some time in the future be used by an ad agency's client in a direct mailing or other promotional activity does not change the application of the tax to these primarily administrative supply items.
The advertising exemption would apply however to the total charge by an ad agency for the provision of writing, graphic design, mechanical art, etc., for use on envelopes, letterhead, etc., designed specifically for use as a component part of a client's direct mail advertising campaign.
IN-HOUSE MANUALS
In a ruling dated January 4, 1988, copy enclosed, the department determined that the development of an in-house newsletter was not the development of advertising for placement in the media. Similarly, the development of an in-house manual is not the provision of media advertising.
PRODUCT MANUALS
Manuals designed and developed by an ad agency for use by purchasers of products sold by its clients do not qualify for exemption as items of exempt media advertising. Product manuals are typically intended to convey information or operating instructions on the proper use of a particular product that has already been purchased, and are therefore generally not intended for promotional purposes.
POINT OF SALE LITERATURE
The design and development by an ad agency of point of sale promotional brochures, flyers, handbills, bulletins, etc., will qualify for exemption from the tax as items of media advertising, provided they are made available to the general public.
EXHIBIT AND DISPLAY MATERIALS
The enclosed January 4, 1988 ruling provides that display materials designed and developed for use at trade shows, exhibits, conventions, and similar events do not qualify as items of exempt media advertising and are therefore subject to the tax. This is true since items developed for use at such events are typically not intended for dissemination to the public.
Such display materials should be contrasted however to point of sale promotional exhibits and displays used in grocery stores and similar public retail establishments, which generally would qualify as items of exempt media advertising.
DIRECT MAIL
While the regulation does not specifically define the term "direct mail", it is generally understood within the advertising industry to apply to mass mailings. Accordingly, in order to qualify as exempt "direct mail" media within the meaning of the advertising exemption, a direct mail ad campaign must be intended to reach large numbers of individuals.
In addition, a mode of communication need not necessarily flow through a "communications channel", such as television, radio, etc., in order for the development of that mode of communication to qualify as an exempt media advertising service. However, not all communications devices are deemed to be "media" for purposes of the exemption. In order to determine the correct application of the tax to the development of a particular mode of communication it is necessary to determine if the communication is intended to convey promotional information to the public generally.
BROCHURES
Unlike point of sale promotional brochures, the creation by an ad agency of brochures for use by a client solely at a conference or trade show would not represent the provision of an exempt media advertising service, since such brochures are not intended for dissemination to the general public. In such circumstances, the total charge by the ad agency for the creation and provision of the brochures, including charges for the design and illustration of the brochures as well as the printed brochures themselves, would be subject to the tax. Furthermore, in these circumstances the ad agency may purchase pursuant to resale certificate of exemption (Form ST-10), any items which it knows at the time of purchase will actually pass to its client, such as the printed brochures.
However, brochures created by an ad agency for use in media advertising, such as direct mail, are similar to the exempt point of sale brochures discussed above and to the brochures mentioned in the enclosed January 4, 1988 ruling. As such, these brochures would qualify as items of exempt media advertising. Moreover, the fact that a small portion of such essentially promotional brochures may also be used by an ad agency's client at a conference or trade show will not negate the exemption.
Accordingly, the total charge by an ad agency for the design and development of brochures for use in media advertising, a small portion of which may be distributed at a trade show or conference or used for some other non-media advertising related purpose of its client, would qualify for the advertising exemption. All of an ad agency's purchases of items used in the development of such brochures would be taxable, however, including its purchases of the brochures themselves.
I hope that the foregoing has responded to your questions, but let the department know if you have any further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner