Advertising Agencies and Sales Tax: Understanding the Law

Sales tax is anything but simple, and for advertising agencies, it can be even more complex.  States today are looking for more revenue from more sources, and expanding sales tax to services represents a promising avenue.

Even in states that do not tax advertising as a service, some components of advertising sales may still be subject to sales tax.  In this guide, you will learn how several states handle the taxation of advertising products and services, as well as how to find information specific to your state and a review of potential upcoming developments

Service taxability: a state-by-state issue

When sales taxation began in the United States, it generally applied only to tangible personal property (TPP) — physical goods that can be delivered by a seller and received by a buyer.  Today, that legacy persists: most states presume TPP is taxable unless a specific type of TPP is exempted from sales tax by law, but presume services are exempted unless they are explicitly made taxable by law.

In a few states, services are “presumed taxable”: West Virginia, New Mexico, Hawaii, and South Dakota.  In each of these states, advertising agencies have not obtained a specific exemption from a general policy of taxing services, and are therefore engaged in providing taxable services.

When TPP and services intersect

So if your business isn’t in one of those four states, you’re free and clear, right?  Not so fast.  State laws vary immensely. Connecticut specifically designates advertising as a non-exempt service — but has exemptions for advertising via television, newspapers, radio, or cooperative direct mail.

Of course, advertising agencies also often provide tangible personal property to clients as part of their services.  When this happens, who pays tax and who is exempt can be a tricky issue, making it important to check on rules for your state.  Take a look at Pennsylvania’s state law, which outlines what is and isn’t exempt: advertisers are allowed to claim a resale exemption on some TPP that is distributed to clients, but must pay sales tax on items that are purchased as office supplies.  This means even the same supply — for instance, copy paper — could be taxed differently depending on its intended use.

Other states complicate matters by designating even more specific parts of this intersection between TPP and services as taxable and other parts as tax exempt.  Promotional goods, in particular, often lead to legal hair-splitting.  In Minnesota, for example, an advertising brochure is considered exempt because it has no functional use aside from advertising.  However, products with a functional use (keychains, calendars) are considered taxable.  Minnesota also taxes some services relevant to advertising agencies, like video production.

Other states take a different approach to the distribution of TPP as it relates to advertising services: according to the state of Massachusetts, TPP distribution is “inconsequential” if it accounts for less than ten percent of the total value of services rendered, and is therefore considered a tax-exempt part of services rendered.

New developments ahead

As states face budget shortfalls, some governors and state legislators have started pushing for a wider range of service taxes. Some proposed budgetary measures could have a significant impact on the sales tax liability of advertising agencies.

In California, Senate Bill 8 (also known as the Upward Mobility Act) would impose taxes on a wide variety of services, including advertising services, making California a “presumed taxable” state like West Virginia, New Mexico, Hawaii, and South Dakota.  The contentious 2015 budget debate in Pennsylvania has seen several proposals for changing sales tax rates or reclassifying some services as taxable.

These changes mean that even if you have a good handle on sales tax in your state today, the laws could be different tomorrow — leaving your business with significant compliance issues.  It’s important for advertising agencies to monitor changes to service taxability in order to avoid falling out of compliance.

Finding sales tax laws for your state

Because tax laws can change so frequently, the best place to look for information on current taxability guidelines is always the Department of Revenue website for each individual state.  Don’t rely on external websites, which can have outdated information, as a definitive source for taxability determinations.

Or better yet, automate the entire process. Constantly having to check DOR website and update rate tables and rules can really slow down your business, especially if you have a broad customer base that spans multiple states. Avalara AvaTax handles all this for you, instantly and accurately applying up-to-the minute rates and rules for every state to every transaction right in the billing systems you already use in your business. Now that’s a service worth advertising!

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