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RULE §3.321Advertising Agencies

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

  (1) Acting as agent--

    (A) The advertising agency has:

      (i) disclosed to its supplier that it is acting as agent for the client designated on the advertising agency's purchase order or in some other written documentation; and

      (ii) maintains accounting records and invoices which evidence that the billing to its clients, except for service charges, is identical to that paid to suppliers.

    (B) In the absence of such documentation, the advertising agency shall be conclusively presumed to be a seller of tangible personal property and not the agent of its client(s).

  (2) Employee-fabrication--The actual assembly or production of finished art or other taxable items by employees of the advertising agency. It includes the incorporation by the employees of items which become a component of the finished art or other taxable items.

  (3) Employee-fabricated property--Any finished art or other taxable items produced by means of employee fabrication.

  (4) Finished art--The final art, assembly, or formulation representing the ultimate product to be used for reproduction by photomechanical or other process, used by the client for display or other advertising purposes. Examples: all camera-ready art, drawings, architectural delineations, paintings, retouched photographs, lettering, assembly of elements, and show cards.

  (5) Nontangible services--Unless related to the sale of employee-fabricated property or the sale of other taxable items, the following are examples of nontangible services:

    (A) account supervision;

    (B) account service;

    (C) creative concept development;

    (D) consultation service;

    (E) supervision of any kind not related directly and solely to employee fabrication of taxable items;

    (F) public relations;

    (G) setting up press conferences;

    (H) writing copy for use in any medium;

    (I) media placement, advertising time, and space charges to client;

    (J) market research individualized for one client;

    (K) postage or freight charges occurring after the sale (see §3.303 of this title (relating to Transportation and Delivery Charges);

    (L) residuals;

    (M) retainers (reserve right to services of advertising agency or actors, models, etc.);

    (N) commissions or fees granted or allowed by suppliers or media;

    (O) media placement fees, commissions, or discounts allowed to advertising agencies by media upon placement of advertising;

    (P) secretarial or clerical fees;

    (Q) telephone, telex, telegraph charges; and

    (R) travel or transportation expenses not directly and solely related to the fabrication of taxable items.

  (6) Preliminary art--Roughs, visualizations, layouts, and comprehensives submitted by an advertising agency to its clients for the client's approval of the advertising concept or message prior to the preparation of finished art.

  (7) Service charges--The charges, commissions, or other compensation received by the advertising agency, however measured or computed, and whether or not related to the acquisition or disposition of taxable items. Standard methods of compensation include:

    (A) the standard agency commission allowed by the supplier or media;

    (B) the handling fee or service charge for outside purchases for the client;

    (C) billable time for creating, directing, consulting, copywriting, or other nontangible services; and

    (D) retainer fees which would be a charge agreed upon between agency and client for the overall handling of their advertising.

  (8) Taxable items--All tangible personal property and taxable services.

(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. The agency may not issue the agency's resale certificate to a supplier in lieu of tax.

  (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. Unless the items purchased are for resale by the client, the agency is responsible for paying sales tax to the supplier on the amount so billed. If the supplier fails to add the tax to the amount billed the agency, it is the agency's responsibility to remit the tax directly to the state. The client-principal is liable to the agency for payment of the tax on the net amount billed. The handling or service fee charged for these purchases is considered nontaxable. If the item purchased is for resale by the client, the client's resale certificate may be issued to the supplier in lieu of sales tax. The resale certificate must show the client's sales tax permit number.

  (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 subsection (c)(2) and (3) of this section 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 §3.285 of this title (relating to Sales for Resale; Resale Certificates).

  (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 such as:

    (A) photographs and additional prints;

    (B) photostats, line negatives, offset negatives;

    (C) type composition;

    (D) finished art;

    (E) photo retouching;

    (F) research sold to public (not a single client);

    (G) printed materials: annual reports, stationery, brochures, direct mail, business cards, ad reprints, sale literature, point-of-purchase materials;

    (H) outdoor poster paper;

    (I) radio and television dubs;

    (J) electrical transcriptions (see §3.309 of this title (relating to Electrical Transcriptions, Recording Studios, Producers));

    (K) motion picture films (see §3.350 of this title (relating to Audiovisual Works)).

    (L) video tapes (see §3.350 of this title (relating to Audio-visual Works)).

(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 §3.346 of this title (relating to Use Tax).

(e) Exempt charges. Sales tax is not due on the advertising agency's charge to its customers for:

  (1) nontangible services except taxable services. See §3.292 of this title (relating to Repair, Remodeling, Maintenance and Restoration of Tangible Personal Property);

  (2) Service charges for acquisition of property from third party suppliers as agent, or acquisition of property from third party suppliers as sellers.

  (3) Preliminary article. Any portion of preliminary art that becomes physically incorporated into the finished art shall be taxable. To be considered nontaxable, charges for all preliminary art must be separately stated and identifiable on agency's internal records.

(f) Records required. Each advertising agency must maintain sufficient records that provide the following.

  (1) Art time records must clearly distinguish layout and preliminary art from finished art.

  (2) Supplier or media invoices identifying by client the net amount paid, and tax paid, if any.

  (3) Employee-fabricated property must be easily identifiable on agency internal records.

  (4) Invoices to clients need not show taxable and nontaxable items separately. The tax due on any invoice need not be shown, but the agency must indicate on the invoice that tax is included on those items subject to tax and the agency must be able to document the amount of tax included on that invoice from its internal records.

  (5) Commissions, handling, or service fees must be easily determinable on agency records.

  (6) All certificates, receipts, and/or invoices verifying each deduction from gross sales of nontaxable items listed as follows must be kept on file: sales for resale, sales to exempt organizations, sales to persons using the property in a manner exempt by law, sales of items which are shipped to out-of-state locations by the seller, bad debts, repossessions, returned goods, nontaxable labor and services charges, sales of nontaxable items.

  (7) Records must be maintained for a four-year period.

(g) Seller's responsibilities. For responsibilities of sellers and filing requirements, see §3.286 of this title (relating to Seller's Responsibilities).

Source Note: The provisions of this §3.321 adopted to be effective January 1, 1976; amended to be effective November 15, 1976, 1 TexReg 3099; amended to be effective July 6, 1981, 6 TexReg 2182; amended to be effective November 19, 1984, 9 TexReg 5717; amended to be effective March 10, 1987, 12 TexReg 603.

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