When it comes to New York sales and use tax, most people don’t associate it with services, especially advertising. While advertising services are generally not subject to sales tax in New York, there are certain situations where parts of your business activities might not be entirely exempt. This can catch business owners by surprise, especially when tangible items or taxable information services are involved.
Pure Advertising Services
In New York, advertising services are generally not subject to sales tax. This includes consulting, developing advertising campaigns, and placing ads with various media outlets.
For instance, if an advertising agency is hired to design an ad campaign and deliver the final advertisement to the media, the fees charged for this service are not taxable. Likewise, when an agency creates materials and delivers them to the customer through digital or electronic formats, those materials are exempt from sales tax as long as they are part of the advertising service.
On the other hand, if the agency sells tangible items, such as artwork or layouts, before they are delivered to the media, these sales are taxable. Additionally, if the agency provides other tangible products, like printing plates or films on physical media, those transactions are subject to sales tax.
If an agency sells a report containing information gathered from its services, it is not considered a taxable information service. However, if the agency conducts a survey for a client and charges for it separately, that survey may be subject to sales tax. For further details on taxable information services. see (TB-ST-10).
Purchases by Advertising Agencies
Generally, when advertising agencies purchase goods or services to perform their work, those purchases are subject to New York sales tax. This includes tangible personal property or taxable services used to create advertising content.
For example, if an advertising agency is hired to design billboard advertisements and contracts with a printer to produce the physical billboard posters, the agency must pay sales tax on purchasing materials to create those billboards. Similarly, the agency must pay sales tax on any taxable services, such as printing, necessary to deliver its nontaxable advertising services.
However, certain sales tax exemptions may apply to advertising agencies under specific circumstances. These exemptions generally relate to:
- The production of television and radio commercials.
- The development and production of printed promotional materials.
For further information on applicable exemptions, you can refer to Tax Bulletin Exempt UseCertificate (TB-ST-235) and related memoranda such as TSB-M-92(4)S, TSB-M-92(4.1)S, and TSB-M-97(6)S, which provide guidance on sales and use tax exemptions for promotional materials.
Sales Tax Exemption for Promotional Materials
New York allows businesses to exempt certain promotional materials from sales tax when sent outside the state. Using the Exempt Use Certificate (Form ST-121), businesses can apply this exemption for single and blanket promotional materials purchases. A blanket certificate can be issued to cover multiple purchases, making it easier for businesses to manage ongoing campaigns. The percentage of materials being sent out of state must be indicated on the certificate, and this percentage determines the exemption.
Businesses may use a sampling technique to calculate the percentage of materials sent outside of New York. They can sample up to 10% or 5,000 addresses from the mailing list for larger mailings. Alternatively, businesses can rely on previous mailings to estimate an accurate average percentage for future campaigns. If the percentage of out-of-state mailings changes over time, companies must update their blanket certificate to reflect the new percentage and avoid liability for New York use tax on materials delivered within the state. See (TSB-M-92(4.1)S.
Taxable Advertising Information Services
In Matter of Dynamic Logic, Inc. v. Tax Appeals Tribunal of the State of N.Y., 2024 NY Slip Op 01136, the Appellate Division, Third Department, upheld a ruling that certain advertising-related services are subject to sales tax. The taxpayer provided services that measured the effectiveness of their clients’ advertising campaigns, which included analyzing consumer and internet user surveys and comparing campaign results with industry benchmarks. These benchmarks were based on a database of aggregated and anonymized survey data. The taxpayer also provided recommendations for improving ad performance.
The court found that these services were taxable as information services, not exempt consulting services. It emphasized that the primary function of the services was data collection and analysis, which falls under taxable information services.
Furthermore, the court determined that the services did not qualify for the sales tax exclusion under Tax Law § 1105(c)(1). This exclusion applies to information services where the data provided is not substantially incorporated into reports given to other clients. Since portions of the taxpayer’s database were included in reports for customers, the exclusion did not apply, making the services subject to sales tax.
This case underscores the importance of advertising agencies and businesses offering data analysis to carefully assess the taxability of their services, particularly when information is shared across multiple clients.
Understanding Tax Implications for Direct Mail Marketing in New York
Direct mail marketing is a popular advertising tool, but it involves understanding the tax implications of various scenarios. In New York, the sales tax treatment on direct mail marketing services depends on whether the charges relate to tangible personal property or exempt services. See Publication 831.
Suppose you hire a marketing agency to create and distribute promotional mailers, such as pamphlets and flyers, to potential customers in the Upper West Side. Here’s how New York State treats the taxability of these services:
- Promotional Materials Definition
Under New York tax law, promotional materials include advertising literature, catalogs, brochures, and other related items, whether or not they are personalized. The envelopes used to mail these items are also considered part of the promotional materials if they exclusively contain promotional items. Items like invoices or statements do not qualify as promotional materials. - Sales Tax Exemptions for Promotional Materials
According to Publication 831 and the ruling in TSB-A-08(54)S, printed promotional materials that are mailed or shipped to customers or prospective customers using the U.S. Postal Service or a similar service are exempt from sales tax, as long as the recipient is not charged for the materials or their delivery. This exemption applies to both in-state and out-of-state mailings. However, any portion of the printed materials delivered directly to the advertiser in New York State rather than mailed to customers is taxable. - Resale Exemption
Franchisees or marketing agencies responsible for producing promotional materials can claim a resale exemption by providing a resale certificate (Form ST-120) when purchasing printed materials for resale to advertisers. Advertisers, in turn, must submit a Certificate of Exemption for Purchases of Promotional Materials (Form ST-121.2) to ensure that the promotional materials distributed free of charge are not subject to sales tax (TSB-A-08(54)S).
- Handling Multiple Components with Different Tax Treatments
When a direct mail marketing campaign involves taxable and exempt components (for example, printed promotional materials and taxable items like invoices), businesses must apply the appropriate sales tax treatment to each element. Proper documentation, including the use of exemption forms, is essential to substantiate the taxability of each component and ensure compliance with New York tax law (TSB-A-08(54)S).
Digital Advertising Services
New York is considering expanding its tax base to include digital advertising services.
Recently, bills have been introduced in the state legislature that would impose a sales tax on digital advertising services. These services include banner ads, interstitial ads, and search engine ads, all of which play a significant role in modern marketing strategies. While this idea has been floated before, the push to tax digital advertising stems from the growing revenue potential of online marketing, which states see as an untapped resource for funding public programs, such as education loan refinancing.
This move mirrors actions taken in other states, most notably Maryland, which became the first state to tax digital advertising services. The Maryland law taxes the annual gross revenues derived from digital advertising services. The tax applies to companies with significant global revenues and has sparked constitutional debates, particularly around the issue of sourcing and how to determine where digital ads are viewed. As New York and other states contemplate similar legislation, questions about the constitutionality of such taxes and the logistical challenges of taxing interstate digital commerce remain at the forefront of the discussion.
Contact a New York Sales Tax Professional for Advice
If you're in the advertising, direct mail marketing or digital advertising space, compliance with New York sales tax laws are essential. If you need clarification about how these tax rules apply to your business, consulting with a New York sales tax professional is wise.
Our team of experienced sales tax experts is here to help you understand your obligations and develop tailored strategies. Don't leave your compliance to chance—contact our talented sales tax professionals today for personalized advice and guidance to protect your business.