Advertising agencies in Texas have a lot to manage when it comes to sales tax compliance. The offerings of your business can result in many different sales tax outcomes, some of which may be taxable or exempt. This often creates confusion about your obligations to collect tax from clients or to pay it to suppliers. Our guide covers all you need to know about Texas sales tax as an advertising agency, including a checklist to help your business get started with its compliance efforts.
What Advertising Services or Products Are Taxable in Texas?
Texas sales tax broadly applies to the sale of tangible personal property while services are generally not subject to sales tax unless specifically taxed under the Texas Tax Code. However, Texas Administrative Rule Section 3.321 clarifies how these general concepts apply in the context of the many different products or services an advertising agency may provide.
Charging Sales Tax on Employee Fabricated Property
Advertising agencies must collect sales tax from clients for employee-fabricated property and other taxable items provided to clients. This will include items of finished art and other tangible goods often transferred to clients for use in various advertising mediums. Examples may include the following:
- Printed materials (e.g., sales literature, stationery, direct mail, ad reprints, business cards)
- Photos and related materials (e.g., photostats, line negatives, offset negatives, retouching)
- Poster paper
- Motion picture films
- Video tapes
- Research sold to the public
The bottom line is that if your advertising agency delivers a tangible product to clients, you’ll need to collect sales tax on the charge for it.
A Note on Preliminary Art: Charges for preliminary drafts or articles of art are not taxable if separately stated and identified on your internal records, such as an invoice, scope of work, or contract. However, preliminary art that becomes physically incorporated into the finished art will be taxable.
How Texas Sales Tax Can Apply (Or Not) to an Advertising Agency’s Different Services
Most services an advertising agency provides will not be subject to Texas sales tax. Subsection (e) of Rule 3.321 specifically exempts the following types of services from sales tax:
- Nontangible services. Examples include:
- Account supervision
- Account services
- Creative concept development
- Consultation services
- Public relations services
- Organizing press conferences
- Writing copy
- Media placement
- Individualized market research
- Post-sale charges for postage or freight
- Residuals
- Retainers
- Commissions or fees granted or allowed by suppliers or media
- Secretarial or clerical fees
- Telephone charges
- Travel or transportation expenses
- Service charges to acquire property from third parties. Examples include:
- Standard agency commissions
- Handling fees for third-party purchases
- Billable time to create, direct, or consult on nontangible services
- Retainer fees
Charges for nontangible services will be exempt from Texas sales tax unless they are related to the advertising agency’s sale of employee fabricated property. For example, an account service fee related to the production of printed materials or finished art would likely be taxable.
Modern advertising agencies may also provide services that are explicitly taxable under the broad categories of services listed in Texas Tax Code Section 151.0101. For example, an advertising agency’s services involving web hosting, website creation, and other maintenance may be taxable as a data processing service.
Purchasing Taxable Supplies as an Advertising Agency in Texas
The second half of the sales tax equation for advertising agencies is properly managing the tax owed on the purchases they make. How you handle sales tax for these business purchases will depend on the agency’s role in the transaction for the client—either as an agent or as a seller.
Advertising Agencies Operating as an Agent
As an agent, the advertising company must pay sales tax to its supplier for the items purchased on behalf of a client and cannot use a resale certificate. If the client is purchasing the items for resale, then the advertising agency can provide the client’s resale certificate to the supplier. The advertising agency is ultimately responsible for remitting sales tax to the Texas Comptroller’s Office on purchases if it fails to pay sales tax to the supplier.
Advertising Agencies Operating as a Seller
Advertising agencies can generally use a resale certificate for items it purchases as a seller and intends to later resell to a client. This includes purchases of items that are a physical ingredient or component part of an item sold to a client. The advertising agency then charges sales tax to the client on the amount billed to the client. Note that an advertising company cannot use a resale certificate for the materials or supplies it consumes in providing services to a client. Rather, the company must pay sales tax to the supplier or remit use tax to the Comptroller’s Office.
A Sales Tax Checklist for Texas Advertising Agencies
The following checklist is a good place for advertising agency’s to quickly review their current sales tax strategy and take steps to limit future risk of an audit or assessment.
- Confirm nexus for sales tax in Texas either through the location and business activities of the company or the location of its clients in the state.
- Register for a Texas sales tax permit or apply for a voluntary disclosure agreement if necessary.
- Conduct an internal audit to identify any gaps in sales tax compliance.
- File or amend sales tax returns to remedy any past mistakes.
If you recently received a notice from the Texas Comptroller’s Office about an audit or exam, review our materials on the audit and appeal processes in Texas.
Contact Us for Help with Your Advertising Company’s Sales Tax Concerns in Texas
Texas sales tax can be a challenge for advertising agencies because of the varied taxability of their offerings and the potential for mixed transactions that involve both taxable and nontaxable items. This often results in additional burdens for agencies in their record-keeping systems and can result in an increased risk of audit. When the Texas Comptroller’s Office does come knocking, our sales tax professionals have years of experience and a dedicated focus to defending businesses in an audit or subsequent appeal. Contact us today to schedule an initial consultation.