98-039
Response
July 8, 1998
REQUEST
LETTER
April
30, 1998
Subject:
Sales tax charges by Public Relations Firms, Graphic Artists and/or Advertising
Agencies.
Request
is being made for rulings regarding when sales tax/use tax is applicable and or
due under the circumstances described below:
1) Graphic Designers: Is the consulting time or labor billed
taxable for sales tax? Are printing or film negatives used to print from,
considered materials for use tax purposes when purchased by a graphic designer?
If these items are being purchased for a specific job that is with an exempt
customer, is use tax applicable for that job? This would include government agencies and out of state exempt
clients. Note: Just about every purchase by a graphic design artist is done for
a specific job. All materials generally can be tied right back to a specific
job.
2) If a Taxpayer purchases printing, photographs, or film negatives for a specific job, and then marks
up these items on the final bill to the customer, are they required to charge
sales tax on the marked up amount on a taxable sale? And is this item exempt as
resale for use tax purposes?
3) Same question above but now the customer is tax exempt, is
the taxpayer required to then pay use tax when they purchase the items that go
into a specific exempt job?
4) When an Ad Agency, Public Relations Firm, or Graphic Artist
contracts with a government agency like the State of Utah or the University of
Utah, are they considered to be an agent of that entity for all work they do
for that agency? This question is in the scope of determining when they buy
materials for a job to that agency whether the taxpayer is subject to use tax.
If this is not the case, could you please outline how a firm or person could qualify to be considered an
agent for purposes of a use tax exemption when dealing with tax exempt customers?
5) When the taxpayer bills a customer that is taxable for a job
that has both labor and materials on it, i.e., a brochure that has considerable
creation labor billed and possibly printing and other materials, how do they
break out the labor so as not to have it taxed as part of the basis for sales
tax to a taxable customer?
6) How does an Individual or Firm determine when they are
working for another Firm or Ad Agency who is the "producer" of a
final product sold to a taxable customer. Example: If an Agency contracted with
a taxable publisher for a publication presentation, and they hired several
Graphic Artists to produce inserts, pages and or cover designs, would the work
that the Graphic Artists are doing be considered exempt for resale? Would
any materials the Graphic Artists
purchased be subject to use tax? If in this case, the Graphic Artist had some printing done that they paid
use tax upon, and then marked this item up to the Ad Agency, would this still
be subject to either a higher sales tax by the Graphic Artist upon transfer or
another use tax by the Ad Agency?
As
you can well see from my questions, the Utah State Sales Tax Code does not
always clearly
outline
answers to these questions for our various clients. If you could please answer the above
questions
in number order with specific answers instead of a general overall answer to
the
questions
it would be greatly appreciated. If you have any questions please call for
clarification.
Also,
we are very concerned about getting a quick response to this request.
Thank
you for your considerable help.
Sincerely,
NAME
July
2, 1998
NAME
ADDRESS
CITY,
STATE ZIP
RE: Advisory
Opinion - Sales Tax as Applied to Graphic Design and Advertising Agencies
Dear
NAME,
We have received your request for an
advisory opinion concerning the sales tax liability that exists on charges made
by graphic design and advertising agencies.
At present, the Tax Commission is studying the taxation of the graphic
design, advertising and printing industries, particularly as it relates to
recent technological changes and the consistency of tax liability between the
various providers within these industries.
The findings from this study should be available for possible
implementation in the near future.
Until then, the Tax Commission will address your questions using the
guidelines currently in place.
Question #1 actually asks
three separate questions. Each needs to
be addressed separately, as follows:
1) Consulting Time and Labor by a Graphic
Designer. This is one of the primary
areas of taxation under study at this time. The sale of graphic artwork or
printed material is taxable. Currently,
all services in connection with these sales are also taxable, including the
charges for graphic design services.
2) Purchases Made by Graphic
Designer. The graphic designer must pay
sales tax on all purchases of tangible personal property that are used or
consumed in the process of providing his or her services or to which the
graphic designer retains title. Sales
tax is due on these purchases whether or not the graphic designer’s customer is
an exempt entity.
On the other hand, certain items may be
bought for resale tax free if the graphic designer issues the vendor an
exemption certificate. A purchase
qualifies for this exemption if the purchased item is resold to the customer or
if it becomes a component part of the final taxable product. Sales tax on the sale of the final product
would then be charged to the graphic designer’s customer. Of course, should the customer be exempt
from sales tax (such as the federal or a Utah government entity), then no sales
tax would be charged if the exempt customer provides the graphic designer with
an exemption certificate or other acceptable evidence of exemption (such as a
purchase order from a qualified governmental entity).
Question #2. Any charge for the final taxable product
is subject to sales tax on the price charged to the customer. As described above, if the taxpayer resells
an item to his or her customer or the item becomes a component part of the
finished product, then the taxpayer can purchase the item tax free by issuing
the vendor an exemption certificate.
Question #3. Answered in #1 and #2 above.
Question #4. Utah Admin. Code R865-19S-91(B) provides
the requirements that must be met before a purchaser is considered an agent for
an exempt government entity and can make tax free purchases on behalf of that
entity, as follows:
A person qualifies as an agent
for purchasing on behalf of a government entity if the person and the
government entity enter into a contract that includes the following conditions:
1. The person is officially designated as the government entity's
purchasing agent by resolution of the government entity;
2. The person identifies himself as a purchasing agent for the
government entity;
3. The purchase is made on purchase orders that indicate the
purchase is made by or on behalf of the government entity and the government
entity is responsible for the purchase price;
4. The transaction is approved by the government entity; and
5. Title passes directly to the government entity upon purchase.
Should the ad agency, public
relations firm, or graphic artist qualify as an agent for a government entity
under these terms, then its purchases as an agent for the exempt entity could
be bought tax free upon issuance of an exemption certificate. If these agency requirements are not
met, sales tax would be remitted as set
forth in #1 and #2 above.
Question #5. With certain exceptions, the creative effort
and labor involved in producing a tangible personal product has been subject to
taxation. As explained in #1.1 above,
all labor charged by a graphic artist in association with the sale of graphic
artwork or printed material is currently taxable. The same is true for a public relations firm.
As to an advertising agency, the
labor is not taxable if the product sold is placed as advertising and the
transaction is exempt from taxation under Utah Admin. Code R865-19S-65. Also, if the advertising agency is considered
to be in an “agency” relationship with its customer, then its labor charges are
not taxable. Should either of these
situations not exist, then the advertising agency’s labor charged in
association with the sale of advertising or printed materials is taxable.
Question #6 asks three
separate questions given a scenario involving an “Agency” which is preparing
taxable personal products for its customer.
In its preparation, the Agency purchases work from “Graphic Artists” to
include in its presentation. We answer each of these questions as follows:
1) Resale Exemption. Currently, if The Agency produces and places
advertising for a client with that transaction being exempt under Utah Admin.
Code R865-19S-65, The Agency is considered the consumer of the items purchased
from the Graphic Artists. The Agency
should pay sales tax on its purchase from the Graphic Artists.
For
other transactions, The Agency may purchase tax free any product that it plans
to resell to its customer or is to become a component part of the final taxable
product sold to its customer. To do so,
the Agency would issue an exemption certificate to the party from which it
purchased the exempt product. Should
any inserts, pages, or cover designs be resold or be considered a component
part of the final product, The Agency could purchase them tax free.
However,
should The Agency retain title to any item purchased from a Graphic Artist or
the item was consumed in creating the final taxable product sold to the
customer, then The Agency should pay sales tax on its purchase of the item from
the Graphic Artist.
2) The Graphic Artist would pay sales tax
on its purchases and collect sales tax on its sales as described in #1 and #2
above.
3) The Graphic Artist’s purchase of the
printing is a purchase for resale. The
Graphic Artist should have provided the printer an exemption certificate and
purchased the printing tax free.
Regardless of whether the Graphic Artist paid sales tax to the printer,
the Graphic Artist will charge the Agency sales tax on whatever price the
Agency is charged for the printing unless the Agency provides the Graphic
Artist an exemption certificate.
If
the Graphic Artist has both paid sales tax on the printing and collected it
from the Agency, the Graphic Artist may claim a refund within three years of
the date of payment. Normally to do so,
the Graphic Artist would provide an exemption certificate to the printer and
request a refund. The printer would
refund the Graphic Artist the sales tax, then apply for a refund or credit from
the Tax Commission of taxes collected and remitted.
When the study is complete and any
changes are implemented, tax bulletins alerting the industries of any changes
will be issued. Please contact us if
you have any other questions.
For
the Commission,
Joe B.
Pacheco
Commissioner
^^