830 CMR: DEPARTMENT OF REVENUE
830 CMR 64H.00: SALES AND USE TAX
830 CMR 64H.00 is hereby repealed and replaced with the following:
830 CMR 64H.1.2: Advertising Agencies
830 CMR 64H.1.2: Advertising Agencies and Graphic Design Firms
830 CMR: DEPARTMENT OF REVENUE
Table of Contents
(a) Statement of purpose. The purpose of this regulation, 830 CMR 64H.6.2, is to provide guidelines as to the sales and use tax treatment of transactions engaged in by advertising agencies and graphic design firms.
(b) Outline of topics. This regulation, 830 CMR 64H.1.2, is organized as follows:
3. Sale transactions.
4. Purchase transactions.
5. Specific applications.
6. Specially commissioned tangible personal property.
Advertising agency. The term "advertising agency" or "agency" means a business which holds itself out as an advertising agency and which provides comprehensive professional services including, but not limited to, artwork, concept development, design, and any other creative services necessary to create, plan, and implement an advertising campaign.
Agency. The term "agency" means an advertising agency.
Collateral advertising campaign. The term "collateral advertising campaign" means the creation of graphic design work intended to market a client's goods or services through the incorporation of the work into collateral properties.
Collateral properties. The term "collateral properties" means tangible personal property that incorporates graphic design work rendered as part of a collateral advertising campaign. Collateral properties serve a marketing function and typically are mass-produced and distributed. Some examples of collateral properties include fliers, brochures, business cards, stationary, product packaging, cups, and pins. For purposes of this regulation, the incorporation of graphic design work into the form of a composite, disk, or other "printer-ready" property is not the creation of a collateral property.
Firm. The term "firm" means a graphic design firm.
Graphic design firm. The term "graphic design firm" or "firm" means a business engaged, in whole or in part, in the creation of graphic design work to be incorporated into a client's advertising or marketing materials.
Graphic design work. The term "graphic design work" or "design work" means the creation of artwork or designs in two-dimensional, graphic form.
Inconsequential. In general, the term "inconsequential" means a value of less than ten per cent of the total charge for a given transaction, and the term "not inconsequential" means a value of ten per cent or more of such total charge. However, this definition is a general guideline and what percentage of a charge is inconsequential may vary depending upon the facts and circumstances in question.
Media placement advertising. The term "media placement advertising" means the development, production, and placement of advertising in media. Illustrative examples of media include newspapers and magazines; radio, television, and cable television programming; and billboards, buses, and other vehicles used in public transportation.
Tax. The term "tax" means the sales tax imposed under M.G.L. c. 64H or the use tax imposed under M.G.L. c. 64I.
(3) Sale transactions
In general, tax applies to the retail sale of tangible personal property, but not the performance of a service. Therefore, when a transaction involves the performance of a service and there is no transfer of tangible personal property the transaction is not subject to tax.
Agencies and firms are generally engaged in the performance of service transactions in which tangible personal property may be transferred. In general, any such transfer will be presumed to be an inconsequential component of the overall transaction. A service transaction involving the transfer of tangible personal property as an inconsequential component is not subject to tax.
(4) Purchase transactions
(a) General. An agency or firm is the consumer of tangible personal property used in its business, including computer equipment, stationary, ink, paint, pens, pencils, and other office supplies. Purchases of such property are subject to tax.
(b) Agent or representative. When an agency or firm purchases tangible personal property as an agent or in a representative capacity on behalf of a client, the agency or firm shall pay tax with respect to such transaction unless an exemption applies. However, no tax will then apply to any subsequent transfer of the property from the agency or firm to the client.
It will be presumed that an agency or firm purchases tangible personal property as an agent or in a representative capacity on behalf of its client when it transfers title or possession of the property to the client in its purchased form and the purchase is for purposes of media placement advertising or a collateral advertising campaign. However, to secure this presumption as to any purchase of tangible personal property which is not inconsequential as compared to the services provided, the agency or firm shall retain a satisfactory record of the taxable transaction and of the tax paid by the agency or firm with respect thereto, and shall state on its invoice to the client that all applicable Massachusetts tax on the representative third-party transaction has been duly paid. In these situations, if the agency or firm does not pay the applicable tax, the client is liable for all taxes due.
(5) Specific applications
(a) Consultation services. The performance of consultation or any other services in which no tangible personal property is transferred is not subject to tax.
Example. Market Associates does market research on behalf of its clients and provides consultation and advisory services based upon this research. Market does not transfer tangible personal property to its clients. Market's transactions are not taxable.
(b) Collateral advertising campaigns. In general, the performance of a collateral advertising campaign constitutes the performance of a service transaction in which tangible personal property is transferred, but in which this transfer is an inconsequential component. Therefore, in such instance, the performance of a collateral advertising campaign is not subject to tax.
Example 1. John Artist specializes in designing logos and complementary artwork that businesses will incorporate into their letterhead, business cards, and product packaging. Mr. Artist provides the logos and artwork to his client and the client seeks a printer or other vendor who will produce the letterhead, business cards, and product packaging. Mr. Artist's design transactions are not taxable, whether or not Mr. Artist provides his graphic design work to his client in the form of a composite, disk, or other "printer-ready" property.
Example 2. Mary Purchase designs annual reports on behalf of her clients and, on approval by the client, contracts with a printer for the mass-replication of these reports. Ms. Purchase's design transactions are not taxable. Moreover, it is presumed Ms. Purchase is purchasing the annual reports as an agent or in a representative capacity for her clients. Therefore, Ms. Purchase shall pay tax on the purchase of the annual reports, but is not required to collect tax upon the subsequent transfer of these reports to her clients. However, Ms. Purchase shall retain a satisfactory record of the taxable printing transaction and of the tax paid by her with respect thereto, and shall state, in her invoice to the client, that such tax was paid.
Example 3. Same facts as in Example 2, except that prior to approaching the printer, Ms. Purchase first contracts with a vendor who transforms her design work into a composite, disk, or other "printer-ready" product. Ms. Purchase plans to transfer this tangible personal property to the printer to print the annual reports. As in Example 2, it is presumed Ms. Purchase is acting as an agent or in a representative capacity as to this taxable transaction for printer-ready property.
Example 4. Concept Overhaul creates graphic designs on behalf of business clients which the clients will incorporate into their letterhead, business cards, and product packaging. In addition, Concept contracts with third-party vendors for signs and decorative materials that incorporate Concept's designs and which are to be placed at its clients' offices. Concept's design transactions are not taxable. Moreover, it is presumed that Concept is purchasing signs and decorative materials as an agent or in a representative capacity for its clients. Therefore, Concept shall pay tax on the purchase of signs and decorative materials, but is not required to collect tax upon the subsequent transfer of this property to its clients. However, Concept shall retain a satisfactory record of the taxable third-party vendor transactions and of the tax paid by it with respect thereto, and shall state, in its invoice to the client, that such tax was paid.
(c) Media placement transactions. Media placement transactions constitute the performance of a service in which tangible personal property may be sold, but in which such a sale is an inconsequential component. Therefore, the performance of a media placement transaction is not subject to tax.
Example. Media Maker offers to create and place media advertisements in newspapers, television programs, and public transportation vehicles, including buses. Media develops a media placement plan with its client, then creates the advertisements necessary to implement this plan and contracts with media firms, such as newspapers and television stations, to place these advertisements in accordance with the placement plan. The advertisements created are the property of Media's client, and may or may not be physically transferred (since the advertisements are of de minimis value to the client apart from their media utilization). Media is required to pay tax on all equipment and materials purchased to create the advertisements. However, the placement transactions between Media and its clients, including any charge for the creation of the advertisements, are not taxable.
(d) Sale of collateral properties. In general, an agency or firm does not create collateral properties, though these businesses may create the graphic designs which are incorporated into such properties. However, if there is a transfer of collateral properties by an agency or firm to a client for consideration, such transfer would be a taxable retail sale.
Upon the completion of graphic design work, an agency or firm might contract with a third-party vendor on behalf of that agent or firm's client for the production of collateral properties that incorporate the graphic designs. In general, the agency or firm is acting as its client's agent or in a representative capacity in these transactions. Therefore, tax applies to the transaction by the agency or firm with the third-party vendor. However, no tax applies to the subsequent transfer of the collateral properties from the agency or firm to the client. If such transfer is not inconsequential as compared with the services provided, the transferor shall retain a satisfactory record of the taxable transaction and of the tax paid by the transferor with respect thereto, and shall state, in its invoice to the client, that such tax was paid.
Example. John Artist specializes in designing logos and complementary artwork that businesses will incorporate into their letterhead, business cards, and product packaging. However, Mr. Artist also owns an in-house copy machine and offers to copy fliers and other collateral properties that incorporate his designs. Mr. Artist's design transactions are not taxable. However, when Mr. Artist creates collateral properties on behalf of his clients he is acting as a vendor and must collect the applicable tax on these retail sales. For sales tax purposes, Mr. Artist's creation of collateral properties is treated separately from his design work. Mr. Artist's clients can and often do purchase such design work, then separately contract with a third-party vendor for the production of collateral properties utilizing these designs. The taxable sales price for Mr. Artist's sale of collateral properties includes only his cost of materials and applicable labor in producing these properties. On his client billings, Mr. Artist shall separately state the sales price for any sale of collateral property and also separately state the applicable tax.
(6) Specially commissioned tangible personal property
In general, the purchase of specially commissioned tangible personal property that is not created as part of a collateral advertising campaign or for purposes of media placement advertising, is a taxable retail sale (e.g., the purchase of a specially commissioned sculpture). However, in these cases there are a number of statutory exceptions which might apply. These exceptions include a sales tax exemption for:
(a) the sale of tangible personal property for resale, c. 64H, § 1;
(b) the sale of tangible personal property which becomes an ingredient or component part of tangible personal property to be sold (i.e., which becomes physically incorporated into such property), c. 64H, § 6(r);
(c) the sale of a motion picture film for commercial exhibition, c. 64H, § 6(m);
(d) certain sales of composted type, film positives, film negatives, or reproduction proofs, c. 64H, § 6(gg);
(e) certain sales of direct and cooperative mail promotional advertising distributed to residents of the commonwealth, c. 64H, § 6(ff); and
(f) the sale of preprinted advertising circulars to be inserted into newspapers, c. 64H, § 6(m).
Date of Promulgation: 4/25/80
New Regulation Promulgated: 2/5/99