How closely do you monitor your advertising-related purchases for compliance with state sales and use tax laws? Advertising-related purchases are facing increased scrutiny during sales and use tax audit examinations. How confident are you that your advertising company is properly charging you sales tax on the items you purchase from it? Where might you have potential use tax exposure issues? Are you missing potential sales tax exemptions and overpaying sales tax on certain exempt purchases from your advertising vendor?
Overview of Purchases
Purchases from advertising companies generally fall into two separate buckets. The first bucket contains the purchase of tangible personal property, which can include books, brochures, business cards, catalogs, finished artwork, photographs, promotional giveaways, signs, and trade show booths, to name a few. The second bucket contains the purchase of services, which can include creation and development of websites, company branding services or advertising themes, production of radio or television commercials, obtaining media space and time, and email blasts.
Method of Delivery
Now ask yourself these questions: How did you receive the tangible personal property from your advertising vendor(s)? Was the property delivered electronically versus hard copy or on a disk? If you have multistate operations, at which location was the property received? Is the object of the transaction truly to receive the service or rather the tangible personal property? All of the questions above are extremely important to ask yourself when evaluating whether the purchase invoices from your advertising companies have been properly charged state sales tax and whether use tax might be due.
Property In almost all states that have sales and use tax, the purchase of tangible personal property received in hard copy (i.e., books, business cards, signs, promotional giveaways) format is generally subject to sales tax. However, many states have specific exemptions when it comes to the purchase of catalogs that are used to advertise the products sold by a company within or outside the state. For example, Wisconsin exempts from sales and use tax the purchase of catalogs designed to advertise the company’s products/services that are stitched or stapled together. It does not matter if the catalogs are used in or outside the state of Wisconsin because both uses are exempt from Wisconsin sales and use tax. Be careful. A common use tax audit adjustment we see is when companies do not selfassess use tax on catalogs or brochures consumed based on the state(s) they are shipped to. State revenue auditors will make inquiries about whether any printed promotional items were shipped into their state when no tax was previously paid. Generally, a company is liable for use tax only if the company has nexus in the destination state.
Many products sold years ago that were delivered in a tangible format are now sent and delivered electronically over the Internet. Examples include books, brochures, photographs, and finished artwork, to name a few. Many taxpayers may not be aware of Streamlined Sales Tax (SST). SST focuses on improving sales and use tax administrations systems for all sellers through uniformity in tax base definitions and uniform state and local sales tax collections. SST has 23 full member states including Iowa, Indiana, Michigan, Minnesota, Utah, Washington, and Wisconsin. SST provides a common definition for digital goods. Digital goods are characterized by the fact that they are transferred electronically to the purchaser (i.e., accessed or obtained by the purchaser by means other than tangible storage media).
Certain states like Minnesota and Wisconsin impose sales and use tax on digital products delivered to customers over the Internet. However, certain states such as Iowa and Michigan do not impose sales and use tax on digital products transferred to a purchaser. Outside of the 23 member states that have adopted SST, the taxability of products delivered to customers electronically varies from state to state. Often the location in which a digital product is received ultimately determines the taxability of the purchased item. Songs or videos are generally sourced to the location of the purchaser at the time of sale and would be taxable to the extent a state imposes sales and use tax on this type of transaction. In certain situations when the delivery location is not known to the seller, the sale may be sourced using the billing address of the customer.
The taxability of services varies greatly from state to state. Many states have specific statutes or regulations that impose sales tax on certain enumerated services provided by advertising companies. For example, the production of a radio or television commercial delivered to a Wisconsin location is subject to sales tax. The production of the same radio or television commercial in Illinois and delivered to an Illinois location is not subject to sales and use tax because it does not involve the transfer of tangible personal property.
Generally, when obtaining media space and time, most states will not impose sales and use tax on this type of transaction. We have seen numerous state auditors erroneously attempt to tax the purchase of space in coupon inserts as the purchase of taxable inserts. When it comes to developing advertising themes/branding services, most states will not impose sales and use tax on this arrangement as long no tangible personal property is provided to the customer with the service.
One state that would likely be the exception to this is New Mexico. New Mexico generally taxes all receipts derived from performing services in the state, including advertising-related services. The taxability of engaging an outside party to send email blasts to customers or potential prospects will vary from state to state. Wisconsin taxes email blasts as a taxable telecommunication service. The struggle companies currently have is determining to which states those email blasts are sent. Many times documentation identifying where the emails were sent (breakdown by state) is not readily available or cannot be produced after the fact. In those situations, a state such as Wisconsin could tax the entire transaction if the invoice bill-to address is in Wisconsin and no information is available to show the percentage of emails delivered to a Wisconsin address versus an out-of-state address.
A similar taxability issue comes up when we talk about engaging an outside party to send electronic newsletters to clients or prospects. A state that imposes tax on the delivery of electronic newsletters may attempt to tax the entire transaction unless information is available to show to which states those newsletters were delivered.
State Tax Collection by Advertising Companies
Many advertising companies are registered exclusively in their home state. You should not assume that the transaction is exempt if you do not see tax charged by the vendor. If you utilized an out-of-state vendor, you may need to self-assess use if the transaction is taxable in your state. Sales and use tax issues can be complex when making purchases of advertising-related products and services from outside parties. In certain situations, significant exposure issues may exist upon audit if not properly addressed at the time of purchase. Wipfli LLP has the expert resources to help you deal with advertising-related purchases. If you have any questions about the procedures your business currently has in place when it comes to reviewing advertising servicerelated transactions, Wipfli can help.