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.
Tangible Personal 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 self-assess 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.
In the next blog post, we'll explore the taxability of services and the collection of state taxes by advertising companies.