Assessing the Taxability of Advertising Service Purchases can be Tricky
Mar 21, 2016
By: Craig A. Cookle
In the last blog post, we looked at the taxability of tangible personal property purchases from advertising companies. In this post, we will look at the taxability of advertising services, which can include the 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.
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 service-related transactions, Wipfli can help.