830 CMR 64H.1.2 is hereby repealed and replaced by
830 CMR 64H.1.2: Advertising Agencies and Graphic Design Firms
General
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.
This regulation, 830 CMR 64H.1.2, is organized
as follows:
- General
- Definitions
- Sale transactions
- Purchase transactions
- Specific applications
- Specially commissioned tangible personal property
Definitions
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.
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.
Purchase transactions
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.
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.
Specific applications
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.
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.
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.
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.
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:
- the sale of tangible personal property for resale, c. 64H, § 1
- 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)
- the sale of a motion picture film for commercial exhibition, c.
64H, § 6(m)
- certain sales of composted type, film positives, film negatives,
or reproduction proofs, c. 64H, § 6(gg)
- certain sales of direct and cooperative mail promotional
advertising distributed to residents of the commonwealth, c. 64H,
§6(ff)
- the sale of preprinted advertising circulars to be inserted into
newspapers, c. 64H, § 6(m)
REGULATORY HISTORY
830 CMR 64H.1.2: M.G.L. c. 14, § 6(1); M.G.L. c. 62C, § 3.
Promulgated 4/25/80
New Regulation Promulgated: February 5, 1999