On March 10, 2016 Normative Ruling SF No. 01/2016 was published in the Official Gazette of City of São Paulo, by which the Municipal Treasury Department changed its standard about taxation related to advertisement and publicity activities through the Municipal Tax on Services of Any Nature (ISS).

According to this Normative Ruling, the Treasury Department of the City of São Paulo will classify the services of publicity, release and placement of ads on item 17.06 of the list of services provided by the Municipal Law n. 13.701/2003, which regulates taxation on advertising services, including sales promotion, campaign planning or advertising systems, creation of illustration, texts and other materials.

This new framework, introduced by the first paragraph of Normative Ruling SF n. 01/2016, is innovative because it clarifies how the ISS will be involved in activities related to publicity, release and placement of ads on radio and television, even in cases of free reception, i.e. that which occurs on the Internet (websites, web pages or e-mail addresses), billboards and illuminated structures, known in Brazil as “backlight” and “frontlight.”

Even though Federal Law No. 116/13, (which regulates ISS nationally) does not have the same provisions, the Senate Legislative Bill No. 386/12 establishes the inclusion of a new item in the annex list of Federal Law No. 116/13 about the insertion of advertising material in any form of media. The purpose of this change is to solve the dispute between Municipal and State Tax Administration, regarding jurisdiction on taxation of advertising activities.

Finally, in an effort to maintain the focus of the ISS tax incidence and in relation to the presidential veto concerned with item no. 17.07 (“Placement and publicity of texts, illustrations and other advertising materials in any media”), the second paragraph of the aforementioned normative rouling rules that the ISS does not apply to the publishing, release and placement of ads in editorial books, newspapers and periodicals. This exception intends to respect the tax immunity stated in Article 150, item VI, “d” of the Brazilian Federal Constitution, which is applicable in these cases except when the publicity has the sole purpose of advertisement, notwithstanding the existence of the aforementioned Senate Legislative Bill no. 386/2012.

The impact of the new position disclosed by the Treasury Department of the City of São Paulo to include the placement of advertisements within the regulation reaches not only the media companies, but also the advertising agencies and the advertisers. Both may be liable for the retention and tax collection of ISS (as intermediaries and borrowers of the services of divulgation), in the event of a media company failing to pay the ISS.

In short, the Normative Ruling only represents a change of the position by the local governmental authority, which intends to collect taxes for the practice of activities related to placement of advertising, contrary to current understanding of the Treasure of the State of Sao Paulo. The State argues that these activities are related to communication services, which are subject to Taxes on the Circulation of Goods and Interstate and Intermunicipal Transport and Communication Services-ICMS.