A recent ALJ decision addresses interesting questions about the scope of the sales tax exemption for advertising services, as well as the proof necessary to qualify for sale for resale treatment where resale certificates are not timely furnished. Matter of BorsaWallace, Inc., et al., DTA Nos. 824173, 824174, 824175 (N.Y.S. Div. of Tax App., Jan. 9, 2014).
Advertising Services. The sales tax is imposed on sales of tangible personal property, but only on enumerated services. The tax law expressly provides that receipts from the service of “advertising” are not subject to sales tax. Tax Law § 1105(c)(1). BorsaWallace, Inc. provides graphic design services in New York. Typically, public relations or advertising firms retain BorsaWallace to create promotional materials (referred to as “kits”), as well as materials such as letters, banners and posters. Those firms, in turn, use the promotional materials in public relations, marketing or advertising campaigns for their own clients. More than 80% of BorsaWallace’s business is from DeVreis, a public relations agency that furnished public relations and marketing services to clients for such brands as Pepperidge Farm, Tide, Tropicana and Crest. DeVreis is not an advertising agency, which typically places advertising with media outlets.
The decision goes into considerable detail regarding the role of BorsaWallace in furnishing graphic design services, its dealings with public relations firms such as DeVreis, and the relationships between public relations firms and their own clients. In summary, BorsaWallace designed promotional material and retained third-party printers to produce samples for DeVreis. BorsaWallace retained ownership of the designs, but not of the actual promotional kits and other materials.
BorsaWallace billed DeVreis for its design services, as well as for its cost of printing the kits and other promotional materials, including an unspecified markup on its printing costs. DeVries, in turn, billed its own customers, and included the amounts billed by BorsaWallace. For some period of time, DeVreis marked up the cost of BorsaWallace’s charges when invoicing its own clients.
The Department of Taxation & Finance conducted an audit of BorsaWallace’s sales tax returns, and concluded that additional sales tax was due. Allegedly based on informal advice obtained from the Department, BorsaWallace had been collecting sales tax on its charges for the printing of kits and other materials, but did not charge sales tax for design services if DeVreis could not alter the design. Where the design could be altered − as in the case of a PowerPoint presentation – BorsaWallace charged sales tax on both the design work and the printing. At the hearing, BorsaWallace submitted customer invoices reflecting sales of the promotional kits, which also showed that sales tax was charged on the printing charges, but not on its design services. BorsaWallace claimed that it was providing a nontaxable advertising service and thus was entitled to a sales tax refund. The Department contended that BorsaWallace was not an advertising agency and therefore did not qualify for the advertising exclusion.
The ALJ agreed with BorsaWallace that its activities constituted a nontaxable advertising service. Based on the nature of the services and the commonly accepted dictionary definition of “advertising,” the ALJ concluded that “advertising” included design services. However, since BorsaWallace was seeking a refund of sales taxes already collected and remitted, the ALJ held that it was not entitled to a refund because it had not refunded the sales tax to DeVreis and other clients.
Sales for Resale. BorsaWallace also claimed that its sales of kits and other promotional items to DeVreis qualified as nontaxable sales for resale. Neither DeVreis nor other public relations firms furnished BorsaWallace with a sales tax resale certificate. The Department agreed that the marketing kits were tangible personal property, but disputed that they were being resold. It claimed, among other things, that BorsaWallace did not present any client invoices showing that the clients collected sales tax on their sales to their own clients. The Department also noted that DeVreis had agreed to pay sales tax on its purchases from BorsaWallace as part of a Department audit for an overlapping tax period, allegedly evidencing that DeVreis did not believe it was making purchases for resale.
The ALJ held that the sales of kits and promotional materials to DeVreis qualified as nontaxable sales for resale. The ALJ cited Savemart v. State Tax Comm’n, 105 A.D.2d 1001 (3d Dep’t 1984), lv. denied 65 N.Y.2d 604 (1985), where the Appellate Division rejected an electronics retailer’s resale claim for sales of excess inventory of TV sets to a distributor, and noted that the taxpayer not only did not receive a resale certificate from the distributor, but did not provide “testimony or evidence to indicate what [the purchaser] intended to or did do with the televisions” purchased. In this case, the taxpayer offered the credible testimony of a former DeVreis official, who explained how the charges for the promotional kits were passed along to DeVreis’ own clients.
Although ALJ determinations are not precedential, the decision is instructive in applying a common sense definition of “advertising” services, and in declining to apply an interpretation that elevates form over substance. While the decision denied the resulting sales tax refunds for BorsaWallace on procedural grounds, the analysis in the decision would appear to support the elimination of sales tax on the services prospectively. With regard to the resale issue, the decision confirms that the failure to timely obtain a resale certificate does not preclude a taxpayer from proving that it made nontaxable sales for resale.