SALT Report 2165 – The Tennessee Department of Revenue issued a Letter Ruling regarding the taxability of brochure printing services. The Taxpayer in this case, provides advertising services and when he enters into a contract with a customer the Taxpayer will develop an advertising strategy that often consists of a multi-phase system to develop customized brochures.
During this phase, the Taxpayer will consult with its customer to develop an advertising strategy. The consultation often involves account planning services, such as budgeting. Although, the consultation phase typically starts at the beginning of a project, it will sometimes continue throughout the client relationship.
During this phase, the Taxpayer conducts the research and development concepts for the custom brochures.
After developing one or more potential concepts, the Taxpayer enters the design phase in which it creates brochure mock-ups for the customer’s review. This phase involves art direction, design, and drafting of copy text. During this phase the Taxpayer will create or purchase photographs, graphic designs, artwork, or other images needed to develop the mock-up.
Once the customer approves an initial mock-up, the Taxpayer begins the production phase. During this phase, the Taxpayer will make any modifications to the design, copy text, artwork, or images based on the customer’s feedback of the mock-ups. Once the customer’s changes have been incorporated, the Taxpayer will create a final proof. At this point the customer can take the final proof and have it printed elsewhere, or contract with the Taxpayer to have it printed.
The Taxpayer requested guidance regarding the application of sales and use tax for its brochure services.
In its response, the Department referred to Tennessee Code ann. § 67-6-312(a) which provides an exemption from sales and use tax for “the transfer of preliminary artwork by an advertising agency to its client” and “[t]he use by an advertising agency of preliminary artwork created by the advertising agency to provide advertising services.”
Based on the above, the Department determined that because the Taxpayer describes its service in “phases,” and those phases result in the creation of brochure mock-ups that are used to select an advertising strategy, and the preliminary proofs are used to turn the brochure mock-up idea into a piece of final artwork, the services that lead to the development of the mock-up qualify as exempt “preliminary artwork.”
In addition, the services used to create the brochure mock-ups and the preliminary proofs are also considered “advertising services” which are not subject to sales and use tax because advertising is not one of the enumerated services in Tennessee Code ann. § 67-6-205(c).
However, brochures printed from a final proof are “advertising materials” and are taxable under Tennessee Code ann. § 67-6-312. Therefore, any fees charged for these services are also subject to sales tax and should be included in the sales price of the brochures.
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