103
KAR 26:120. Advertising agencies.
RELATES
TO: KRS 139.050, 139.100, 139.110, 139.120, 139.140, 139.200, 139.260, 139.270,
139.280, 139.310, 139.330
STATUTORY
AUTHORITY: KRS 131.130, 139.710
NECESSITY,
FUNCTION, AND CONFORMITY: KRS 131.130 and 139.710 authorize the Revenue Cabinet
to promulgate administrative regulations for the assessment, collection,
refunding, administration, and enforcement of the Kentucky tax laws. This administrative
regulation establishes requirements and guidelines for the application of sales
and use tax to purchases and sales of tangible personal property by advertising
agencies.
Section
1. Definitions. (1) "Advertising agency" means a business engaged
primarily in the professional service of developing strategy, concept, and
design for the placement of advertising on radio or television stations, or in
newspapers, magazines, or other media.
(2)
"Advertising services" means all advertising agency activities
involved in the conceptualization, development, production, and refinement of a
master advertisement prior to its reproduction by the advertising agency or a
third party including creative concept development, design, layout,
consultation services, research, script and copy writing, art preparation,
public relations, and account management services.
(3)
"Master advertisement" means the original advertising material
created by the advertising agency for reproduction in tangible form for the
purpose of display or other advertising uses, such as master commercials,
camera ready art, proofs, and corporate logos.
Section
2. Advertising Agencies as Consumers in Creation of Master Advertisement. (1)
An advertising agency shall be the consumer of all the tangible personal
property used in the performance of its advertising services to produce a
master advertisement regardless of whether the property the agency purchases is
acquired in the name or account of the advertising agency or its client. The
tax shall apply to the advertising agency’s purchase of:
(a)
All tangible personal property for use in the performance of its advertising
services, including the purchase or rental of stock photos and movie footage
delivered as tangible personal property;
(b)
Any materials that become a component of the master advertisement; and
(c)
Any tangible personal property that is incidentally provided to the client as
part of the advertising services.
(2)
An advertising agency shall not claim that its purchase of tangible personal
property is exempt from sales and use tax because the property is to be used in
fulfilling a contract with:
(a)
The federal government, state government, or political subdivision thereof;
(b)
Any department, agency, or instrumentality of the federal government, state
government or political subdivision thereof; or
(c)
A religious, educational, or charitable institution exempt from tax under KRS
139.495.
(3)
The performance of advertising services shall not constitute manufacturing or
processing production of tangible personal property for sale. Therefore, an advertising
agency shall not claim that its purchase of tangible personal property used in
the performance of its advertising services is exempt from sales and use tax
under the:
(a)
Raw material, industrial tool, and industrial supply exemption as provided in
KRS 139.470(11); or
(b)
The machinery for new and expanded industry exemption as provided in KRS
139.480(10).
(4)
If acting in the capacity of a consumer, an advertising agency shall not bill
its client for tax on charges made for advertising services.
Section
3. Advertising Agencies as Retailers After Creation of Master Advertisement.
(1) An advertising agency shall be a retailer of tangible personal property the
advertising agency sells to its clients or to others on behalf of its clients
regardless of whether the sale is at a marked-up price. This provision shall
include property reproduced from a master advertisement whether the advertising
agency or a third party actually reproduces the materials. This provision shall
not include property described in Section 2 of this administrative regulation
that the advertising agency uses in creating a master advertisement.
(2)
An advertising agency engaged in business as a retailer shall:
(a)
Complete a "Kentucky Tax Registration Application", (October 2002)
Revenue Form 10A100, to register with the Revenue Cabinet for a retail sales
and use tax permit; and
(b)
Report and pay the applicable tax derived from gross receipts utilizing Revenue
Form 51A102, "Sales and Use Tax Return", (July 2003).
(3)
Taxable receipts from an advertising agency’s retail sale of tangible personal
property shall include all charges for services that are a part of the sale of
tangible personal property including charges for:
(a)
Inbound freight;
(b)
Production supervision; or
(c)
Print management that directly relate to the sale of particular tangible
personal property.
(4)
Gross receipts subject to sales tax shall not include periodic print management
fees or other retainer fees not related to the sale of particular tangible property
and paid whether or not there is a transfer of tangible property in a given fee
period.
(5)
An advertising agency may purchase tangible personal property it sells to or
for its clients as a sale for resale without payment of the tax if the advertising
agency provides to its suppliers a properly completed:
(a)
Kentucky "Resale Certificate" (September 1990), (Revenue Form
51A105);
(b)
Multistate Tax Commission (Uniform Sales and Use Tax Certificate
Multijurisdiction); or
(c)
Other documentation containing the information required by KRS 139.280.
Section
4. Joint Activities by Advertising Agencies. (1) If an advertising agency
contracts with a client to provide both advertising services and the sale of
tangible personal property, receipts subject to tax shall be determined by the
following guidelines provided the charges for the advertising services are
clearly delineated from the charges for the tangible personal property on the
customer’s invoice.
(a)
Any transfer of tangible personal property for a consideration, other than the
master advertisement and the items described in Section 2 of this
administrative regulation used in the creation of the master advertisement, to
a client or a third party on behalf of a client shall be considered a retail
sale of tangible personal property subject to sales tax.
(b)
Receipts from agency fees, service charges, or commissions exclusively for
advertising services shall not be subject to sales tax, including charges for
placing advertisements in print, broadcast, or other media.
(c)
The amount separately stated for the tangible personal property shall not be
less than the fair market value of similar property sold in a similar
transaction not involving the provision of advertising services.
(2)
If an advertising agency contracts with a client to provide both advertising
services and the sale of tangible personal property and does not clearly
delineate the charges on the customer’s invoice, the total billing amount is
subject to tax.
Section
5. Incorporation by Reference. (1) The following material is incorporated by
reference:
(a)
Revenue Form 10A100 "Kentucky Tax Registration Application For
Withholding, Corporation, Sales and Use Taxes, and Motor Vehicle Tire
Fee", October 2002;
(b)
Revenue Form 51A102 "Sales and Use Tax Return", July 2003;
(c)
Revenue Form 51A105 "Resale Certificate", September 1990; and
(d)
"Uniform Sales and Use Tax Certificate - Multijurisdictional", July
2000.
(2)
These material may be inspected, copied, or obtained, subject to applicable
copyright law, at the Kentucky Revenue Cabinet, 200 Fair Oaks Lane, Frankfort,
Kentucky 40601, or at any Kentucky Revenue Cabinet Taxpayer Service Center,
Monday through Friday, 8 a.m. to 4:30 p.m. (30 Ky.R. 1702; Am. 1904; eff.
2-16-2004.)
