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Creative Promotional Services                                                                                                                         133
                                                                                                                                                    Sales Tax
                                                                                                                                                    Fact Sheet

Nontaxable advertising services
Minnesota Rule 8130.9250, Advertising, is the basis for                    tise are usually considered to be “nontaxable advertising
this fact sheet. The guidelines in the rule apply only when                services”:
providing advertising services or creative promotional ma-
                                                                              advertising banners                             magazine ads
terials. The most common types of businesses that provide
                                                                              advertising posters                             newspaper ads
these services are: advertising agencies, graphic design stu-
                                                                              audio or visual commer-                         newspaper inserts
dios, desktop publishers, printers, recording and video stu-
                                                                              cials                                           point-of-sale materials
dios, and photographers. This rule does not apply when
                                                                              billboard ads                                   print media advertising
these businesses are producing other products or forms of
                                                                              brochures                                       radio commercials
communication such as surveys, studies, polls, training ma-
                                                                              catalogs                                        sales promotion materials
terials or other items that are not advertising.
                                                                              direct mail advertising                         table tents
Nontaxable advertising is creative promotional services that                  materials                                       television commercials
meet three criteria:                                                          direct marketing materi-                        trade journal ads
                                                                              als                                             yellow page ads
1. there is no functional use of the medium except to carry                   display signs
   the message,                                                               flyers and handouts
2. the agency must be involved in the creation of advertis-                Example: An advertiser contracts with an agency to produce
   ing, and                                                                   5,000 brochures. The agency designs the brochure and
3. the agency must have a direct relationship with the ad-                    hires the printer to do the printing. The printer charges the
   vertiser.                                                                  agency $1,000 for printing and $68.75 tax. The customer
                                                                              invoice reads as follows:
Creating advertising                                                           For creative promotional services:
You must create the advertising to be considered a provider                       Creative design, artwork
of nontaxable advertising services. Any of the following                           and in-house set up                                         $2,392.00
                                                                                  In-house keyline                                                152.00
activities alone or in combination may contribute to the                          Printing of brochure                                          1,068.75
creation of advertising:                                                          Agency fee                                                    1,000.00
                                                                                  Total                                                        $4,612.75
   development of data, concepts or ideas
   analysis of available media and means to advertise                      Display equipment. Nontaxable advertising does not in-
   analysis of present and potential markets                               clude display equipment. Display booths, point-of-sale dis-
   study of the products/services to be promoted                           plays, racks and all other equipment used to display adver-
   determination of a distribution and sales strategy based                tising materials are taxable.
   on analysis of customer operations                                      Table of contents
   placement of advertising in the media                                   Nontaxable advertising services............................................... 1
   formulation of an advertising plan                                      Key concepts............................................................................ 2
   separately stated charges to customers for agency fees,                 Taxable advertising .................................................................. 3
   creativity assessments                                                  Agency purchases for agency use (and how exemptions work) 4
                                                                           Purchases for producing both nontaxable and taxable
The words “advertising services” or “creative promotional                     advertising .......................................................................... 4
services” must be clearly noted on the invoice. The agency                 Tax responsibilities when businesses are not producing
                                                                              advertising .......................................................................... 5
records must clearly indicate that it directed the creative                Exempt publications ................................................................. 6
work for the nontaxable advertising services.                              Direct pay companies............................................................... 6
                                                                           Local sales and use taxes........................................................ 6
For example, when the three nontaxable advertising criteria
are met, then the following items used to promote or adver-

Sales and Use Tax Division – Mail Station 6330 – St. Paul, MN 55146-6330   This fact sheet is intended to help you become more familiar with Minnesota tax
Phone: 651-296-6181 or 1-800-657-3777                                      laws and your rights and responsibilities under the laws. Nothing in this fact sheet
Minnesota Relay (TTY) 711                                                  supersedes, alters, or otherwise changes any provisions of the tax law, administrative
                                                                           rules, court decisions, or revenue notices. Alternative formats available upon request.

Stock No. 2800133, Revised 6/04                                                                                              Minnesota Revenue, Advertising
(Revised 7/1/09 to reflect the sales and use tax
rate change from 6.5% to 6.875%)
Key concepts
In order to fully understand the remainder      Direct relationship is a criteria for de-    Office supplies are those materials you
of this fact sheet, it is important to under-   termining a nontaxable advertising ser-      need to operate your business. Color
stand these key concepts.                       vice. The provider must be directly re-      pencils, paints, art supplies, all paper not
                                                sponsible to the advertiser. A subcontrac-   directly used in printing a product, clip art,
Advertising is creative promotion. It           tor never has a direct relationship.         software and invoices are examples of
makes you want to buy something, think                                                       office supplies.
positively about an idea or organization,       Inputs are, for the most part, materials
hear about a public concern, or vote for a      directly incorporated into the production    Functional use is a term used to distin-
candidate. It promotes the sale of a prod-      of a piece of advertising. The paper a       guish nontaxable advertising services
uct or a public image. It may be a public       brochure is printed on is an input, as is    from taxable advertising. It refers to the
service announcement or a political mes-        the ink used to print it. There are a few    medium on which the advertising is pro-
sage.                                           inputs, photographs being the most           duced. If the medium has a use beyond
                                                common, that do not become part of an        the promotional message, it has func-
Advertising provider is any agency re-          actual product. Any tangible component       tional use. Advertising that has a func-
sponsible to the advertiser for the devel-      of advertising that is purchased on a sub-   tional use is taxable.
opment of promotional materials. For            contract is treated as an input.
sales tax purposes, there are two differ-                                                    Example: A brochure is used only for
ent types of advertising: nontaxable ad-        Preliminary art is prepared to provide an     advertising. If the advertising message
vertising services and taxable advertising.     advertiser with a variety of promotional      is taken away, nothing is left but a
Each has different tax consequences. An         options. It demonstrates concepts or          piece of paper. However, a calendar
agency may be hired to provide nontax-          ideas that can be pursued in developing       with an advertising message on it is
able advertising services, taxable adver-       the final promotional product. It can be      used for both advertising and also date
tising products, or both. The provider          presented as roughs, mock-ups, visuali-       information. If the advertising message
does not have to call themselves an ad-         zations, comprehensives, layouts,             is removed, the calendar still provides
vertising agency. In this fact sheet,           sketches, drawings, paintings, designs,       information about day and month. This
agency means any provider of creative           storyboards, rough cuts of film and tape,     calendar has functional use so it is tax-
promotional services.                           initial audio and visual tracks, and work     able.
                                                prints. Once the advertiser selects a pro-
Advertiser is a firm or person who pur-         motional concept, either verbally or in
chases advertising.                             writing, the work of the agency is no
                                                longer preliminary art.

                                                                        Example: An advertiser purchases brochures from an agency.
Creating your own advertising                                              One-half of the brochures will be used in Minnesota, and
When you create advertising for your own use, you must pay                 one-half will be shipped outside Minnesota for use. The
tax on all inputs purchased to make the advertising such as                agency should ask the advertiser what portion of the bro-
artwork, photos and printing. No tax is due on the time your               chures will be used outside Minnesota (50 percent), and
own employees spend creating the advertising.                              document the percentage in its records. The agency may
                                                                           purchase 50 percent of all materials consumed in the pro-
An exemption may apply to purchases of certain items used                  duction of the brochures exempt from the Minnesota sales
to create your own advertising if the items will be shipped                tax by giving its suppliers a fully completed Certificate of
                                                                           Exemption, Form ST3 (use exemption code N).
out of Minnesota (see the next section).
Example: A business has a marketing division that creates its
                                                                        Similarly, when an advertiser creates its own advertising, it
   own advertising materials. Their purchase of artwork, pho-           must pay tax on all inputs required to make the advertising
   tos, software, paper and the necessary equipment to create           used in Minnesota. Inputs on advertising used solely out-
   their advertising is all taxable. Any subcontracted work such        side Minnesota may be purchased exempt from tax. To
   as printing is also taxable.                                         claim exemption on the percentage used outside of Minne-
                                                                        sota, the advertiser must give the supplier a fully completed
Nontaxable advertising for use outside                                  Certificate of Exemption, Form ST3 (use exemption code
Minnesota                                                               N).
Generally, an agency must pay sales tax on all the materials
used to create nontaxable advertising. However, when non-               The exemption for advertising shipped out of state does not
taxable advertising is produced for use outside of Minne-               apply to purchases of items that are used, but not con-
sota, the agency may purchase most inputs for the advertis-             sumed, to create or produce nontaxable advertising, since
ing leaving the state exempt from the sales tax. To validate            the items themselves are not shipped out of state.
the exemption, the advertiser must give the agency docu-                Example: An agency purchases a photo that is used to pre-
mentation specifically stating the portion of the advertising              pare an advertising brochure. The brochure will be used
that will be used outside of Minnesota. Form STAD, Decla-                  outside Minnesota. Because the photo itself will not be sent
ration of Nontaxable Advertising Used Outside Minnesota,                   out of state but will be used here in Minnesota to create the
                                                                           brochure, it is subject to tax.
is available on our web site.

                                                                    2                                       Minnesota Revenue, Advertising
Taxable advertising
If the advertising has a functional use other than that of the          cent exemption on the purchase price of the calendars that
advertising message, the advertising is taxable. Examples               will be used outside Minnesota.
of taxable advertising include business cards and specialty
advertising, such as buttons, calendars, clocks, frisbees,           Direct mail
glassware, key chains, matchbooks, notebooks, napkins,               Sometimes taxable advertising or other taxable printing is
pens, rulers, etc.                                                   delivered via direct mail. Direct mail is printed material
                                                                     that meets the three following guidelines:
Charging sales tax
                                                                     1. it is delivered or distributed by U.S. Mail or other deliv-
Generally, sales tax applies to the total sales price of tax-
                                                                        ery service;
able advertising, including charges for concept, creation,
                                                                     2. it is sent to a mass audience or to addresses on a mailing
development, planning, design, commission, agency fees,
                                                                        list provided by the purchaser or at the direction of the
staff time, consultation and retainer fees, delivery charges,
                                                                        purchaser; and
and other charges. Exceptions to this rule:
                                                                     3. the cost of the items is not billed directly to recipients.
Preliminary art used in taxable advertising. If an agency
                                                                     Items to be included with the printed material also qualify
charges separately for preliminary art on its invoice for
                                                                     as direct mail, if supplied by the purchaser to the direct
taxable advertising, the preliminary art charge is not tax-
                                                                     mail seller. (For example, shampoo samples to be included
able. Preliminary art is very narrowly defined. It only ap-
                                                                     with shampoo coupons.) Direct mail does not include mul-
plies to work done by an agency to present optional con-
                                                                     tiple items of printed material delivered to a single address.
cepts for the promotion to the advertiser. Once the adver-
tiser agrees, even verbally, to accept an option, any further        Direct mail delivery exemption. Charges for delivering or
work on the project is taxable. Review and editing that go           distributing direct mail are not subject to sales tax as long
on between the agency and the advertiser after the concept           as the charges are separately stated on the invoice to the
is accepted are not part of preliminary art. Also, inputs that       purchaser. Delivery charges include charges for transporta-
are used to make preliminary art are taxable.                        tion, shipping, postage, handling, crating, and packing.
Taxable advertising used outside Minnesota. The portion              Direct mail taxing rules. For sales of taxable advertising
of taxable advertising that will be used outside Minnesota           that meet the definition of direct mail, the seller must
is not taxable whether shipped outside the state by the              charge sales tax on the sales price of the advertising that
agency or by the advertiser.                                         stays in Minnesota, excluding separately stated delivery
                                                                     charges and preliminary art. Charge the rate of sales tax
If the agency ships the taxable advertising out of Minnesota,
                                                                     imposed in the location from which the mail was shipped,
it is not subject to Minnesota sales tax. No exemption cer-
                                                                     unless the purchase gives the seller one of the following:
tificate is necessary—the agency’s records should indicate
that the taxable advertising materials were shipped outside            Delivery information – documentation showing the tax-
Minnesota. If only a portion is shipped out of Minnesota, the          ing jurisdictions where the direct mail will be delivered.
agency’s invoice must clearly indicate the portion to be               The seller must charge tax according to the delivery in-
shipped outside Minnesota.                                             formation provided.
                                                                       Certificate of Exemption, Form ST3, claiming the direct
If the agency ships or delivers the taxable advertising to a
                                                                       mail exemption or providing a direct pay number (issued
Minnesota location, Minnesota sales tax applies unless the
                                                                       by Minnesota Revenue) – The seller does not charge any
advertiser gives the agency a fully completed Certificate of
                                                                       sales tax. It is the purchaser's responsibility to pay use
Exemption, Form ST3, (use exemption code N) indicating
                                                                       tax to the appropriate taxing jurisdictions.
the percentage of the advertising materials that will be used
outside Minnesota. (Note: this exemption is not allowed for          Example: Advertiser buys 5,000 calendars from an agency
non-advertising items.)                                                 located in Minneapolis and provides a mailing list for the
                                                                        agency to use to ship the calendars. The advertiser pro-
Example 1: Advertiser buys 1,000 matchbooks from a spe-                 vides a Form ST3 indicating that 20 percent of the calen-
   cialty advertising company. The specialty advertising com-           dars will be shipped outside of Minnesota, but no other in-
   pany ships the matchbooks to a location outside Minnesota.           formation about the mailing. Twenty percent of the total
   The specialty advertising company should not charge Min-             charge is exempt since that portion will be shipped outside
   nesota sales tax.                                                    of Minnesota. (However, if the agency is registered to col-
                                                                        lect sales tax in the state(s) into which the advertising is
Example 2: Advertiser buys 1,000 calendars from an agency               shipped, they may be required to collect the other state's
   to be delivered to their Minnesota office. One-half of the           sales tax.) The remaining 80 percent, less separately stated
   calendars will be given away at a trade show outside of              postage charges, is subject to the Minnesota sales tax, the
   Minnesota and the other half will be given away in Minne-            Minneapolis, Hennepin County and Transit Improvement
   sota. The advertiser should give the agency a fully com-             local sales tax rates.
   pleted Certificate of Exemption, Form ST3, to claim 50 per-
                                                                                                        Minnesota Revenue, Advertising
Agency purchases for agency use (and how exemptions work)
Purchases for agency use                                              1. grant to the ad agency the ability to bind the exempt en-
An agency must pay sales or use tax on purchases of office               tity to pay for purchases made by the agency;
supplies, equipment and other taxable items or services               2. require that the agency purchase all materials in the
used or consumed by the agency to conduct business.                      name of the exempt entity;
                                                                      3. require that all contracts, purchase orders and similar
                                                                         writings of the agency shall specifically state that the ex-
Purchases of inputs for nontaxable
                                                                         empt entity is obligated to pay for materials purchased;
advertising                                                           4. require the agency to disclose its relationship to the ven-
An agency generally must pay sales or use tax on the pur-                dor of the materials; and
chase of all inputs. An agency may subcontract with others            5. require that the agency make no use of the property for
to produce part of the nontaxable advertising. Inputs such               itself or for any client other than the exempt entity.
as assemblies, keylines, paste-ups, videos, layouts, color
separations, photographs, film and master tapes are taxable           An agency that has been appointed as a purchasing agent
when purchased by an agency to produce nontaxable adver-              for an exempt entity must provide the vendor evidence of
tising.                                                               the appointment in order to claim exemption. It must be
                                                                      expressly stated on the purchase order that the agency is
When an agency subcontracts with others to write manu-                acting as an agent for the exempt entity and that the pur-
scripts or copy, develop preliminary art, or to compile sta-          chase is authorized by the agreement. The agency must
tistical data, these services generally are not subject to tax.       give the vendor an exemption certificate in the name of the
Inputs used to present these services, however, are taxable.          exempt entity, signed by the advertising agency as purchas-
Preliminary art is only treated as a nontaxable service when          ing agent.
it is separately stated on the invoice to the agency.
                                                                      Example: A church contracts with an agency to produce 1,000
Purchases for entities with tax exempt                                   brochures and also 1,000 calendars. A written agreement
                                                                         must be drawn up clearly incorporating the guidelines listed
status                                                                   above. The agreement allows the agency to purchase the
Certain organizations are exempt from paying Minnesota                   inputs for the nontaxable advertising (brochures) exempt
sales tax. These include:                                                from sales tax. The inputs to the taxable advertising (calen-
                                                                         dars) are already exempt as purchases for resale. The sale
  organizations that have received an exempt status num-                 of both the brochures and the calendars to the church are
  ber for sales tax from the Department of Revenue,                      exempt.
  the federal government,
  certain local government agencies such as schools and               Purchases for taxable advertising
  hospitals.                                                          An agency may purchase items that become an ingredient
                                                                      or component part of taxable advertising exempt for resale.
Since these entities are not required to pay sales tax, they          To claim exemption, the agency must give an exemption
may elect to not pay the tax on the inputs used in their non-         certificate to the vendor.
taxable advertising. To do this they must appoint the
                                                                      Example: Agency purchases poster board for making calen-
agency providing the advertising as their purchasing agent.              dars. The agency may purchase the poster board exempt
                                                                         for resale by giving the supplier a fully completed Form
For an agency to have a valid purchasing agent agreement
                                                                         ST3, Certificate of Exemption, using exemption code G, re-
with an exempt entity, the agreement must:                               sale.

Purchases for producing both nontaxable and taxable advertising
                                                                        Example: An agency buys a ream of paper. Part of the pa-
Purchases that are incorporated into the                                   per will be used to produce a nontaxable brochure, and
promotional material                                                       part will be used to produce a taxable calendar. The pa-
When inputs are incorporated, in part, into nontaxable                     per may be purchased exempt for resale. The agency
advertising, and, in part, into taxable advertising, they                  must report and pay use tax on the portion of the paper
                                                                           used to produce the brochure. It is the responsibility of
can all be purchased exempt for resale. The agency must
                                                                           the agency to prorate the portion that is used for the bro-
then pay use tax on the portion used to produce nontax-                    chure and report the appropriate amount of use tax on
able advertising.                                                          their sales and use tax return. If the agency does not
                                                                           have sufficient evidence to show how the purchase was
                                                                           prorated, use tax is due on the entire purchase price of
                                                                           the ream of paper.

                                                                                                          Minnesota Revenue, Advertising
Purchases that are used but not                                          contract price to the advertiser is $5,000, of which $4,000
                                                                         (80%) is allocated to produce the brochures, and $1,000
incorporated                                                             (20%) is allocated to produce the calendars. 80% of the
Certain inputs are considered to be used, but do not be-                 purchase price of the photo ($80) is subject to use tax
come a part of the advertising. A good example is a pho-                 because 80% of the photo is allocated to producing the
tograph. After the photo image is transferred to the ad-                 brochure and the agency must pay tax on the inputs used
vertising material, the photo remains. It can be reused.                 to produce nontaxable advertising. 20% of the purchase
                                                                         price of the photo ($20) is not taxable because 20% of
These inputs are treated differently than other inputs:                  the photo is allocated to producing the calendar, which
                                                                         will be taxed at the time of sale to the advertiser.
  If the initial use is for nontaxable advertising, tax must
  be paid on the photo.                                               One contract for both nontaxable and
  If it is for taxable advertising, it can be purchased ex-           taxable advertising
  empt from the tax (use Form ST3, exemption code G,                  If a contract between an agency and the advertiser re-
  resale).                                                            quires the creation of both nontaxable and taxable adver-
  Since these inputs do not leave the state, the exemption            tising, and prices are not separately stated, the agency
  from the tax for nontaxable advertising does not apply.             must charge sales tax on the fair market value of the tax-
                                                                      able advertising. Fair market value of the taxable adver-
A photograph
Example 1: If the initial contract between the agency and the
                                                                      tising must include a fair and appropriate allocation of
   advertiser is for a calendar, the photo may be purchased           the agency’s fee or commission.
   exempt for resale as part of the cost of producing the
   calendar and the calendar will be taxed when sold to the           Fair market value means the total charges for the taxable
   advertiser. If the photo is later used to produce a nontax-        advertising that the agency would have charged to the
   able brochure, no additional tax applies, since the taxabil-       advertiser if the contract was only for taxable advertising.
   ity of the photo had already been established.
                                                                      Example: A manufacturer hires an agency to produce em-
Example 2: If the initial contract between the agency and the            ployee training materials and also some brochures that
   advertiser is for a nontaxable brochure, the agency must              advertise their product. The total invoice amount is
   pay sales or use tax when it buys the photo.                          $1,550. The training materials are taxable, the brochures
                                                                         are nontaxable. The fair market value of the training ma-
Example 3: If the initial contract between the agency and the            terials is determined to be $600. The value of the bro-
   advertiser is for both brochures and calendars, the                   chures is $800, which leaves an agency fee of $150. The
   agency should purchase the photo exempt for resale.                   tax is computed as follows:
   The agency must then prorate the portion of the cost of
   the photo that is used for each type of advertising and               Fair market value of taxable item = $600 (value of train-
   pay use tax on the portion used to produce the bro-                   ing materials) ÷ $1,400 (value of training materials + bro-
   chures. Charges should be prorated based on the portion               chures) = 43%
   of the nontaxable advertising charges to the total contract
   price. If the agency does not have sufficient information             Agency fee of $150 x 43% =                         $ 64.50
   to show how the purchase was prorated, use tax is due                 Taxable training materials                        + 600.00
   on the entire purchase price of the photo, and the sale of            Taxable amount                                      664.50
   the calendar is also taxable.                                         Tax rate (6.875%)                                 x .06875
                                                                         Tax due                                            $ 45.68
   An agency purchases a photo for $100 exempt from the
   tax to produce both brochures and calendars. The total

Tax responsibilities when businesses are not producing advertising
Individual businesses such as desktop publishers, graphic             Certificate of Exemption, Form ST3. Common reasons
designers, photographers, printers and recording and video            for exemptions are:
studios might never provide nontaxable advertising services.
These businesses should collect the tax on any product they             the item is, or becomes part of, an exempt publication
make or service they provide that is sold to an agency to be            such as a newspaper, bulletin, flyer or newsletter. An
incorporated into nontaxable advertising services.                      exempt publication must be regularly issued at least
                                                                        four times a year (use exemption code M and write in
For many businesses advertising is only one part of the                 “exempt publication”).
business. Much of their business activity is making tan-                the item is to be used in another state and is directly
gible items, which is taxable.                                          shipped there by the seller. No exemption certificate is
                                                                        necessary, but the seller’s records must clearly show
When a business sells tangible items, the total charge to               that the item was shipped out of state. Note, advertis-
its customer is subject to sales tax. Customers must pay                ing is treated differently.
the tax unless they give the seller a fully completed                   sales to qualifying nonprofit organizations (use exemp-
                                                                        tion code E or F).
                                                                  5                                    Minnesota Revenue, Advertising
  sales for the purpose of resale (use exemption code G).         Local sales and use taxes
  sales of items such as package design or product in-
  structions that become part of a product that will ulti-        Local sales or use taxes may apply to your sales and pur-
  mately be sold at retail (use exemption code A).                chases. See Fact Sheet 164, Local Sales and Use Taxes,
                                                                  for an up-to-date list of local taxes.
When a business buys inputs that become part of a tangi-
ble item it sells, it may purchase these items exempt from        Nontaxable advertising: Generally, an agency is the con-
sales tax. To do so the business must give its suppliers a        sumer of all materials and inputs used to create nontaxable
fully completed Certificate of Exemption, Form ST3.               advertising. If the agency is located in an area with a local
                                                                  tax, the agency must pay both state and local sales or use
A business usually pays tax on all office supplies and            tax on those materials and inputs.
most equipment used to conduct business.
                                                                  However, if the advertising will be used outside the local
See pages seven and eight for examples that contrast the          taxing area, that portion of the materials used to create
difference between providing nontaxable advertising ser-          the nontaxable advertising is exempt from the local tax.
vices and the production of tangible items for various            To validate the exemption, the advertiser must give the
types of businesses.                                              agency documentation specifically stating the portion of
                                                                  the advertising that will be used outside of the local tax-
Exempt publications                                               ing area. Form STADL, Declaration of Nontaxable Ad-
Certain publications are exempt from the sales tax.               vertising Used Outside a Local Government, is available
Newspapers or other publications such as advertising              on our web site.
circulars and catalogs that are regularly issued at average       Example: a business in Bloomington hires an agency in
intervals of three months or less and distributed to the             Minneapolis to create brochures for distribution at the
general public are exempt publications.                              Bloomington business. The Bloomington business gives
                                                                     the agency Form STADL claiming 100% exemption from
An agency can purchase inputs that become a part of an               Minneapolis tax. The agency pays Minnesota tax on the
exempt publication exempt from the tax. To do so, the                inputs to the brochure, but Minneapolis tax is not due.
agency must give the vendor a fully completed Certifi-
                                                                  Taxable advertising: An agency may purchase all inputs
cate of Exemption, Form ST3. Use exemption code M
                                                                  that become part of taxable advertising exempt for resale.
and write in “exempt publication.”
                                                                  The sale of taxable advertising is subject to local sales
                                                                  tax if the advertising will be used in the local taxing area.
Direct pay companies
Companies that hold a Minnesota direct pay number (is-            If the taxable advertising is delivered by the seller outside
sued by Minnesota Revenue) are not allowed to assign              the local taxing area, no local tax is due. The seller
their direct pay status to a third party. Therefore, adver-       should note on the invoice that the advertising was deliv-
tising agencies may not use an advertiser’s direct pay            ered outside the local taxing area.
number when purchasing inputs for the advertiser’s pro-           If the taxable advertising is delivered by the seller in the
motional materials.                                               locality with the local tax, but the purchaser has given the
                                                                  seller a fully completed Certificate of Exemption, Form
References:                                                       ST3 (use exemption code F and write in the name of the
M. S. 297A.68, Subd 10, Publications; publication ma-             local tax), no local tax is due.
M. S. 297A.68, Subd 11, Advertising materials
Rule 8130.9250, Advertising
Other fact sheets you may need:
146, Use Tax for Businesses
163, TV Commercials
164, Local Sales and Use Taxes
169, Photographers and Video Production
170, A Step-by-Step Guide to Filing and Paying
     Sales and Use Tax Electronically

                                                              6                                   Minnesota Revenue, Advertising
                                                          Taxable                                              Nontaxable
                                        Example 1                          Example 2                             Example
                              An advertiser contracts with an    An ad agency is hired as a         An advertiser hires an ad agency
Advertising                   ad agency to develop training      subcontractor by another           to develop an advertising strategy
                              materials for its sales execu-     agency to produce a promo-         for a new product line. The ad
Agencies                      tives. Training materials are      tional brochure. Since the ad      agency develops the message, the
                              taxable. The ad agency charges     agency does not have a direct      visual concepts, the promotional
                              tax on the entire cost of the      relationship with the adver-       materials, and strategies to reach
                              project.                           tiser, it must collect sales tax   the targeted audience. The ad
                                                                 on the entire charge for the       agency must clearly indicate on
                                                                 brochure.                          the advertiser’s invoice that it is
                                                                                                    providing creative work for the
                                                                                                    nontaxable advertising service.
                                                                                                    The ad agency must pay tax on all
                                                                                                    materials and supplies used to
                                                                                                    complete the contract. The ad
                                                                                                    agency’s bill to the advertiser is
                                                                                                    not subject to tax.
                              An advertiser takes the copy       The graphic design studio is       An advertiser asks a graphic de-
Graphic Design                and photos it wants used in a      hired by an agency to design a     sign studio to create a new com-
                              promotional mailer. The studio     logo for one of the agency’s       pany image. Included in the con-
Studios                       is asked to do the layout and      clients. The graphic design        tract is development of a logo and
                              color separation work needed       studio has no direct relation-     a brochure introducing a new
                              to make the mailer ready for       ship with the advertiser. It       product line. The graphic design
                              the printer. Layout and color      must charge sales tax on its       studio is providing a nontaxable
                              separation are taxable fabrica-    entire charge to the agency.*      advertising service. The graphic
                              tion labor. Since the graphic                                         design studio must clearly indicate
                              design studio did not create the                                      on the advertiser’s invoice that it is
                              promotional concept, it must                                          providing the creative work for the
                              collect sales tax on its entire                                       nontaxable advertising service.
                              charge to the advertiser.*                                            The studio must pay tax on all
                                                                                                    materials and supplies used to
                                                                                                    complete the contract. The stu-
                                                                                                    dio’s bill to the advertiser is not
                                                                                                    subject to tax.
                              An advertiser goes to a photog-    An agency hires a photogra-        An advertiser goes to a photog-
Photographers                 rapher to have some photo-         pher to do the photography for     rapher to have some promotional
                              graphs made of a product dis-      a promotional brochure it is       posters made. The photographer
                              play. The advertiser prepares      creating for an advertiser. The    creates the design concept, hires
                              the display and provides the       photographer charges the           someone to write the copy, de-
                              back-drop and setting. The         agency sales tax on the entire     velops and manages the entire
                              photographer collects tax on       charge for the photographs         filming and printing process.
                              the total charge for the photo-    since it is not working directly   The photographer must clearly
                              graphs.*                           with the advertiser.*              indicate on the advertiser’s in-
                                                                                                    voice that she is providing the
                                                                                                    creative work for the nontaxable
                                                                                                    advertising service. The photog-
                                                                                                    rapher must pay tax on all mate-
                                                                                                    rials and supplies (such as the
                                                                                                    film, color separation) used to
                                                                                                    produce the poster. The photog-
                                                                                                    rapher’s bill to the advertiser is
                                                                                                    not subject to tax.
* Electronic delivery. When the final graphic design or photography is transferred electronically to the client, with no physical
transfer of prints, negatives, discs, or other tangible items, the entire charge is exempt. The invoice must clearly state that the
graphic design or photography is transferred electronically. No exemption certificate is necessary.

                                                                   7                                        Minnesota Revenue, Advertising
                                         Taxable                                                Nontaxable
                       Example 1                          Example 2                                Example
             An advertiser goes to a desktop    An agency subcontracts with a       The desktop publisher develops
Desktop      publisher to have some adver-      desktop publishing firm for the     the concept for the brochures and
             tising brochures done. The         layout of a catalog. The desk-      advises the advertiser on color of
Publishing   advertiser has a rough hand-       top publisher charges the           paper, type of print, graphics, etc.
             written copy of how the bro-       agency tax on the entire bill.      The desktop publisher must
             chure should look. Advertiser                                          clearly indicate on the advertiser’s
             consults with desktop pub-                                             invoice that he is providing the
             lisher and selects the color of                                        creative work for the nontaxable
             paper, type of print, and some                                         advertising brochure. As such, the
             graphics. The desktop pub-                                             desktop publisher must pay tax on
             lisher will set up the brochure                                        all materials and supplies (such as
             and have it printed. The desk-                                         paper and ink) used to produce the
             top publisher charges tax on                                           brochures. The bill to the adver-
             the entire amount of the bill,                                         tiser is not subject to tax.
             including charges for typing,
             setup, layout and the subcon-
             tracted printing.

             An advertiser goes to a print      An agency subcontracts with a       The printer, in this case, develops
Printing     shop to have some advertising      printer to print brochures for      the concept for the flyers and ad-
             flyers printed. Advertiser has a   one of its advertising clients.     vises the advertiser on color of
             rough handwritten copy of          The printer charges tax on the      paper, type of print, graphics, etc.
             how the flyer should look.         entire amount of the bill, in-      The printer clearly indicates on the
             Advertiser reviews sample          cluding charges for typing,         advertiser’s invoice that he is pro-
             books and selects the color of     setup, layout and printing.         viding the creative work for the
             paper, type of print, and some                                         nontaxable advertising flyer. The
             graphics. The printer will set                                         printer must pay tax on all materi-
             up the flyer and print it. The                                         als and supplies (such as paper and
             printer charges tax on the en-                                         ink) used to produce the flyers.
             tire amount of the bill, includ-                                       The printer’s bill to the advertiser
             ing charges for typing, setup,                                         is not subject to tax.
             layout and printing.
             An advertiser goes to a re-        An agency subcontracts with a       An advertiser goes to a recording
Recording    cording studio to have a radio     recording studio to produce a       studio to have a radio commercial
             commercial made. The adver-        radio message for a promo-          made. The recording studio pro-
Studios      tiser gives the recording studio   tional campaign of one of the       vides the creative work to develop
             the script for the commercial.     agency’s clients. The recording     the concept of the commercial.
             The recording studio hires         studio must charge the agency       The recording studio must clearly
             voice talent and makes the         sales tax on the entire charge      indicate on the invoice that it is
             commercial. The recording          for the recording since it is not   providing the creative work for the
             studio charges tax on the entire   working directly with the ad-       nontaxable radio commercial. The
             amount of the bill, including      vertiser.                           recording studio must pay tax on
             charges for voice talent and                                           all materials and supplies (such as
             background music.                                                      the tape) used to produce the
                                                                                    commercial. The recording stu-
                                                                                    dio’s bill to the advertiser is not
                                                                                    subject to tax.

                                                                                             Minnesota Revenue, Advertising

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