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Sales Tax State Activity Update - April 2006

Texas Ad Agency Tosses the Hour Glass – Taxes the Work

A Texas advertising agency takes on a new model for billing clients and collecting taxes for their services.

The taxpayer will estimate the charges for each project and bill the client accordingly regardless of the amount of hours each employee actually devotes to the project. However, the bill to the client must be a representative allocation of charges for time spent by each employee who will work on the project.

For example tax will apply to the time devoted for producing the final art, not to work allocated towards developing preliminary art. To assist with the allocation of taxable and nontaxable charges, the taxpayer included descriptions of each job title and provided comments as to whether the service performed would be subject to sales tax. The response in the letter from the Tax Policy Division approved the allocation for collecting tax in this manner.

Below we have included the most common job tasks performed by advertising agencies and their taxability.

Account Service

• Lead Strategist – The strategist will be responsible for working with the Executive Creative Director on overall branding and strategy based on the client's business needs.
• Account Supervisor – The Account Supervisor is responsible for keeping the work on strategy. The supervisor will review all preliminary art before it is presented to the client. The supervisor is also available to the client daily as needed with questions and provides senior level input to the account
  Executive as needed.
• Account Executive – The Account Executive is responsible for day-to-day administrative functions including client communications. This includes providing client feedback to internal teams, working with clients on estimates and billing, and general account administration.
  Charges for the above time will not be taxable because it does not create finished art or constitute taxable services.

Operations

• Project Manager – The Project Manager will be responsible for the day-to-day management of the internal schedule and budget. The Project Manager routes all layouts to team members and makes sure that the client receives deliverables on time. The Project Manager ensures that taxpayer is accountable for its services. Charges for this person's time are not related to sales of taxable items
• Proofer/QA Specialist – The Proofer checks layouts, copy and images to ensure compliance with taxpayer standards in terms of spelling, grammar, layout and positioning. For example, the Proofer verifies that subject advertising correctly meets style guides (margin settings, serial comma usage, fonts), proper legal disclaimers (stipulated by client), and the correct contact information (proper phone number, address, or webpage links). Charges for this person's time are taxable to the extent the services relate to finished art.

Crreative

• Executive Creative Director – The Executive Creative Director is responsible for working with the Lead Strategist to determine overall strategy based on the client's business needs. The Creative Director will also review all preliminary art prior to it being presented to the client.
• Art Director – The Art Director will work with the Creative Director and Copywriter on all concepts. The Art Director will be responsible for the creative process behind the composition of initial layouts, images, etc.
• Designer/Jr. Art Director – The Designer is responsible for working on preliminary layouts with direction from the Art Director.
• Copywriter – The Copywriter will work with the Creative Director and Art Director on all concepts. The Copywriter will be responsible for all copy and messaging. However, before being used, all copy is routed through a Proofer/QA Specialist for final edits and corrections. Charges for the above tasks are not related to sales of taxable items.

Production

• Artists, Rich Media Specialist, Developer, and Production Manager, perform tasks relative to finished art and therefore are taxable.

The full text may be viewed on the Texas State Comptroller website.

(Texas Tax Policy Division, Sale Tax Letter Ruling, No. 200601438L, 01/27/2006)

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