Depending on the state, advertising services performed by an advertising agency may be taxable or not. In Minnesota, advertising services can be taxable or nontaxable depending on the "functional use" of the item produced or sold to the customer.
The following is a brief summary of Minnesota's rules:
Definition and Example
Functional use is a term used to distinguish nontaxable advertising services from taxable advertising. It refers to the medium on which the advertising is produced. If the medium has a use beyond the promotional message, it has functional use. Advertising that has a functional use is taxable.
Example: A brochure is used only for advertising. If the advertising message is taken away, nothing is left but a piece of paper. However, a calendar with an advertising message on it is used for both advertising and also date information. If the advertising message is removed, the calendar still provides information about day and month. This calendar has functional use so it is taxable.
Examples of items that will generally be considered nontaxable are:
- printed materials, such as fliers, promotional materials, direct mail materials, and posters;
- radio, television, and other audio or visual commercials (including the cassettes, tapes, films, or slides of such commercials);
- print media advertising such as ads in magazines, newspapers, and other printed materials;
- billboard ads; and
- direct marketing materials not distributed by mail.
Examples of items that will generally be considered taxable are:
- specialty advertising items, such as key chains, calendars, matchbooks, and napkins;
- business cards and stationery;
- books and training and educational materials;
- annual reports;
- business identification signs;
- business directories ( e.g., the yellow pages); and
- items that generally are considered nontaxable but that are mass produced or reproduced in quantities in excess of that reasonably anticipated to be necessary for an advertising campaign, but only to the extent of such excess.
If you are an advertising agency and not sure if your services or the item you are selling is taxable, please contact me for assistance. The sales tax rules are different in every state. The Minnesota rules are provided only as an example.