PURPOSE: This rule explains, pursuant to section 144.034, RSMo, when sales of advertising are sales of a service, which are not subject to tax, and when such sales of advertising are sales of tangible personal property, which are subject to tax.

1. (1) In general, if a sale of advertising involves the transfer of tangible personal property, it is a sale of tangible personal property subject to tax unless it is preliminary art or the sale is made by an exempt business. If the sale is made by an exempt business, the transaction is the sale of a service and is not subject to tax when the true object of the sale is the advertising. When the true object of a sale by 12 CSR 10-103

an exempt business is tangible personal property, it is subject to tax.

1. (2) Definition of Terms.

   1. (A) Advertising—the expression of an idea created and produced for reproduction and distribution in the media, such as television, radio, newspapers, newsletters, periodicals, trade journals, publications, books, other printed materials, magazines, standardized outdoor billboards, direct mail or point-ofsale (POS) displays, and which is designed to promote sales of a particular product or service or otherwise affect consumer behavior.
   2. (B) Advertising agency—a business, not owned by an advertiser, which is directly responsible to an advertiser for and whose predominant functions as a business are the creation or supervision of the production and placement of advertising and advertising materials in the media.
   3. (C) Broadcast station—a radio or television enterprise which engages in the collection, writing, production and dissemination of news, public affairs or entertainment by means of transmitting signals through space or wires intended for reception by the public on a receiving set.
   4. (D) Exempt business—advertising agency, broadcast station, legal newspaper pursuant to Chapter 493, RSMo, or standardized outdoor billboard company exempt from the sales tax law pursuant to section 144.034, RSMo.
   5. (E) Finished art—the final art used in print advertising for actual reproduction by photochemical or other process, or the master tape or film and duplicate prints used in broadcast advertising.
   6. (F) Preliminary art—art, film or tape prepared by a person engaged in the advertising business for the purpose of conveying or demonstrating an idea or concept for acceptance by a buyer before the final approval is given by a buyer for finished art or finished film or tape. Examples of preliminary art include, but are not limited to: roughs; visualizations; comprehensives; layouts; sketches; drawings; paintings; designs; story boards; rough cuts of film and tape; initial audio and visual tracks; work prints; and music or sound effects.
   7. (G) Specialty advertising—items of tangible personal property on which advertising is placed but which have a use and value separate from the advertising. Such items include, but are not limited to: tee shirts, key chains, glassware, frisbees, rulers, pens, calendars, matchbooks, calculators, clocks, notebooks and pocket protectors.

2. (3) Basic Application.

   1. (A) Sales of advertising by exempt businesses are not subject to tax.
   2. (B) Sales of preliminary art by nonexempt businesses are not taxable if separately stated.
   3. (C) Sales of final art by nonexempt businesses are subject to tax.
   4. (D) Required services included as part of the sale price for taxable advertising are also subject to tax.
   5. (E) Optional services included as part of the sale price for taxable advertising are not subject to tax, if the charge for such services is separately stated. If the charge for such services is not separately stated, the entire sale price is subject to tax.
   6. (F) Services provided in connection with the sale of nontaxable advertising are also not subject to tax.
   7. (G) A person selling equipment, materials or supplies to a seller of nontaxable advertising must collect tax from the seller of such advertising.
   8. (H) Sales of tangible personal property that are not advertising but may contain advertising, such as specialty advertising, are subject to tax, even if the sale is made by an exempt business.

3. (4) Examples.

   1. (A) The following items are generally considered to be tangible personal property, not advertising, although they may have promotional value:

      1. 1. Specialty advertising;
      2. 2. Business cards;
      3. 3. Brochures and books not promoting

sales of products or services;

1. 4. Annual reports;
2. 5. Informational pamphlets not promot-

ing sales of products or services;

1. 6. Training materials not promoting

sales of products or services;

1. 7. Banners (not POS);
2. 8. Posters (not POS);
3. 9. Signs (not POS);
4. 10. Educational films not promoting

sales of products or services;

1. 11. Employee benefits material and plan

descriptions not promoting sales of products or services;

1. 12. Business signage, logos and sta-

tionery designs;

1. 13. Business directories including yel-

low pages;

1. 14. Warranty books and product instruc-

tions not promoting sales of products or services; and

1. 15. Items mass produced or reproduced

in quantities in excess of that reasonably anticipated to be necessary for an advertising campaign and sold for purposes other than promoting sales of a particular product or service.

1. (B) The following items are generally considered to be advertising:

   1. 1. Printed materials promoting sales of

products and services, including fliers, handouts, brochures and sales promotion materials;

1. 2. Direct mail and direct marketing

materials (not distributed by mail), promoting sales of products and services;

1. 3. POS materials, including displays,

banners, posters and table tents and package designs, promoting sales of products and services;

1. 4. Radio commercials, including film

and video cassettes and tapes of them;

1. 5. Television commercials, including

film and video cassettes and tapes of them;

1. 6. Audio or visual commercials for pro-

motional or merchandising purposes, including audio and visual tapes, cassettes and films of them;

1. 7. Print media advertising, including

magazine ads, newspaper ads, periodical ads, trade journal ads, publication ads, book ads, other printed material, ads and newspaper inserts;

1. 8. Billboards, signage, transit advertis-

ing (bus, rail, taxi and airport) and shopping mall and sports arena advertising and displays, promoting sales or products or service;

1. 9. Product and service sales materials

for dealers, distributors and other sales persons; and

1. 10. Corporate advertising.

2. (C) The following services are generally considered not to be taxable if the charges for such services are separately stated:

   1. 1. Writing original manuscripts and

news releases;

1. 2. Composing music;
2. 3. Conducting research and compiling

statistical or other information;

1. 4. Providing time and space for adver-

tising;

1. 5. Arranging for the placing of advertis-

ing in newspapers, magazines, television, radio, billboards, transportation facilities or other media;

1. 6. Securing the services of actors, direc-

tors and artists; and

1. 7. Delivering or causing the delivery of

brochures, pamphlets, cards and similar items after passage of title.

AUTHORITY: section 144.270, RSMo 1994.* Original rule filed Jan. 3, 2000, effective July 30, 2000.

*Original authority: 144.270, RSMo 1939, amended 1941, 1943, 1945, 1947, 1955, 1961. Gammaitoni v. Director of Revenue, 786 S.W.2d 126 (Mo. banc 1990). The taxpayer produced commercials on videotape as well as instructional and other non-advertising videotapes. The court held that the true object of the sales of these videotapes was the finished videotapes themselves. The court also held that the taxpayer was not an exempt business under section 144.034, RSMo. The taxpayer did not meet the definition of a broadcast station because it did not transmit by radio or television nor was it a facility equipped for radio or television transmissions. It did not qualify as an advertising agency because it did not contract with advertisers to place the advertising in the media. Travelhost v. Director of Revenue, 785 S.W.2d 541 (Mo. banc 1990). The taxpayer sold advertising in a magazine it purchased but then distributed for free. The court held that the taxpayer was an advertising agency and therefore exempt pursuant to section 144.034, RSMo from tax on its sales. The court also held that the express terms of section 144.034, RSMo required the taxpayer to pay tax on its purchases of the magazines. The Hearst Corp. v. Director of Revenue (AHC 1992). The taxpayer, a video production house, produced commercials for advertisers. The taxpayer retained the master tape and provided duplicates for use by the advertisers. The commission held that the taxpayer was not an exempt business pursuant to section 144.034, RSMo. However, the commission found that the true object of these transactions was the production services provided by the taxpayer. The taxpayer retained the master and the advertisers had no need for the physical copy of the tape once the commercial was broadcast. Neely v. Director of Revenue (AHC 1990). The taxpayer, a broadcast station, purchased advertising to promote the station from a production house. The commission held that section 144.034, RSMo, was inapplicable because it relates only to sales of advertising by exempt businesses. The taxpayer, an exempt business, was purchasing, not selling, advertising. The production house was not an exempt business. The commission, however, also held that the true object of the transaction was the purchase of advertising services. Therefore, the taxpayer was liable for tax only on the separately stated charge for the finished master tape.