United States

Arkansas: Bus Advertiser Did Not Qualify For Advertising Agency Exemption

Feb 19, 2018
From KPMG TaxWatch

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The Arkansas Department of Finance and Administration recently issued a legal opinion addressing whether a taxpayer qualified as an “advertising agency” so that it was not required to collect Arkansas gross receipts tax on its services. The taxpayer at issue contracted with city transit systems across the United States to sell advertising space on buses. As part of its service, the taxpayer worked with clients to design ads and ad campaigns, printed approved ads, and installed the ads on or inside buses. By statute, Arkansas has a gross receipts tax exemption for the gross proceeds derived from “sales of advertising space in newspapers and publications and billboard advertising services.” By regulation, “advertising services” is defined to mean professional services provided by an “advertising agency.” An “advertising agency” is defined, in relevant part, as a business that provides “comprehensive, professional advertising services.”

In its ruling, Legal Counsel explained that to qualify for the exemption the regulations require a business to demonstrate that it is an advertising agency providing comprehensive professional advertising services to its clients. Because the term “comprehensive” was not defined in the regulation, the plain meaning was applied and Legal Counsel determined that “comprehensive” meant “including or dealing with all or nearly all aspects of something” or “of large content or scope.” In the Legal Counsel’s view, this meant that to qualify for the exemption, an agency must provide a “full spectrum of advertising services ranging from conception of a concept through the placement and publication of produced ads.” This would necessarily “include the creation and development of an intangible central theme or idea for purposes of branding a client or product such that its familiarity would bring about an immediate awareness to that client or product over a long period of time, and be able to cross a multitude of media venues.” Although it was undisputed that the taxpayer engaged in some advertising activities, the Legal Counsel concluded that because the taxpayer provided advertising only for buses, it was not providing “comprehensive” professional advertising services to its clients. As such, the taxpayer’s services were subject to gross receipts tax. Please contact Brandon Fulmer at 214-840-2497 with questions.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.