Interpretation Letter AGD-0001, May 26, 2003

We refer to your letter dated January 29, 2003 regarding the application of Ontario Retail Sales Tax (RST) to your business activities.

This interpretation is based on the information provided and which is conveyed in the "Understanding of Facts" portion of this ruling. Please review the information for its completeness and accuracy. If it is determined that the information is incomplete or inaccurate, this interpretation will not be binding. In the event that our understanding of the facts is inaccurate or incomplete, please notify the undersigned, in writing, so that we may reconsider our opinion.

Understanding of Facts

It is our understanding that Company A is an advertising agency that organizes meetings for pharmaceutical companies. Company A provides different services and some furniture, as well as posters, binders, brochures, etc. for which Company A charges the client without any markup. Company A's profit is made on the time it charges.

You are enquiring as to the application of RST to three scenarios that you have provided. Before addressing your scenarios, we are providing some general information regarding advertising agencies.

Legislation and/or Administrative Policy

Advertising agencies and graphic design companies may bill differently depending upon the terms of their agreement with their client. The following outlines various agency-client relationships and explains the RST status in each case.

• Simply as an agent for the client

  The agreement between the ad agency and the client normally indicates whether or not the ad agency is acting as an agent or as a vendor of tangible personal property (TPP). In the absence of an agreement, the action of the two parties is considered. The ad agency's policy in dealing with their suppliers and printers determines the role they play. If the agency is acting as an agent, the agency buys the goods on behalf of their client and it is reimbursed accordingly, a commission and/or service fee is also charged. The advertising agency is providing a service and is not a vendor under these circumstances.

  The client, through the agent (advertising agency) must pay RST to the supplier of any TPP bought. The fee or commission charged for providing this service is not subject to RST.

• As a service

  When an ad agency provides a client with services such as media planning, market research, producing and placing advertisements in advertising media, this is the provision of a non-taxable service. Media includes radio, television, magazines, newspapers, billboards, posters, etc. Included in the area are drawings, illustrations and the like, used to present ideas to the client before a concept is agreed upon. In these cases, the agency is considered to be the consumer and is liable for RST on all materials used in the provision of this service. RST should not be charged to the customer for the non-taxable service.

• As a vendor

  When an advertising agency manufactures and produces goods for sale to a client on disk or CD, it is acting as a vendor and only as a vendor. Although most advertising agencies no longer produce artwork in-house, if the agency produces the artwork, it cannot act as an agent. Therefore, the agency must charge RST on the selling price of the artwork and printing, even if it purchases the printing from an outside source.

For example, if an agency produces in-house the artwork for a flyer and purchases the flyers from a printer, they may purchase the flyers exempt from RST by issuing the printer a purchase exemption certificate (PEC) as the flyers are being purchased for resale. The agency would then charge the client RST on the agency's invoice price which may include an amount for mark-up or commission. In this case, the charge for the flyers would include an amount for artwork.

Consultation fees not forming part of the product sold are exempt from RST provided the consultation fees are segregated on the invoice.

In certain circumstances, a contract will convey the provision of both taxable and non-taxable services. In this situation, RST does not apply to the non-taxable service (outlined above) provided the charges for such services are separated and identified on the billing and are reasonable in relation to the service provided. Where charges for non-taxable services such as conceptual design are not separated from other taxable charges on the customer billing, the entire charge is considered taxable.

Artwork and/or Graphic Design Services

The creation of lay-outs, designs, typesetting, camera-ready or plate-ready artwork is the production of TPP and is taxable. The ad agency must charge, collect and remit RST on the charges to the clients that will be used, either by the ad agency or an outside printer, to produce taxable printed matter for the customer since the design forms part of the fair value of the printed matter. If the design is being used to produce exempt printed matter or the printed matter is being purchased by the client for the purpose of resale, the client must give the ad agency a properly completed PEC in order to claim an exemption from RST. If a PEC is not received, RST must be charged.

Artwork bought for use in the printing of exempt publications may be purchased exempt from RST by a non-printer as well as the printer of the publication. However, the seller of the artwork is still required to obtain a PEC from the person claiming this exemption. Where the vendor of the artwork is not involved in the actual printing, it is not the vendor's responsibility to determine if the purchaser of the artwork qualifies for exemption from RST. As long as the PEC is properly completed and contains the required information, the vendor may accept it at face value.

The following items are examples of taxable printed matter. The purchaser of the artwork should pay RST unless the printed matter is for resale. The purchaser must provide the vendor with a PEC in order to claim an exemption if the printed matter is for resale.

• Brochures, direct mail flyers, logos, menus, coupons, gift certificates, posters, catalogues, business cards, letterheads, envelopes, invitations cards.

When an advertising agency places advertisements directly in advertising media, this is the provision of a non-taxable service. Media includes radio, television, magazines, newspapers, billboards, posters, internet, etc.

The provision of copywriting services is the provision of a non-taxable service. RST is not required to be charged on these services, however, the provider of the non-taxable service must pay RST on any materials, equipment or taxable services purchased in order to provide the non-taxable service.

Production of Print Advertisements

1. Newspapers: Where an ad agency designs, produces and places an advertisement in a newspaper, no RST is to be charged to the client as this is the provision of a non-taxable service. Since the newspaper is an exempt publication, no RST is to be paid on the ad agency's cost of the produced artwork used in the manufacture of production of the advertisement to be used in the newspaper.
2. Magazines: Where an ad agency designs, produces and places an advertisement in a magazine, no RST is to be charged to the client. Magazines qualify for exemption only when purchased by subscription. For RST purposes, controlled distribution is the same as distribution by subscription. Magazines are taxable when sold at retail. The ad agency is not required to pay RST on the cost of the artwork used to place ads in exempt magazines or in magazines that will be sold at retail.

3. Advertising supplements and inserts: Where an ad agency designs, produces and places an advertising supplement or insert produced by a third party, no RST is to be charged to the client. The agency must pay RST on its cost of the artwork for ads placed in these taxable publications.

   Where the ad agency designs and prints or arranges for the printing of taxable publications, and the agency is acting as a vendor, RST must be charged to the client unless the client provides a properly completed PEC. In this case, the agency is not required to pay RST on the cost of the artwork used in the production of the advertising insert or supplement as the artwork forms part of the fair value of the goods for resale.

4. Packaging supplies: Advertising agencies may produce artwork for the design of the packaging of goods for resale. The Branch's administrative policy is to exempt non-returnable containers and packaging materials used to deliver goods for resale to the consumer. The agency is, therefore, not required to pay RST on its cost of the artwork for the design of the packaging of goods for resale. The client should provide the agency with a properly completed PEC in order to produce the artwork for the packaging materials exempt from RST.

Creative and Consulting Fees

When an agency enters into an agreement to provide only consulting services, no RST will apply as this is the provision of a non-taxable service. Similarly, where the agency provides a client with services such as media planning, market research, preparing and placing advertisements in media, this is also the provision of a non-taxable service and no RST applies to consulting fees.

Where an ad agency is acting as a vendor, RST does not apply to creative and consulting charges to present ideas to the client before a concept is agreed upon. Once the customer accepts a concept, all further creative work and consulting charges pertaining to the production of TPP are taxable.

Translation services are the provision of non-taxable services. RST does not apply to charges for these services.

Analysis & Conclusion

Based on the above information, we will now address your scenarios. Please note that GST is a federal tax administered by the Canada Revenue Agency (CRA). Please contact CRA directly regarding your GST questions.

1. When we ask doctors to assist or give a conference, we pay them honoraria. Most of them don't have a GST number, so they don't charge us any GST or PST. When we are charging back those honoraria to our client, do we apply the rule of the fair value of the product sold and charge them GST and PST for those services?

The honoraria paid to the doctors to assist or give a conference are not subject to RST. When Company A is charging back those honoraria to its client, this amount is not to be included in the fair value of any taxable product that may be sold for the purpose of the calculation of the RST as long as the charge for these honoraria is separate from the charge of any taxable product. Where an invoice contains both taxable and non-taxable items, RST does not apply to the non-taxable services provided such charges are separated and identified on the billing to the client.

2. Usually, we use freelancers to do some work for us (for example: translation, provide some pictures, copywriting, proofreading, etc.). Most of them don't have a GST number, so they don't charge us any GST or PST. When we are charging back those services to our client, do we apply the rule of the fair value of the product sold and charge them GST and PST for those services?

The provision of translation, copywriting and proofreading services are the provision of non-taxable services. Therefore, RST does not apply to those services.

However, if Company A provides clients with translation, proofreading and copywriting services as a component of the production of printed matter (brochures, etc.), RST must be charged by Company A on the total fair value of the taxable goods which includes the cost of all of the components to produce the taxable goods (i.e., design, copywriting, proofreading, development, translation, printing, etc.) unless the client is entitled to claim an exemption from RST and provides Company A with a properly completed PEC. The provision of pictures is the sale of TPP and is subject to RST. If Company A is purchasing pictures from the freelancers for resale to its client, it may purchase the pictures exempt from RST by providing a properly completed PEC to the freelancer. Company A will then be required to charge RST on the sale of pictures to its client unless it is provided with a properly completed PEC.

3. When we charge our client consultation fees following a pitch for which the client issued a P.O. specifying that the provided service is PST exempt, do we charge them the PST anyway or not? And if there is no specification on the P.O., is it a taxable service?

When Company A enters into an agreement to provide only consulting services, no RST will apply as this is the provision of a non-taxable service.

Where the consulting services are provided as a component of the sale of taxable goods (brochures, posters, etc.), RST would not apply to consulting charges made before a concept is agreed upon. However, all amounts billed after the acceptance of the original design such as charges for camera-ready artwork and any consulting charges occurring subsequent to the original design approval, are subject to RST unless the client claims an exemption from RST and provides a properly completed PEC to Company A.

We are enclosing Ontario Sales Tax Guides # 204 - Purchase Exemption Certificates, # 400 - Manufacturers, # 402 - Printing and # 507 - Publications for your information.

If you have any further questions, please contact our office.

ISBN 0-7794-2507-3

© Queen's Printer for Ontario, 2002