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The Tennessee Department of Revenue has issued Letter Ruling No. 18-01 on its website here, clarifying that client payments for media purchased by advertising agencies on the client’s behalf are not subject to Tennessee’s business tax. However, agency service fees billed to the client remain taxable.

The Tennessee business tax is a tax assessed on gross receipts for many businesses.

The letter of ruling is an interpretation and application of the tax law as it relates to a specific set of existing facts furnished to the Tennessee Department of Revenue by the taxpayer. In this case, the Tennessee Department of Revenue clarified the application of the Tennessee business tax to an advertising agency engaged in the procurement of advertising space, time and/or placement.

“The Letter Ruling No. 18-01 is an example of clarifying a tax law,” said attorney and lobbyist Dan Haskell with Gullett Sanford Robinson & Martin in Nashville. “If media purchases had become part of the Tennessee business tax receipts, Tennessee would have instituted an indirect tax on advertising. This outcome is a positive result for Tennessee businesses.”

In an effort to clarify Tennessee’s business tax as it applies to media receipts, David Bohan, founder and chairman of the Nashville-based Bohan (stylized “bohan”) agency, retained Haskell and Chattanooga-based CPA Kirk Low. The trio led representatives from a group of media services providers and industry associations, including the Tennessee Association of Broadcasters, Tennessee Press Association, and the Outdoor Advertising Association of Tennessee, to ascertain whether or not reimbursements from Tennessee-based clients to agencies for media purchases or “buys” on the client’s behalf could be interpreted as subject to Tennessee’s business tax.

“At the crux of this was a need to fully distinguish the media buy from the associated fees collected by an agency for providing this service,” said Bohan. “If not, the resulting taxes would unnecessarily increase the overall spend, creating financial repercussions felt throughout our industry, not only by clients whose budgets were affected but also by service providers across all media—broadcast, print, digital and outdoor.”

Because advertising budgets are fixed in total, any tax imposed on media agencies could result in lower media purchases, therefore harming broadcasters and other media outlets.

“To put this in perspective, the purchase of a thirty-second television advertisement that aired during the 2018 Super Bowl would have been assessed at approximately $25,000, based on Tennessee’s business tax assessment rate, if purchased by an agency on behalf of a Tennessee client,” Low said.

Haskell and Low drafted a bill, introduced by Senator Steven Dickerson and Representative Susan Lynn, to ensure that media purchases were exempt. Haskell, Low, and Bohan met with Tennessee Commissioner of Revenue David Gerregano to explain the bill’s significance to the advertising industry.

As a result, the Department of Revenue suggested requesting a Letter Ruling as an alternative that could better explain the issues and related exemptions. In the Letter Ruling, “the amounts that a taxpayer receives from clients” for media placement that the advertising agency “transfers to the media outlet and does not ultimately retain, are not subject to the Tennessee business tax.”  However, the fees that are retained by the advertising agency for arranging the media placement “are subject to the Tennessee business tax.”

Low explained, “The request for a Letter Ruling allowed us to present an extensive range of media purchases by advertising agencies. Upon review, the Department of Revenue agreed that when an advertising agency is ‘only facilitating the media placement for its customer,’ the receipts are not part of the Tennessee business tax base.”

“We agree that the fees retained by the advertising agency should be taxable receipts,” Low added.