Title: TV Fanfare Publications, Inc. v. Tracy

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as TV Fanfare Publications, Inc. v. Tracy, 87 Ohio St.3d 165, 1999-Ohio-311.] 
 
 
 
 
 
TV FANFARE PUBLICATIONS, INC., APPELLANT, v. TRACY, TAX COMMR., APPELLEE. 
[Cite as TV Fanfare Publications, Inc. v. Tracy (1999), 87 Ohio St.3d 165.] 
Taxation — Use tax — Production charge for placing advertising material on 
shopping carts is taxable — Advertising service charge for placing 
advertising material on shopping carts is not taxable. 
(No. 98-1918 — Submitted June 22, 1999 — Decided November 10, 1999.) 
APPEAL from the Board of Tax Appeals, No. 96-S-530. 
 
TV Fanfare Publications, Inc. (“Fanfare”), headquartered in California, 
organizes various types of advertising promotions.  During the audit period 
January 1, 1988 through June 30, 1991, it operated offices in Columbus and in 
Cleveland. 
 
In its ADCART promotions, Fanfare solicited grocery stores, usually chain 
stores, to allow Fanfare to place placards that promoted an advertiser’s business in 
sign holders on the store’s shopping carts.  Fanfare called the grocery store an 
exhibitor and the promoted business an advertiser.  Fanfare paid the exhibitor to 
allow placement of the placards on the shopping carts. 
 
Fanfare charged the advertiser a production charge for typesetting, layout, 
paste-up, negative, and plate for preparing the placard.  Fanfare charged the 
advertiser a separate fee to place the placard on the grocery cart.  Fanfare installed 
the signs and maintained them for the term of the promotion. 
 
In the Market Information Center promotions, Fanfare solicited grocery 
stores to allow it to place signs on the wall of the store or on a three-panel spinner 
stand set up in the store.  The signs promoted an advertiser’s business and had an 
area on which the exhibitor-store could place advertisements for its special sales.  
Fanfare maintained the signs. 
 
 
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Fanfare paid the grocery store to exhibit these centers.  Fanfare collected a 
production charge from the advertiser for preparing the sign and a separate fee to 
place the sign in the store for the length of the promotion. 
 
Fanfare also published two magazines, “Sports & Soaps,” which reported 
information on and dates and times for the viewing of sporting events and soap 
operas, and “TV Movie News,” which reported weekly TV movie listings.  These 
publications, distributed free, contained advertising that paid for production and 
distribution.  Because the information provided in these magazines was time 
sensitive, Fanfare printed these magazines for specific periods. 
 
Fanfare again obtained the permission, for a fee, of grocery stores to place 
these magazines in racks in the stores; Fanfare called these stores distributors.  
Fanfare then solicited businesses to advertise in the magazines. It charged the 
advertisers production fees to prepare the advertisements and a fee for placing the 
advertisements in the magazines.  Fanfare then placed the magazines in the stores 
for free distribution to the store’s customers. 
 
Finally, Fanfare printed advertising on the reverse side of cash-register 
tapes.  Fanfare contracted with grocery stores, also called distributors, to provide 
them with these tapes, paying the stores to use the tapes in receipting sales for 
customers.  Fanfare obtained advertisers to print their advertising on the reverse 
side of the tapes.  Fanfare charged the advertisers a production fee and a separate 
fee for placing the advertising on the tapes.  These promotions ran until the 
distributor-store used all the allotted tapes. 
 
The Tax Commissioner, appellee, assessed use tax against Fanfare as a 
seller; the commissioner concluded that Fanfare should have collected the tax from 
the advertisers.  He ruled that the advertisers were the consumers of the tangible 
personal property that Fanfare transferred to the various stores in which the 
advertisements were exhibited or from which the advertisements were distributed.  
 
 
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The commissioner issued an assessment against Fanfare, including penalty and 
interest, of $294,432.77.  Fanfare appealed this order to the Board of Tax Appeals 
(“BTA”). 
 
The BTA affirmed the commissioner’s order.  The BTA agreed with the 
commissioner that Fanfare’s customers, its advertisers, consumed the advertising 
materials and that Fanfare should have collected use tax from the advertisers on the 
subject transactions.  The BTA rejected Fanfare’s argument that the advertisers 
purchased advertising space, finding that the advertisers purchased advertisements 
and made taxable use of these materials. 
 
This cause is now before the court upon an appeal as of right. 
__________________ 
 
Porter, Wright, Morris & Arthur, Ronald W. Gabriel and Cynthia Butler 
Carson, for appellant. 
 
Betty D. Montgomery, Attorney General, and Duane M. White, Assistant 
Attorney General, for appellee. 
__________________ 
Per Curiam. 
A. Exhibited Advertisements 
 
As to the placards in the ADCART promotions and the signs in the Market 
Information Center promotions, Fanfare concedes that it should have collected the 
tax on the production charges.  It claims, however, that the remainder of the 
charges was for providing advertising space and not taxable under Ohio Adm.Code 
5703-9-41.  The commissioner contends that this rule requires Fanfare to collect 
tax on the entire amount charged the advertisers. 
 
R.C. 5741.02(A) levies an excise tax “on the storage, use, or other 
consumption in this state of tangible personal property or the benefit realized in the 
state of any service provided.”  R.C. 5741.02(C)(2) exempts transactions from the 
 
 
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use tax if the transactions would be exempt from the sales tax.  R.C. 5741.01(C) 
defines “use” as “the exercise of any right or power incidental to the ownership of 
the thing used.”  Ohio Adm.Code 5703-9-41 states: 
 
“A person engaged in the field of advertising or in the preparation of 
advertising matter  * * * who produces tangible personal property for transfer to 
another for a consideration is a vendor with respect to such transactions.  * * * 
 
“The production of tangible personal property for the advertiser is a sale 
irrespective of whether the material used in the production is supplied either 
directly or indirectly by the advertiser or is obtained by the producer on his own 
behalf.  The production of items such as photographs, photostats, art work, plates, 
mats, printed material, etc., for another for a consideration is a sale of such items. 
 
“The full amount charged on the sale or production of tangible personal 
property is subject to the sales tax even though a part of the charge may be billed 
as ‘service charge’, ‘fee’, or ‘commission’.  Where preliminary art has been 
prepared, the price or tax base for the finished artwork includes the amount 
attributable to the preliminary art. 
 
“ * * * 
 
“A person in the advertising field who does not sell or produce tangible 
personal property, but who is engaged solely in rendering service to others as a true 
agent, is not considered to be a vendor with respect to such services.  In 
determining whether such a person is acting as a true agent, consideration shall be 
given to the contract between the parties, the conduct of the parties with respect to 
property involved, and the facts and circumstances of the transaction.  A person 
who, for example, operates under an agreement wherein the agency relationship is 
specifically set forth and under which advertising is placed in selected media  * * * 
would be considered a true agent.  * * * 
 
 
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“Transactions not involving the sale of tangible personal property or the 
production of tangible personal property are considered to be the performance of a 
service.  Examples of such services are: 
 
“ * * * 
 
“The placing of advertising matter in or the purchase of space or time from 
advertising media; 
 
“ * * * 
 
“Where an advertiser is billed for a fee which represents a charge for service 
not subject to the sales tax, as distinguished from services which are a part of a 
retail sale or services in the production of tangible personal property, such billing 
must clearly show the nature of the service rendered.” 
 
The rule subjects “[t]he full amount charged on the sale or production of 
tangible personal property” to the tax.  The rule, however, does not treat a “true 
agent” as a vendor.  A true agent engages “solely in rendering service to others.”  
According to the rule, placing advertising matter in, or purchasing space or time 
from, advertising media is an example of a service rendered by a true agent.  
Moreover, when a vendor, under the above-quoted language of the rule, bills an 
advertiser a fee for service not subject to the tax as distinguished from services that 
are part of a retail sale or services in the production of tangible personal property, 
he or she must clearly show the nature of the services rendered in the billing.  In 
Ohio, charges for services are usually not taxed, while charges for transactions in 
tangible personal property and certain services usually are.  Albright v. Limbach 
(1988), 37 Ohio St.3d 275, 525 N.E.2d 801; Emery Industries, Inc. v. Limbach 
(1989), 43 Ohio St.3d 134, 539 N.E.2d 608. 
 
We interpret this rule to require a person engaged in the field of advertising 
to collect the tax on advertising material he or she produces and transfers, but to 
relieve him or her from collecting the tax on nontaxable services.  Under the rule, 
 
 
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the transfer of produced tangible personal property is a taxable sale unless 
otherwise excepted.  Moreover, the full amount charged on the sale of produced 
tangible personal property is the price to be taxed.  But an advertising company 
that places the produced matter into advertising media need not collect the tax for 
this service.  The advertising company avoids the obligation to collect the tax on 
this latter service if it separately charges for the service.  It, nevertheless, must 
collect tax for the produced property. 
 
In this case, Fanfare produced the advertising material and separately 
charged a fee for this production.  Fanfare, as it concedes, should have collected 
the tax on this production charge.  Fanfare, however, did not have to collect the tax 
on the separately charged fee for placing the advertising material in the advertising 
media of the sign holder on the shopping cart or the signboard of the Market 
Information Center.  The advertisers paid Fanfare one amount for the produced ad 
and a separate amount for the service of placing the advertisement on the shopping 
cart or on the spinner.  Thus, the production charge is taxable, and the advertising 
service charge is not. 
B. Distributed Advertisements 
 
Next, as to the magazines and register tapes, Fanfare argues that the 
advertisers were not consumers because they did not exercise sufficient rights or 
powers incidental to the ownership of these items.  The commissioner replies that 
the advertisers exercised such sufficient rights or powers because they selected the 
content of the advertisements and the location where the advertisements were to be 
distributed. 
 
In Drackett Products Co. v. Limbach (1988), 38 Ohio St.3d 204, 527 N.E.2d 
860, we rejected an argument similar to that which Fanfare presents here.  In 
Drackett, Drackett Products Company (“Drackett”), in concert with other 
advertisers, paid several companies to produce advertising supplements for 
 
 
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distribution in newspapers selected by Drackett.  We found that Drackett, “along 
with the other advertisers, purchased the advertising supplements from the out-of-
state publishing companies for distribution to the newspapers’ customers when 
[Drackett] and the other advertisers paid the consideration to publish and distribute 
the supplements.” Id. at 206, 527 N.E.2d at 863.  We held that Drackett exercised 
sufficient rights or powers incidental to ownership to subject its purchase of a 
portion of the supplement to the tax: 
 
“Appellant selected the content of its ad, the newspaper in which it was 
placed, and the date on which the ad was delivered.  * * * Thus, a use of tangible 
personal property occurs, under R.C. 5741.02(A) and 5741.01(C), when several 
advertisers, in concert, pay the cost for producing and distributing a publication 
that advertises their products.” Id. 
 
Drackett controls here.  The advertisers purchased the magazines and 
register tapes when they paid to have their advertisements printed in the magazine 
and on the register tape available for distribution to the patrons of the distributing 
grocery store.  The advertisers, by choosing to participate in the promotion, 
selected the content of the advertisements, the store in which the magazine or 
register tapes were to be placed, and the dates on which the advertisements were to 
be distributed.  Fanfare would not have organized these promotions if the 
advertisers had not agreed to these terms and paid Fanfare the charges. Under 
Drackett, the transactions in which the magazines and register tapes were 
distributed to patrons of the grocery stores were taxable, and Fanfare should have 
collected the use tax. 
 
Nevertheless, this ruling applies only until July 18, 1990, when Am.S.B. No. 
303 became effective.  This Act amended the definition of “seller,” contained in 
R.C. 5741.01(E), to mean: 
 
 
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“[T]he person from whom a purchase is made, and includes every person 
engaged in this state or elsewhere in the business of selling tangible personal 
property or providing a service for storage, use, or other consumption or benefit in 
this state  * * *.  ‘Seller’ does not include any person to the extent the person 
provides a communications medium, such as, but not limited to, newspapers, 
magazines, radio, television, or cable television, by means of which sellers solicit 
purchases of their goods or services.”  (Emphasis supplied.) 143 Ohio Laws, Part 
I, 1603. 
 
Consequently, persons providing communications media are not sellers.  
Fanfare provides communications media by publishing these magazines and by 
printing advertising on the reverse side of cash-register tapes.  Thus, on July 18, 
1990, Fanfare was no longer a seller as to these items, and it did not have to collect 
the use tax on transactions occurring on and after such date. 
 
Accordingly, we hold that the BTA’s decision is unlawful in part.  We 
affirm that portion of the decision that taxed production charges for the ADCART 
and Market Information Center transactions and reverse that portion that taxed the 
charges for placing the produced advertisements on the shopping carts and on the 
information centers.  Furthermore, we affirm that portion of the BTA’s decision 
that taxed amounts collected from the advertisers for advertising in the magazines 
and on cash-register tapes until July 18, 1990.  We reverse that portion of the 
BTA’s decision that taxed such transactions on and after July 18, 1990. 
Decision affirmed in part, 
reversed in part 
and cause remanded. 
 
MOYER, C.J., DOUGLAS, RESNICK, F.E. SWEENEY, PFEIFER, COOK and 
LUNDBERG STRATTON, JJ., concur.