Did a California HMO owe use tax on free, preaddressed handbooks an out-of-state printer sent by common carrier through California postal centers directly to members?

Plain-English summary

A California HMO had health handbooks printed outside the state. The printer sent some preaddressed, postage-paid books by common carrier to Northern California postal centers, where USPS continued delivery directly to members without charge. Other copies went directly to the HMO's California locations.

The handbooks did not qualify for the printed-sales-message exemption because their principal purpose was not advertising or promoting sales of goods and services.

Even so, staff counsel concluded that the HMO made no taxable California use of the direct-member books. The gift was completed outside California when the printer handed the preaddressed books to the common carrier, and the journey was not interrupted for an unrelated purpose.

The books shipped to the HMO's own California locations were different. Use tax applied to their sales price.

The 1995 letter cited Annotation 570.1110 as additional support. A later official 2002 letter supporting Annotation 280.0060 reports that 570.1110 was removed because its backing letter was inaccurate; readers should therefore not rely on that cited annotation as current support.

What this means for you

Health plans and member organizations

Separate direct-to-recipient mailings from bulk copies delivered to your California offices.

Direct-mail teams

Preserve evidence that items were preaddressed, postage paid, delivered to a common carrier outside California, and moved without unrelated interruption.

Accountants and tax professionals

The printed-sales-message exemption and gift-completion analysis are separate. This source denied the former but found no California use for the direct-member shipment.

Common questions

Q: Did the handbook qualify as an exempt printed sales message?

A: No. Its principal purpose was not advertising or promoting sales.

Q: Why was the direct-member shipment not taxed?

A: The letter treated the gift as complete outside California when the printer delivered the preaddressed books to the common carrier.

Q: Were books sent to HMO offices taxed?

A: Yes. Use tax applied to those copies.

Q: Is every authority cited in the 1995 letter still reliable?

A: No. A later official letter says Annotation 570.1110 was removed because its backing letter was inaccurate.

Citations and references

• California Revenue and Taxation Code § 6201
• California Sales and Use Tax Regulations 1541.5 and 1670(a)
• California Sales and Use Tax Annotation 280.0360
• Later source-status disclosure: official Annotation 280.0060 supporting opinion
• October 1994 inquiry, Nov. 18, 1994 answer, and Mar. 30, 1995 second-opinion request — history and later request quoted; inquiries, answer, handbook, and attachments not reproduced in the official PDF
• Out-of-state printing, preaddressing, postage, common-carrier shipment, Northern California postal centers, direct free member delivery, uninterrupted journey, and separate HMO-location shipments — facts supplied or assumed; printer agreement and invoices, handbook edition, address and postage files, bills of lading, postal-entry records, member lists, delivery proof, allocation, and tax records not reproduced in the official PDF
• Official Annotation 280.0708's direct-member shipment, no-charge, outside-state gift, uninterrupted journey, and no-HMO-use summary — annotation omits the printed-sales-message denial, HMO-location tax result, former 570.1110 citation, and later withdrawal status and supplies no additional transaction record
• Possible later handbook distribution, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0708
• Original supporting opinion: 280.0708 PDF

Original ruling text

280.0708

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone No.: (916) 324-2655
Facsimile No.: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

August 18, 1995

KATHLEEN CONNELL
Controller, Sacramento
────────

A--- M--Senior Tax Analyst
K--- P--- M--- C--- Program
Financial Administration
P.O. Box XXXXX
---, CA XXXXX-XXXX

BURTON W. OLIVER
Executive Director

Re: Sales and Use Tax Regulation 1541.5
Dear Mr. M---:
This is in response to your letter of March 30, 1995. You ask for a second opinion in regard to the application of the printed sales message exemption to K--- P---'s (K---) distribution of the "K--- P--- H--- Handbook". You made a similar inquiry in October, 1994, and an answer was mailed to you on November 18, 1994. That answer states that the sale or use of the handbook does not qualify for the exemption provided in Sales and Use Tax Regulation 1541.5 for the sale and use of certain printed sales messages. The handbook does not meet the requirement that its principal purpose was to advertise or promote the sale of goods and services. In your latest letter, you ask us to consider the following additional facts: "The handbooks were printed out of state, and the printer shipped the handbooks from the printer's out-of-state location by common carrier to Postal centers in Northern California. The Postal Service delivered the handbooks directly to the members in Northern California. There was no charge to the member for the handbooks. "Also, separately, the out-of-state printer shipped copies of the handbook from the printer's out-of-state location directly to K--- locations in Northern California. "It is K--- F--- H--- Plan, Inc's opinion that handbooks that were shipped directly from the out-of-state printer via common carrier and Postal Service directly to the members without any charge whatsoever to the members are exempt from California use tax, and the handbooks that were shipped from the out-of-state printer directly to K--- locations in Northern California are subject to use tax."

A--- M---

-2-

August 18, 1995
280.0708

California imposes the use tax on the storage, use or other consumption in this state of tangible personal property purchased from a retailer for use in this state. (Rev. and Tax. Code § 6201.) Persons who make gifts of property to others are the consumers of the property, and sales or use tax applies to the sale of the property to or the use of the property by such persons. (Sales and Use Tax Regulation 1670(a).) A gift that is deposited in the mail out-ofstate is completed at that time, and the donor is not obligated for California use tax. (Sales and Use Tax Annotation 280.0360, 7/18/50.) Use tax does not apply with respect to the use of catalogues which are addressed and mailed to persons outside of California when the catalogues are forwarded to an agent in California for forwarding to the pre-addressed destination provided the catalogues remain in the stream of interstate commerce and their delivery is not interrupted for any purpose unrelated to the journey. (Sales and Use tax Annotation 570.1110, 11/28/66.) The question here is whether or not K--- makes a taxable use in this state of the handbooks it sends to its members in California free of charge. I assume that the handbooks are pre-addressed and postage paid when they come to the Northern California Postal facility. The gift of the handbooks takes place outside the state when the printer delivers them to the common carrier for shipment directly to the recipient in view of the fact that their journey is not interrupted for any purpose unrelated to their delivery to K---'s members. Thus, there is no use of the handbooks made by K--- in California to which tax applies. We agree with your conclusion that use tax applies to the sales price to K--- of the handbooks the printer ships to K--- locations in this state. We hope this answers your questions; however, if you need further information, please do not hesitate to write again. Sincerely,

Anthony I. Picciano
Staff Counsel

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Oakland District Administrator (CH)