Were materials in complimentary copies of ordinarily sold newspapers exempt when copies went to employees, VIPs, political groups, or sales prospects?

Plain-English summary

A redacted publisher and its subsidiaries distributed qualifying daily and weekly newspapers for general circulation. Some copies were sold and others were free, and the newsprint and ink used to publish all of them had been purchased ex-tax. Copies of an issue ordinarily distributed for a charge went to full-time employees, VIPs, associates' family members, political organizations, and sales prospects. The publisher also placed copies inside the business and used others as advertising tearsheets.

California quoted proposed Regulation 1590(b)(2), which said that effective October 2, 1991 tax did not apply to tangible personal property incorporated into a qualifying newspaper or periodical copy distributed without charge. The publication had to be regularly issued at average intervals not exceeding three months.

The memorandum applied that rule even when the publication normally was sold. It exempted component materials in employee copies delivered by carrier inside the delivery area or at work outside it, mailed VIP and political-organization copies, and samples distributed by in-house or subcontracted sales representatives.

Copies placed around departments also qualified if distributed for individuals' benefit. If instead they were retained for employees to use in producing the newspaper, the publisher consumed them and tax applied to their component materials.

Advertising tearsheets likewise were consumed by the publisher, so tax applied to materials incorporated into those copies.

The memorandum also raised whether employee newspaper subscriptions were bartered for employment services, making the employer a retailer, or furnished free, making the employer the consumer. It cautiously said the Board had “apparently” taken the consumer position, citing Annotation 280.0240 by comparison.

Source and live-annotation limits

The official PDF quotes part of the audit office's explanation but does not include its September 15, 1993 memorandum, newspaper copies, circulation or employee records, material purchases, contracts, mailings, sales-solicitation records, tearsheets, proposed regulation, cited Annotation 280.0240, invoices, returns, audit workpapers, amounts, assessment, appeal, or later outcome. The taxpayer, its subsidiaries, publications, and listed identifying numbers are redacted.

The live annotation summarizes the free-copy and internal-use results and adds that employee copies may be furnished under a union contract. The supporting memorandum does not mention a union contract. The live entry omits the ex-tax purchases, six distribution categories, proposed regulation's effective date and three-month interval, employer retailer-versus-consumer issue, cautious “apparently” characterization, Annotation 280.0240 reference, redactions, and source and outcome limits.

What this means for you

Newspaper publishers and tax professionals

Track complimentary circulation by use and recipient, separating true free distribution from tearsheets and internal production copies consumed by the publisher. Preserve the publication schedule, component purchases, contracts, distribution records, and internal-use evidence.

Common questions

Q: Were free employee copies exempt?

A: Yes.

Q: Were sales-solicitation samples exempt?

A: Yes.

Q: Were advertising tearsheets exempt?

A: No.

Q: How were office copies treated?

A: Copies for individuals' benefit were free distributions; copies used to produce the newspaper were taxable self-consumption.

Q: Did the supporting memorandum discuss a union contract?

A: No. That detail appears only on the live annotation page.

Citations and references

• California Revenue and Taxation Code § 6362.7
• Proposed California Sales and Use Tax Regulation 1590(b)(2), Newspapers and Periodicals — quoted in part
• California Business Taxes Law Guide Annotation 280.0240 — cited by comparison but not included
• September 15, 1993 Santa Ana audit memorandum — described and quoted in part but not included
• Publications, materials, distribution records, contracts, invoices, returns, audit records, amounts, assessment, and outcome — described or implicated but not documented

Verbatim support

From the official Staff Counsel memorandum:

Under this provision, if the publisher of a newspaper or periodical that is a publication normally sold (such as the R---) distributes complimentary copies, the sale to the publisher of tangible personal property incorporated into those copies is exempt.

If the copies are "staged in-house" merely for the employees to use in producing the newspaper, then the copies are self-consumed. Tax applies to the sale of property incorporated into those copies.

Tax applies to the sale of property incorporated into the copies used in situation (e). Those copies are consumed by F---.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 385.0164
• Original supporting opinion: 385.0164 PDF

Original ruling text

State of California

Board of Equalization
Legal Division

385.0164
Memorandum
To:

Shalu A. Jogin
Santa Ana District Office Audit - EA

From:

Ronald L. Dick, Staff Counsel
Legal Division - MIC:82

Subject:

F--- N--- INC.
SR – XX-XXXXXX dba O--- C--- R--SR -- XX-XXXXXX dba D--- S--- P--SR -- XX-XXXXXX dba A--- B--SR -- XX-XXXXXX dba T--- D--- J--SS -- XX-XXXXXX dba A--- D---

Date:

December 7, 1993

This is in reply to your September 15, 1993 memorandum regarding the application of sales tax to sales to F--- N---, Inc. of materials incorporated into newspapers. You explained the following: "This office is currently performing an audit of F--- N--- Inc and their subsidiaries. These entities publish and distribute qualifying daily and weekly newspapers for general circulation. Some of the newspapers are distributed for a charge and some are distributed without any charge. "Newsprint and Ink for publishing all the newspapers are purchased extax. "Some copies of an issue of a newspaper that have been published for distribution for a charge, such as "The R---" are given away free to full time employees of the Company, as samples to solicit sales and to Vip's or family members of the Associates. Some copies are used internally by the Taxpayer."

Shalu A. Jogin

-2-

December 7, 1993
385.0164

You note that F--- N--- distributes copies as follows:
"(a) A complimentary copy delivered to a full time employee of the Company residing in a "delivery area" by a carrier. "(b) A complimentary copy delivered at work to a full time employee of the Company residing outside the 'delivery area.' "(c) Complimentary copies staged inhouse thru out the Company in different departments for anyones use. "(d) Complimentary copies mailed by U.S. Mail to VIPs, political organizations etc. "(e) Copies used by the "Advertisement" department as "Advertising Tearsheets" "(f) Copies distributed as "samples" by inhouse or subcontracted sales representatives for soliciting sales." Given this information, you asked for the application of tax given the Board's interpretation of Revenue and Taxation Code section 6362.7. In this regard subdivision (b)(2) of proposed Regulation 1590, Newspapers and Periodicals, provides: "DISTRIBUTIONS OF NEWSPAPERS AND PERIODICALS WITHOUT CHARGE. Effective October 2, 1991, tax does not apply to the sale or use of tangible personal property which becomes an ingredient or component part of a copy of a newspaper or periodical regularly issued at average intervals not exceeding three months when that copy of such newspaper or periodical is distributed without charge, nor does tax apply to such distribution." Under this provision, if the publisher of a newspaper or periodical that is a publication normally sold (such as the R---) distributes complimentary copies, the sale to the publisher of tangible personal property incorporated into those copies is exempt. When the employer provides the newspaper subscriptions to the employees, the issue arises as to whether the employer is a retailer of the newspapers (i.e., barters them for the employment services) or is the consumer of the newspapers by providing them free of charge. We have apparently taken the position that, under such arrangements, the employer is the consumer of such property. (cf. Bus. Taxes Law Guide Anno. 280.0240.)

Shalu A. Jogin

-3-

December 7, 1993
385.0164

Based on the foregoing, we conclude that tax does not apply to sales of property incorporated into the newspaper distributed in accordance with the facts you describe in situations (a), (b), (d), and (f). As to situation (c), if you mean that the copies are distributed throughout the department for the benefit of the individuals, then we believe the copies are distributed without charge, and the sale of the material to F--- is exempt. If the copies are "staged in-house" merely for the employees to use in producing the newspaper, then the copies are self-consumed. Tax applies to the sale of property incorporated into those copies. Tax applies to the sale of property incorporated into the copies used in situation (e). Those copies are consumed by F---. We hope this answers your questions; however, if you need further information, feel free to write again.

RLD:plh