Was a separately named plant-site database an exempt component or extra issue of a newsletter when sold in a package with online access, and how was the price allocated?

Plain-English summary

A semiconductor market-research and consulting publisher challenged two items from its first sales and use tax audit, covering July 1, 1989 through March 31, 1992. Item A measured publication sales claimed exempt in error at $87,084 for state, local, county, and transit taxes and $31,596 under the source's “EQRF” column. Item B measured a sales-record reconciliation at $31,953 and $8,111, respectively.

The publisher's major newsletter cost domestic customers $495 for 18 issues per year. Each issue ran 20 to 26 pages and tracked and analyzed semiconductor companies worldwide. The parties agreed that the newsletter qualified for the former periodical exemption until section 6362 changed on July 15, 1991.

A separately named plant-site database listed names, addresses, phone numbers, and other identifying information for locations worldwide. It appeared four times per year, cost $695 annually or $395 for one issue, and sold about 15 single copies per year plus subscriptions. The publisher appeared to agree that its separate sales did not qualify for the former exemption.

A $795 package supplied the newsletter, one database copy, and discounted online access to current and past newsletter issues on an unrelated computer service. Package customers paid that service $100 per hour rather than its apparently normal rate of about $240; the service paid the publisher 35% of its access receipts. The discount was not sold separately. Existing newsletter subscribers could upgrade to both the database and online discount for $300.

California said the database was not a component part because it was not physically attached to or incorporated into the newsletter. It also was not an extra newsletter issue: customers paid extra to upgrade, and the database's name and format differed.

The audit had allocated $420 to the newsletter, $375 to the database, and nothing to online access. The publisher proposed $495 to the newsletter, $300 to online access, and nothing to the database. The decision rejected both free-component positions. Lacking separate online pricing or a reliable cost allocation, it assigned $495 to the newsletter, $150 to the taxable database, and $150 to online access. It called that allocation a guess made for lack of a better alternative and allowed the publisher to submit better records during a reaudit.

The recommendation said $23,413 of Item A involved post-July 15, 1991 periodical sales and $7,828 involved other post-amendment sales, neither disputed. The remaining $55,843 apparently also included other publications, leaving the exact package amount in dispute uncertain.

The publisher could not receive section 6596 relief based on an undocumented telephone call because the statute required a written request, written Board response, and sworn statement. A separate audit item also remained because the publisher offered no evidence to overcome the determination's presumed correctness.

For Item B, the auditor said invoices showed tax reimbursement charged but not remitted. The publisher said its computerized records made that impossible but that reconstructing proof after the auditor left its files disordered would cost too much. Citing Paine v. State Board of Equalization, the decision said the determination was presumed correct and left the item unchanged without supporting evidence.

Source and live-annotation limits

The official PDF does not include the publications, database, online service, customer contracts, invoices, audit schedules or workpapers, sales journals, gross-receipts records, written request or Board advice, sworn statement, or cited annotations and case. It redacts the publisher, product names, service provider, representative's name, plant-site count, and listed identifying number. It records conference testimony and competing assertions, not the underlying proof; leaves the exact Item A amount attributable to the package uncertain; recommends a reaudit; and supplies no signed date, final Board decision, payment, appeal, or later outcome.

The linked decision and live annotation materially conflict. The decision describes a semiconductor-industry firm, 18 newsletter issues for $495, a database costing $695 annually or $395 per issue, and a $795 package including the newsletter, one database, and online access. The live page instead describes the computer industry, says 12 newsletter issues cost $360 and four database issues cost $200, and describes a $400 package containing the newsletter and one database copy; it mentions no online service. The decision's continuation headers repeatedly say August 8, 1994 and its signature date is blank, while the live page says August 31. This page follows the linked decision for the transaction facts and source-body date and does not resolve the official conflict.

The live annotation preserves the physical-incorporation component holding but omits the audit period and amounts, statutory-change cutoff, database facts, online service, competing allocations, extra-issue analysis, legacy annotations and case, reliance claim, Item B, reaudit, redactions, and source and outcome limits.

What this means for you

Publication and data publishers

Treat separately named physical databases independently from a periodical, document every package component's standalone value, preserve written agency requests and responses, and retain invoices and sales-journal evidence supporting audit reconciliations.

Common questions

Q: Was the plant-site database a component of the newsletter?

A: No.

Q: Was it an extra newsletter issue?

A: No.

Q: How was the $795 package allocated?

A: $495 to the newsletter, $150 to the database, and $150 to online access, subject to better evidence.

Q: Did oral advice support reliance relief?

A: No.

Q: Was the $150 database allocation final?

A: No. It was an estimate for a recommended reaudit and could change if the publisher supplied better evidence.

Q: Do the live annotation and linked decision agree on the product prices?

A: No. Their newsletter frequencies, standalone prices, package prices, and package components conflict.

Citations and references

• California Revenue and Taxation Code §§ 6362 and 6596
• California Sales and Use Tax Regulation 1590(a)(2)-(3)
• California Sales and Use Tax Annotations 385.0840, 385.0930, 385.1330, and 385.1600 — cited for identifying-information lists that lack literary character and content
• California Sales and Use Tax Annotations 385.0880 and 385.0900 — cited in the extra-issue analysis
• Paine v. State Board of Equalization (1982) 137 Cal.App.3d 438 — cited for the presumption and taxpayer's burden
• Publications, online-service and customer records, invoices, audit workpapers, written-advice materials, sworn statement, final decision, and later outcome — described or implicated but not documented

Verbatim support

From the official Decision and Recommendation:

The SIPS Database is not physically incorporated into the S--- Newsletter and is therefore not a component part of the newsletter.

We therefore find that the $795 package price should be allocated: $495 to the newsletter (the normal price), $150 to the SIPS Database and $150 to S--- On-Line.

This allocation is admittedly a guess, and we have chosen it simply for lack of a better alternative.

Petitioner did not make a written request for advice and did not receive any written advice from the Board. Further, petitioner has not presented the required statement under penalty of perjury.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 385.0167
• Original supporting opinion: 385.0167 PDF

Original ruling text

STATE OF CALIFORNIA

385.0167

BOARD OF EQUALIZATION
LEGAL DIVISION, APPEALS REVIEW SECTION
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
H--- R---, Inc.

Petitioner

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DECISION AND RECOMMENDATION

No.

SR --- XX XXXXXX-010

The Appeals conference in the above-referenced matter was held by Senior Staff Counsel James E. Mahler on April 8, 1994, in Sacramento, California. Appearing for Petitioner:

S--- Z. S--President

Appearing for the Sales
and Use Tax Department:

Kevin Hanks
Senior tax Auditor
Protested Items

The protested tax liability for the period July 1, 1989, through March 31, 1992, is measured by:

Item
A.

B.

State, Local,
County & Transit

EQRF

Sales of books and other
publications claimed as
exempt in error

$ 87,084

$31,596

Reconciliation of audited
sales to recorded

31,953

8,111

$119,037

$39,707

Petitioner's Contentions
1.
The Plant Site Database provided with the S--- Service is a part of the S--Newsletter and is not taxable.

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2.

A Board employee advised petitioner that the S--- Service was not taxable.

3.

Audit Item B cannot possibly be correct.
Summary

The petitioner corporation is a market research and consulting firm specializing in the semiconductor industry. It sells various publications and reports to its customers. It has held a sellers permit since October 1984, but this is its first sales and use tax audit. Insofar as concerns us here, petitioner's major publication is the S--- I--- & B--- S--Newsletter (the "S--- Newsletter"). A subscription for 18 issues per year sells for $495 to domestic customers. Each issue runs 20 to 26 pages and includes articles tracking and analyzing the activities of semiconductor firms worldwide. Petitioner and the staff agree that, until July 15, 1991 (the effective date of the 1991 amendments to Revenue and Taxation Code Section 6362), the S--- Newsletter qualified as an exempt periodical. When it first started publishing the S--- Newsletter, petitioner often received telephone inquiries from subscribers seeking further information about the companies mentioned therein. Petitioner decided to compile the information into a publication to see if it would sell. This publication, now issued four times a year under the name S--- I--- P--- S--- Database (the "SIPS Database") lists names, addresses, phone numbers and other identifying information for --- plant site locations around the world. A year's subscription costs domestic customers $695, and single issues sell for $395. We understand that petitioner sells about fifteen copies per year on a singlecopy basis, plus a number of other copies by subscription. Petitioner appears to agree with the staff that single-issue sales of the SIPS Database do not qualify for the former periodical exemption. Petitioner also offers its customers a package called the "S--- Service." For a yearly fee of $795, domestic customers selecting this option receive (1) a year's subscription to the S--Newsletter; (2) one copy of the SIPS Database; and (3) "S--- On-Line", which is the right to access an on-line version of the S--- Newsletter for a discount price. The on-line service is provided by N---, a computer service unrelated to petitioner. N---'s customers access that company's computers through telephone lines and are able to view current and past issues of the S--- Newsletter. Anyone can access the newsletter, but persons who have purchased the S--- Service from petitioner pay N--- only $100 per hour. Other persons, including other subscribers to the S--- Newsletter, must pay N---'s normal access fee (apparently around $240/hour). In either case, N--- pays petitioner 35% of its receipts from customers who access the newsletter. The S--- On-Line discount program is not sold separately; it is available only to persons who purchase the SIBS Service from petitioner.

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According to testimony at the Appeals conference, persons who subscribe to the S--Newsletter sometimes later decide that they also want the SIPS Database or S--- On-Line. Petitioner "upgrades" those customers to the S--- Service for an additional $300 (i.e., $795 for the S--- Service minus the $495 already paid for the S--- Newsletter). In return for the $300, the customer gets both S--- On-Line and one copy of the SIPS Database. The audit concluded that the SIPS Database is taxable, not only when sold separately, but also when provided as part of the S--- Service package. Petitioner disagrees and argues that the SIPS Database is included in the package as a component part or extra issue of the S--- Newsletter; since the newsletter concededly qualified as an exempt periodical prior to the 1991 statutory amendments, the extra issue should also qualify. Petitioner also contends that it did not charge tax reimbursement to purchasers of the S--- Service in reliance on advice from a Board employee. Petitioner's president, Mr. S--S---, states that he telephoned the Board's Santa Cruz office sometime in 1984, when the company began offering the S--- Service, to inquire about the taxability of the "newsletter product". The person to whom he spoke (whose name he does not recall) did not ask in detail about what was being sold, but did conclude that the S--- Service package was not a taxable item. Mr. S--- notes that petitioner would have charged and reported tax on the S--- Service if the Board had said to do so. The audit measure of tax is based on the assumption that the $795 price of the S--Service should be allocated: $420 to the S--- Newsletter; $375 to the SIPS Database; and zero to S--- On-Line. We are uncertain exactly why the auditor allocated the price in this manner, but she apparently saw a few invoices charging $375 for separate sales of the SIPS Database and felt that price was reasonable. Petitioner, on the other hand, argues that the $795 price should be allocated $495 to the newsletter, $300 to the on-line service and zero the SIPS Database. In support, it alleges that the on-line service is at least an $800 value to the customer, while the SIPS Database is added to the package only as a bonus or incentive for customers to sign up for the on-line service. The protested sales of the S--- Service are included in Audit Item A. Of the total $87,084 in that item, $23,413 is from sales of periodicals after July 15, 1991, and $7,828 is from other sales after that date, none of which are protested. The remaining $55,843 apparently includes sales of various other publications in addition to the protested sales of the S--- Service, and we are uncertain of the exact amount in dispute. Audit Item B is comprised of transactions where, according to the auditor, petitioner charged tax reimbursement to the customer but failed to pay tax to the State. (The invoice numbers for each such transaction are listed on schedule 12B.2, page 2, of the audit workpapers.) Petitioner argues that such mistakes are impossible because its record-keeping system is completely computerized; all charges for tax reimbursement are automatically recorded on the

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sales journal and are reported. According to petitioner, however, the auditor "shuffled through" the business files and left them in complete disarray, so it would now be too expensive and timeconsuming to match up each invoice with a journal entry to prove that the auditor was wrong. Finally, Mr. S--- states that the audit was very costly and disruptive to the business. The auditor was a trainee who assumed that she could tie up petitioner's copy machine and telephone lines. Petitioner had to reserve a conference room where the auditor could work undisturbed. The petition process has already resulted in over $6,000 in additional costs for attorney's fees and time lost from business, plus exorbitant interest on the determination. At each stage petitioner has met with bureaucratic delays. Also, since the 1991 repeal of the periodical exemption, some of petitioner's customers have refused to pay tax reimbursement, and it is too expensive to pursue collection, so petitioner has to pay the tax from its own funds. Analysis and Conclusions 1. Subdivision (a)(2) of Sales and Use Tax Regulation 1590 defines the term "periodical", for purposes of the former sales and use tax exemption, to mean: "... those publications which appear at stated intervals, each issue of which contains news or information of general interest to the public, or to some particular organization or group of persons. Each issue must bear a relationship to prior or subsequent issues in respect to continuity of literary character.... The term does not include catalogs, programs, score-cards, handbills, price lists, order forms or maps.... Petitioner appears to agree with the staff that the SIPS Database does not in itself qualify as an exempt periodical. We also agree. It has consistently been held that mere lists of addresses, telephone numbers and other identifying information do not meet the definition of "periodical", even if they are updated at periodic intervals, because they lack literary character and content. (See, e.g., Sales & Use Tax Annots. 385.0840 [4/23/57], 385.0930 [2/18/77], 385.1330 [3/26/76] and 385.1600 [12/15/65].) Petitioner contends, however, that the SIPS Database is exempt as a component part of the S--- Newsletter when the two are offered together as part of the S--- Service. Petitioner points out that the SIPS Database gives customers the opportunity to effectively utilize both the first issue of the newsletter and subsequent issues. Petitioner relies on subdivision (a)(3) of Sales and Use Tax Regulation 1590, which provides in the second paragraph: "Handbills, circulars, flyers, order forms, reply envelopes, maps or the like are considered as component parts of a newspaper or periodical when attached to or inserted in and distributed with the newspaper or periodical."

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We cannot agree. The SIPS Database is not attached to or inserted in the S--- Newsletter. Also, the first paragraph of subdivision (a)(3) defines "component part" of a periodical to include "only those items that become physically incorporated into the publication...." The SIPS Database is not physically incorporated into the S--- Newsletter and is therefore not a component part of the newsletter. Petitioner also argues that the copy of the SIPS Database provided with the S--- Service is like an "extra issue" of the S--- Newsletter and thus exempt. It relies on Sales and Use Tax Annotation 385.0880 (5/26/65), which reads: "Directories [sic] issued as 13th edition of exempt periodical which is distributed to subscribers of periodical at no extra cost is considered to be an exempt periodical." However, Sales and Use Tax Annotation 385.0900 (6/26/52) clarifies that a "Directory Issue" is "not considered as 13th issue of monthly magazine where the format size, and name is [sic] different from the monthly magazine." Here, petitioner does not provide the SIPS Database to S--- Newsletter subscribers for no extra cost; subscribers who decide they want the SIPS Database must instead pay at least $300 over the subscription price to "upgrade" to the S--- Service. Furthermore, the SIPS Database's name and format differ from the S--- Newsletter. The SIPS Database is therefore not an "extra issue" of the newsletter. Finally, petitioner argues that the $795 price of the S--- Service is allocable entirely to the S--- Newsletter and S--- On-Line, with the SIPS Database provided as a "bonus" for no charge. The audit staff takes the opposite stance - that the $795 price is allocable entirely to the S--- Newsletter and the SIPS Database, with S--- On-Line provided as a free bonus. We find both these positions untenable. Businesses normally obtain compensation from their customers for all products and services provided, and we see no reason to assume that petitioner is an exception to this rule. Both the SIPS Database and S--- On-Line are valuable to the customer, and we are unwilling to assume that either is provided free. In our view, therefore, the $795 price must be allocated among all three components of the S--- Service. The question is how to make the allocation. Usually "package deals" are allocated by the ratio of the prices which would be charged for each component sold separately, but that cannot be done here, since S--- On-Line is not sold separately. Another common technique, allocation by cost ratio, would also be inappropriate here, since the on-line service is provided by another company and petitioner's negligible costs do not truly reflect the value of the discounts to the customer. It might be possible to establish a value for S--- On-Line by determining petitioner's receipts from N---, and then use that value to allocate the price. Such an approach would require substantial additional audit time, however, and we have no guarantee it would produce a reasonable result. Under these circumstances, we believe it best to make the allocation on an estimated basis.

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It seems to us that the S--- Newsletter is the main component of the S--- Service, while the SIPS Database and S--- On-Line are promotional incentives of relatively equal value. We therefore find that the $795 package price should be allocated: $495 to the newsletter (the normal price), $150 to the SIPS Database and $150 to S--- On-Line. We recommend a reaudit to adjust the measure of tax accordingly. This allocation is admittedly a guess, and we have chosen it simply for lack of a better alternative. If petitioner believes that a more accurate allocation can be made by examining its gross receipts from the various components, or by any other method, it should provide the necessary records to the staff for use during the reaudit. 2. Revenue and Taxation Code Section 6596 authorizes the Board to grant relief from tax if certain requirements are satisfied. Among other things, the taxpayer must have relied on written advice which the taxpayer received from the Board in response to the taxpayer's written request for advice. The taxpayer must present a copy of its written request for advice, a copy of the Board's written response, and a statement under penalty of perjury setting forth the facts on which the claim for relief is based. Petitioner contends that it is unreasonable to expect a business to wait for a written opinion from the Board every time it has a question about California taxes. The staff believes that it is reasonable to require written documentation, because that is the only way to avoid misunderstandings. For example, petitioner states that it inquired about the taxability of its "newsletter product", which indicates that the question may have been phrased in a way to suggest that the SIPS Database was part of the newsletter itself, not a separate publication. Without a written record, however, we have no way to determine exactly what questions were asked or exactly what advice was given. In any event, the statute clearly and unequivocally requires a written request and response as prerequisites to relief, and we cannot ignore the law simply because petitioner believes it is unreasonable. Petitioner did not make a written request for advice and did not receive any written advice from the Board. Further, petitioner has not presented the required statement under penalty of perjury. Petitioner is therefore not entitled to relief.

3. A determination by the Board is presumed correct, and the taxpayer bears the burden
   of proving error. (Paine v. State Bd. of Equalization [1982] 137 Cal.App.3d 438.) Petitioner states that Audit Item B must be incorrect, but it would be too expensive and time-consuming to compile supporting evidence. Without evidence, however, there is no basis for any adjustment.

H--- R---, Inc.
SR --- XX XXXXXX-010

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385.0167

Recommendation
Reaudit to calculate the measure of tax on the SIPS Database furnished with the S--Service at the estimated price of $150 per copy, unless petitioner presents evidence supporting a more accurate estimate. In all other respects, redetermine without adjustment to the tax.

James E. Mahler, Senior Staff Counsel

Date