Did a qualifying compact-disc periodical lose exemption because each current disc also carried a rolling archive of the preceding 11 months?

Plain-English summary

A redacted publisher offered 26 annually renewable research and analysis subscription products focused on computer hardware, software, communications, and related technology industries. A single service fee covered industry publications, unlimited analyst telephone consultation, and seminar tickets; subscribers could buy extra publication copies and tickets, and online access carried a separate line charge.

The publications included annual five-year strategic forecasts, generally quarterly analysis reports, sets of six to eight research notes about every two weeks, and monthly reviews. The subscription agreement did not state an exact issue count, but the publisher fixed production schedules and editorial deadlines six months in advance. A roughly biweekly series could supply 23, 24, or 25 issues because of scheduling and calendar limits. Reviewed issues dated from August 23 through November 29, 1993 appeared 13 to 25 days apart.

Quoted section 6362.7(b) covered qualifying periodicals regularly issued at average intervals no longer than three months when sold by subscription and delivered by mail or common carrier. Subdivision (c) required four to 60 issues per year, general-interest information, continuity between issues, and sufficiently similar style and format; it excluded specified advertising publications exceeding the printed-area threshold in more than half the issues during a 12-month period.

Every subscriber then received paper copies by mail. Optional formats included CD-ROM, Lotus Notes, online access, and facsimile updates. CD-ROMs carried a separate charge of approximately $2,500 per redacted unit; the publisher was considering letting customers replace paper with CD-ROM at no additional charge. Each searchable disc held the current month's periodicals plus the preceding 11 months so customers would not need to store many discs.

California concluded that qualifying periodicals remained exempt when published on CD-ROM. If the discs themselves were regularly issued at average intervals no longer than three months and otherwise met the periodical requirements, carrying the rolling 11-month archive did not change the result.

The publisher also supplied new paper subscribers with the preceding three months of periodicals. Those back issues, delivered as part of the subscription, were exempt.

The broader opinion separately found that the annual Scenarios were not periodicals. They could not be combined with differently titled, differently timed reports merely because the reports updated them. Strategic Analysis Reports, Research Notes, and Research Reviews were qualifying periodicals when sold by subscription and mailed to recipients. The letter cited Annotation 385.1100 for the distinction between a taxable annual publication and potentially exempt supplements.

The letter conditionally treated consultations and seminars as nontaxable services if a subscription buyer did not have to buy them and the publisher transferred no tangible personal property. Pure electronic transmission was also nontaxable when it transferred no tangible personal property.

Source and live-annotation limits

The official PDF says the publisher sent one copy of one redacted publication, four consecutive copies of another, and four copies of another redacted title. It does not publish those copies, the October 12, 1993 request, subscription agreement, production schedules, editorial deadlines, CD-ROMs, paper issues, software or networks, online or facsimile services, consultations, seminars, customer records, contracts, invoices, returns, cited Annotation 385.1100, audit or assessment, or later outcome. The publisher, recipient, product and service names, prices' units, and other details are redacted or incomplete. The facts say a single subscription fee includes unlimited consultation and seminar tickets, while the conclusion assumes a subscriber is not required to buy consultation and seminars; the letter does not reconcile that condition with its stated package facts.

The live annotation preserves only the conclusion that a qualifying CD-ROM periodical does not lose exemption by including information from the eleven preceding issues. The linked letter describes the current month plus the prior eleven months. The live entry omits the October request and materials reviewed, subscription products and components, statutory definition, advance scheduling, issue-count variation and sample dates, annual-title analysis, paper back issues, separate services, electronic-only delivery, redactions, and source and outcome limits.

What this means for you

Digital-media publishers and tax professionals

Document each disc's release interval, the underlying series' periodical characteristics, subscription terms, advance schedules, delivery method, and which archived issues accompany the current release. Separately document whether optional services and electronic deliveries transfer tangible property.

Common questions

Q: Did including the previous 11 months make the current disc taxable?

A: No.

Q: Was the result unconditional?

A: No. The CD-ROM had to be regularly issued no more than three months apart and otherwise qualify as a periodical.

Q: Were three months of paper back issues supplied to a new subscriber exempt?

A: Yes, when delivered as part of the qualifying subscription.

Q: Did an annual forecast become a periodical because quarterly reports updated it?

A: No. Their different titles and issue intervals kept them separate.

Q: Were consultations, seminars, and electronic-only delivery taxable?

A: Not on the stated conditions that the services were optional and no tangible personal property was transferred.

Citations and references

• California Revenue and Taxation Code § 6362.7(b)-(c) — quoted in part
• California Business Taxes Law Guide Annotation 385.1100 — cited but not included
• October 12, 1993 request and reviewed publication copies — described but not included
• Subscription agreement, schedules, disks, publications, services, customer and transaction records, tax records, and outcomes — described or implicated but not documented

Verbatim support

From the official Senior Tax Counsel letter:

Assuming that the CD-ROMS are regularly issued at average intervals not exceeding three months and qualify as periodicals, ---'s including the information from the 11 preceding months on the CD-ROM does not affect the exemption.

---'s sale of the periodicals for the three months preceding an initial subscription, which are delivered to a new subscriber as part of the subscription, is exempt from tax.

Assuming that --- transfers no tangible personal property to the customer and merely transmits information electronically, tax does not apply --- charge. The transactions would not involve the sale of tangible personal property.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 385.0202
• Original supporting opinion: 385.0202 PDF

Original ruling text

385.0202
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 445-6450

MEMBER
First District
BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG,
JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

March 17, 1994

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Dear
This is in reply to your October 12, 1993 letter regarding the application of California sales tax to charges by --- for products it sells on a subscription basis. You explained the following: “--- supplies subscription-based research and analysis of the computer hardware and software, communications and related technology industries. --- currently offers 26 subscription-based products called “---” focused on computing, software, networking, application areas, industry and management, and logical use. The (--are annually renewable subscription services which highlight industry developments, review new products and technology, and analyze industry trends within a particular technology or market sector. “Each subscriber to a Continuous Service receives the following: “1. --- --- --- issued annually for each --- --- It includes a detailed five-year industry segment forecast identifying key issues and strategic planning assumptions, assessing leading vendor strength and weaknesses, and reviews anticipated product introductions, trends and events. “2. --- --- --- are generally published on a quarterly basis and assess key assumptions and forecasts set forth in the --- --- --- These reports synthesize and analyze key trends and industry developments, discuss vendor strategies and review available products and services. "3. --- A set of --- is issued to clients approximately every two weeks. Each set includes six to eight individual --- different topics, which provide up-to-date information and analysis and assess the impact of current developments on strategic planning assumptions with respect to key industry issues. "4. --- All subscribers receive on a monthly basis a·--- that includes a comprehensive summary of nearly all --- publications.

"The --- --- --- --- are hereinafter referred to as the "Periodicals." In addition to the Periodicals, subscribers to a --- also receive the following: "5.·Analyst Telephone Consultation. Continuous Service subscribers are entitled to analyst consultations via telephone. Clients call to obtain more-specific data than they be set forth in the periodicals issued to all clients. "6. Briefings. Clients are invited to attend periodic regional user briefings in which --- analysts review and exchange information with clients on industry developments and trends. “7. Industry Conferences. --- presents a large number of conferences annually on significant information technology issues and trends. "8. Audio and Video Teleconferencing. --- offers numerous audio conferences and video teleconferencing sessions. “The briefings, conferences and teleconferences are hereinafter referred to as the 'Seminars'.” “A subscriber to a --- pays a single fee and receives the Periodicals, unlimited telephone consultation and tickets for Seminars. There is a line charge for --- OnLine. Subscribers to a --- may also purchase additional copies of the Periodicals for a specified fee and may purchase additional tickets for Seminars. “--- delivers the Periodicals in an [sic] variety of optional formats in addition to mail delivery, including CD-ROM, Lotus Notes electronics formats and --- OnLine. Every subscriber currently receives a paper copy of the periodicals by mail. There is a separate [sic] charge for CD-ROMs of approximately $2500 per --- The Company is considering offering subscribers the choice of foregoing the paper version and receiving the CD-ROM version at no additional. The CD-ROM permits full text and graphics search and retrieval of the included materials, enabling a client to search and retrieve information interactively on critical issues. The CD-ROM product also includes a directory of all published --- materials. --On-Line is an on-line electronic delivery service that permits full text search and retrieval and offers bulletin boards on key information technology issues, electronic mail and other features. Subscribers connect to --- On-Line from their place of business through a modem. The Periodicals are also transmitted to the client electronically via modem for placement on their networks and accessible
[sic] via Lotus Notes. --- is a service through which the Company provides timely delivery by facsimile of updates on major developments as they occur. “A subscriber who chooses to receive the periodicals on paper, through the mail, will initially receive copies of the periodicals for the 3 months preceding their initial subscription. As a matter of convenience to the clients, so as to avoid the need to store a large number of CD-ROMs, each CD-ROM contains 12 months of rolling periodicals (i.e. the current month's periodicals plus those for the 11 prior months).”

Given this information, you asked that we confirm your conclusion that --- charges for the --- are exempt from sales tax under Revenue and Taxation Code section 6362.7, which provides in relevant part: “(b) There are exempted from the taxes imposed by this part, the gross receipts from the sale of, and the storage, use, or other consumption in this state, of tangible personal property which becomes an ingredient· or a component part of any periodical regularly issued at average intervals not exceeding three months, and any such periodical, that is sold by subscription and delivered by mail or common carrier. “(c) For purposes of this section, “periodical” means any publication that appears at stated intervals at least four times per year, but not. more than 60 times per year, 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 with respect to continuity of literary character or similarity of subject matter, and there must be some connection between the different issues of the series in the nature of the articles appearing in them. each issue must be sufficiently similar in style and format to make it evident that it is one of a series. The term does not include printed sales messages, shopping guides, or other publications of which the advertising portion, including product publicity, exceeds 90 percent of the printed area of the entire issue in more than one-half of the issues during any 12-month period.” You sent for our review one copy of the publication, --- four consecutive copies of --- and four copies of --- --- --You note that --- does not specify in the subscription agreement the number of issues which --- will distribute during this subscription; however, ---. establishes a rigid production schedule with strict editorial due dates. --- establishes the schedules two times each year for the publications to be published in the next six months. The exact number of issues may vary, typically by one issue per year because of scheduling of several publications and calendar limitations such as holidays and weekends. For example, while the --- are issued approximately every two weeks, a subscriber might receive 23, 24, or 25 issues during a year. Nonetheless, --- publishes --- --- pursuant to a specific schedule established in advance for the upcoming six months. The periodicals are not issued on an as needed basis nor only when a certain amount of information has been accumulated. We note that the --- were issued between August 23, 1993 and November 29, 1993 at intervals between 13 to 25 days. However, we believe that for purposes of Revenue and Taxation Code section 6362.7, if --- has a rigid publication schedule whereby it establishes the --- publication intervals six months in advance, then the publications appear at stated intervals. We, therefore, draw the following conclusions: We do not believe that the --- --- --- are periodicals. You believe that the --- --- --(Scenarios) and Strategic Analysis Reports (Reports) are a single periodical, because the Reports update key assumptions and forecasts contained in the Scenarios. We disagree. The publications have different titles, and they are issued at very different intervals. Their dealing with the same subject matter is not determinative. We .have previously taken the position that, when a publisher sells a subscription to an annual publication and regularly issues supplements to the

subscriber at average intervals not exceeding three months, the sale of the annual publication is subject to taxi however, the sale of the supplements may qualify as exempt. See Business Taxes Law Guide Annotation 385.1100. We agree with your conclusion that the Strategic Analysis Reports. Research Notes, and Research Reviews are periodicals. When --- sells the periodicals by subscription and sends them by mail to the recipients, the sale is exempt from sales tax. We believe the exemption applies whether the periodicals are published on paper or CD-ROM.
---'s sale of the periodicals for the three months preceding an initial subscription, which are delivered to a new subscriber as part of the subscription, is exempt from tax. Assuming that the CD-ROMS are regularly issued at average intervals not exceeding three months and qualify as periodicals, ---'s including the information from the 11 preceding months on the CD-ROM does not affect the exemption. You asked for our confirmation that ---’s charges for telephone consultations and seminars are nontaxable charges for services. Assuming that a person who purchases a subscription to the --- --- --- is not required to also purchase any telephone consultation and seminars and assuming that makes no transfer of tangible personal property in connection with the conferences and seminars, tax does not apply to ---'s charge. You also asked for our confirmation that, to the extent --- --- --- delivers its --- --electronically to the customer through Lexus Notes, --- On-Line, and --- the charges are nontaxable. Assuming that --- transfers no tangible personal property to the customer and merely transmits information electronically, tax does not apply --- charge. The transactions would not involve the sale of tangible personal property. We hope this answers your questions; however, if you need further information, feel free to write again.

Very truly yours,

Ronald L. Dick
Senior Tax Counsel

RLD:Dlh
bc: Administrator -