Were a section 501(c)(3) foundation's quarterly member periodicals exempt despite one paid advertiser, and what about copies sold to nonmembers?

Plain-English summary

A redacted request dated November 3, 1993 and received by the Legal Division in December asked about a quarterly publication from a foundation registered under Internal Revenue Code section 501(c)(3). The requester understood that the publication cost was built into membership dues, represented a small part of those dues, and that one advertiser paid to appear in it.

Section 6362.7 covered qualifying free distributions and qualifying subscriptions delivered by mail or common carrier, along with specified ingredient or component property. Its quoted definition required four to 60 issues yearly, news or information of general interest, continuity and similarity across issues, and no disqualifying advertising share above 90 percent in more than half of a 12-month period.

Section 6362.8 covered qualifying nonprofit publications and components. The letter quoted three categories: section 501(c)(3) publications distributed for membership fees or to contributors; section 501(c)(3) publications without commercial advertising; and nonprofit member distributions whose printing cost was less than 10 percent of the applicable membership fee.

The one reviewed issue appeared to be a periodical because it was quarterly and contained news and information for the foundation's membership. Because counsel saw only one issue, the letter assumed that each issue related to earlier and later ones and remained similar in style and format. The proposed Regulation 1590(a)(2) enclosure offered further clarification but is absent.

Counsel said section 6362.7 exempted component parts of any issues distributed without charge. Distribution to the foundation's members for membership fees and to contributors qualified under section 6362.8(b)(1). Sales to nonmembers were not exempt if the copies contained any paid commercial advertising.

Source and live-annotation limits

The official PDF does not include the November 3, 1993 request, proposed Regulation 1590(a)(2) enclosure, publication, reviewed issue, earlier or later issues, articles, advertisements, foundation registration, governing documents, membership categories, fee or publication-cost amounts, contributor records, member or nonmember recipients, distribution records, subscriptions, mail or carrier evidence, sales, invoices, printing costs, returns, exemptions claimed, tax calculation or payment, audit, assessment, claim, appeal, or other outcome. The foundation, publication, requester, membership, and recipient are redacted.

The source first prints “Sections.6362.7 and 6362.81,” then immediately introduces and quotes section 6362.8. This page treats 6362.81 as a source wording defect, not a separate authority. The original text also preserves the letter's printed “it is issue quarterly,” “If and of the issues,” and incomplete section 6362.8(b)(1) sentence rather than reconstructing them.

The live annotation accurately preserves the quarterly foundation publication, dues, small cost share, one advertiser, member-distribution exemption, and nonmember-advertising limit. It omits the November request and December receipt, requester's-understanding qualification, one-issue review and assumptions, detailed sections 6362.7 and 6362.8 categories, contributors in its conclusion, free-distribution component rule, proposed regulation and missing enclosure, printed defects, redactions, missing records, and outcome limits.

What this means for you

Nonprofit publishers and tax professionals

Document section 501(c)(3) status, recipient status, membership fees and attributed printing cost, contributions, free distributions, subscriptions and delivery, advertising, and continuity across multiple issues.

Common questions

Q: Did one paid advertiser defeat the member-distribution exemption?

A: No.

Q: Were free copies exempt?

A: The quoted statute covered qualifying free periodicals, and counsel expressly said their component parts were exempt.

Q: Were advertised copies sold to nonmembers exempt?

A: No, under the conclusion stated in this opinion.

Q: Did counsel verify multiple issues?

A: No. Continuity and similar format were assumed.

Citations and references

• California Revenue and Taxation Code §§ 6362.7 and 6362.8(a), (b)(1)-(3)
• Proposed California Sales and Use Tax Regulation 1590(a)(2) — described as enclosed but not included
• Internal Revenue Code § 501(c)(3)
• November 3, 1993 request, publication and other issues, foundation and membership records, advertising and distribution records, tax records, and outcomes — described or implicated but not documented

Verbatim support

From the official Staff Counsel letter:

Since we had only one issue to review, we assume that each issue bears a relationship to prior and subsequent issues and each issue is similar in style and format.

Then the periodical is tax exempt under Section 6362.8 (b) (1) for purchases of distribution to members and contributors.

Sales of copies to non-members will not be exempt if they contain any paid commercial advertising.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 385.0358
• Original supporting opinion: 385.0358 PDF

Original ruling text

385.0358

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 12, 1994

Re: ---

Dear: --This is in response to your letter of November 3, 1993, which was received by the Legal Division in December, in which you request our opinion about the applicability of sales and use tax to the publication --- published quarterly. The publisher is --- which is registered with the Internal Revenue Service under Internal Revenue Code Section 501(c) (3). It is your understanding that the cost of the publication is built into the membership dues, and represents a small portion of those dues. Currently, there is one paid advertiser. Revenue and Taxation Code Sections.6362.7 and 6362.81 describe how periodicals may be distributed exempt from sales and use taxes. Section 6362.7 states in pertinent part the following: "Newspaper and periodicals distributed without charge; periodicals. (a) 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 component part of any newspaper or periodical that is distributed without charge and regularly issued at average intervals not exceeding three months, and any such newspaper or periodicals. (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,
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¹All further section references are to Revenue and Taxation Code.

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." Section 6362.8 states in pertinent part: "Newspaper and periodicals distributed by nonprofit organizations. (a) 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 that becomes an ingredient or component part of any newspaper or periodical regularly issued at average intervals not exceeding three months, or any such newspaper or periodicals. (b) this section shall apply only with respect to any of the following: (1) Any newspaper or periodical that is published or purchased by an organization that qualifies for tax-exempt status under Section 501 (c) (3) of the Internal Revenue Code and is distributed to the members of the organization in consideration of payment of the organization’s membership fee, or to the organization’s contributors. (2) Any newspaper or periodical that is published by an organization that qualifies for tax-exempt status under Section 501 (c) (3) of the Internal Revenue Code and does not receive from, or accept, any commercial advertising. (3) Any newspaper or periodical distributed by a nonprofit organization for which both of the following apply: (A) Distribution is to any member of the nonprofit organization in consideration, in whole or in part, of payment of the organization's membership fee. (B) The amount paid or incurred by the nonprofit organization for the cost of printing the newspaper or periodical is less than 10 percent of the membership fee attributable to the period for which the newspaper or periodical is distributed.” “--- appears to fit the definition of a periodical as it is issue quarterly and contains news and information for the --- membership. Since we had only one issue to review, we assume that each issue bears a relationship to prior and subsequent issues and each issue is similar in style and format. For a further clarification of “periodical” please review the enclosed proposed Sales and Use Tax Regulation 1590 (a) (2). If and of the issues of --- --- are distributed without charge, then any component part is exempt (Section 6362.7). Since --- --- --- is tax exempt under IRC Section 501 (c) (3) and --- --- --- distributed to --- --- membership in return for a membership fee. Then the periodical is tax exempt under Section 6362.8 (b) (1) for purchases of distribution to

members and contributors. Sales of copies to non-members will not be exempt if they contain any paid commercial advertising. If you need anything further, please do not hesitate to write again.

Sincerely

Carl J. Bessent
Staff Counsel

CJB/md
Enclosed