Did an annual association directory qualify as a periodical or printed sales message, and how were member copies, reliance on a prior audit, and interest treated?

Plain-English summary

A commercial-printing partnership that began in January 1989 printed a bimonthly industry-association magazine and a separate annual directory. Its September 29, 1994 Arcadia conference involved Staff Counsel Carl Bessent, Tax Auditor Charles Spaeth, Supervising Tax Auditor George Fong, and redacted petitioner representatives.

The audit covered April 1, 1989 through March 31, 1992 and disallowed $30,598 in claimed resale sales. The partnership had no prior audit. Four contentions addressed periodical status, reliance on a different sole proprietor's audit, printed-sales-message status, and interest.

The petitioner called the directory a seventh magazine issue distributed at no extra cost. The Department said it differed in format, size, and name. The magazine also used volume/number identification and a featured “President's Message”; the directory lacked literary continuity, similar subject matter, and article connection.

California said the directory was not an extra issue and did not qualify as a periodical. Regulation 1590(a)(2) required literary character and excluded listed forms. Prior Annotations 385.0840, 385.0930, and 385.1600 treated address, telephone, and identifying lists as lacking literary content; Annotation 385.0900 rejected a differently formatted, sized, and named directory as a thirteenth issue. The Department also noted that sections 6362.7 and 6362.8 took effect only after the 1991 directory was issued.

An auditor's November 17, 1994 memorandum agreed that the directories exceeded 50 percent advertising, meeting Regulation 1541.5's principal-purpose rule, and verified two other requirements. But approximately 275 copies annually went to organization members whose fee included the right to receive a copy. The Department treated that annual fee as “cost,” so those copies failed Regulation 1541.5(b)(3); the remainder qualified. In a December 14 letter, the petitioner agreed to pay the percentage based on 275 copies but disputed interest.

The partners claimed reliance on a sole proprietor's audit through March 31, 1987. But the sole proprietorship and partnership were separate sales-tax persons; Spaeth found no directory discussion in the earlier audit. Section 6596 required a written request and advice. Separately, a September 30, 1992 delegation described in Operations Memo 1012 allowed staff relief when prior-audit workpapers clearly recorded the issue and both sides agreed erroneous advice was given. Neither writing nor agreement existed.

Interest under section 6482 ran from the tax due date through payment and could not be deleted. Counsel compared it to the cost of borrowing funds from a bank.

The recommendation reduced the tax measure to 275 directory copies yearly. The February 8 transmittal called the petition partly granted and partly denied, provided 30 days for reconsideration or a Board hearing, and said later Board action would be mailed. The signature date, any request, final action, liability, and outcome are absent.

Source and live-annotation limits

The official PDF does not include the petition, partnership audit or workpapers, sampled transactions behind the $30,598 measure, magazine or directory issues, publication schedules, association or membership records, annual-fee terms, advertising measurement, printing or distribution agreements, subscriber records, November 17 auditor memorandum, December 14 taxpayer letter, prior sole-proprietor audit or workpapers, written-advice request, Operations Memo 1012, invoices, sales, returns, tax calculations or payments, interest computation, reconsideration or hearing request, final Board action, signed recommendation date, claim, appeal, or later outcome. The petitioners, partnership, sole proprietor, association, publications, members, customers, transactions, and amounts beyond stated figures are mostly redacted or unidentified.

The source prints brace characters around several annotation dates, “the' directory,” “they-lack,” and “wj.enclosure.” The original-text section preserves those forms rather than silently correcting the official record.

The live annotation preserves the bimonthly magazine, annual directory, format/size/name distinction, nonperiodical result, over-50-percent advertising, and possible printed-message exemption. It omits the February 8 transmittal and conflicts with it by stating February 3, plus the conference and named participants, audit period and $30,598 measure, partnership history, four contentions, 1991 effective-timing issue, detailed literary analysis and four prior annotations, November and December follow-ups, 275 taxable member copies and annual-fee-as-cost rule, sole-proprietor audit and separate-person analysis, section 6596 and Operations Memo 1012, interest and section 6482, reduced measure, 30-day review routes, missing records, redactions, and outcome limits.

What this means for you

Association publishers, printers, and tax professionals

Analyze directory format and literary continuity separately from related magazines. Preserve every issue, advertising calculations, membership and fee terms, recipient and delivery records, written tax requests and advice, audit workpapers, invoices, returns, payments, and statutory-interest calculations.

Common questions

Q: Was the annual directory an exempt periodical?

A: No.

Q: Did most copies qualify another way?

A: Yes, as printed sales messages.

Q: Why were 275 member copies taxable?

A: Members' annual fees included the right to receive them, so they were not distributed at no cost.

Q: Was prior-audit reliance or interest relief granted?

A: No.

Q: What audit measure was protested?

A: $30,598 in disallowed claimed resale sales.

Q: Was the recommendation the final Board action?

A: No. The cover letter allowed reconsideration or a Board hearing and promised later official notice.

Citations and references

• California Revenue and Taxation Code §§ 6362.7, 6362.8, 6482, and 6596
• California Sales and Use Tax Regulations 1541.5 and 1590(a)(2)
• California Sales and Use Tax Annotations 385.0840 (April 23, 1957), 385.0930 (February 18, 1977), 385.1600 (December 15, 1965), and 385.0900 (June 26, 1952)
• State Board of Equalization Operations Memo 1012, page 4 (August 13, 1993), describing September 30, 1992 delegated section 6596 authority — not included
• Petition, partnership and sole-proprietor audits, publications, membership and distribution records, transactions, tax records, and final action — described or implicated but not documented

Verbatim support

From the official transmittal and Appeals recommendation:

The directory does not bear a relationship to prior or subsequent issues of the magazine in respect to continuity of literary character or similarity of subject matter.

Both petitioner and the Department agree that the directory should be treated as a printed sales message except for 275 copies a year which do not meet the requirement of Regulation 1541.5(b) (3).

Reduce the measure of tax to only 275 copies of the directory per year.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 385.0833
• Original supporting opinion: 385.0833 PDF

Original ruling text

385.0833

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

February 8, 1995

Re: --- --- ---

Dear: --- --- ---

Enclosed is a copy of the Decision and Recommendation pertaining to the above-referenced petition for redetermination. I have recommended that the petition be granted in part and denied in part.

Please read the Decision and Recommendation carefully. If you accept the decision, no further action is necessary. If you disagree with the decision, you have the following two options:

REQUEST FOR RECONSIDERATION. If you have new evidence and/or contentions not previously considered, you should file a Request for Reconsideration. Any such request must be sent to me within 30 days from the date of this letter, at the post office box listed above, with a copy to the Principal Tax Auditor at the same box number. No special form is required, but the request must clearly set forth any new contentions; and any new evidence must be attached.

BOARD HEARING. If you have no new evidence and/or contentions, but wish to have an oral hearing before the Board, a written request must be filed within 30 days from the date of this letter with Mrs. Mary Ann Stumpf, Business Tax Appeals Analyst, Board Proceedings Division, at the above post office box.

The above options are also available to the Sales and Use Tax Department. If the Department requests reconsideration or an oral hearing before the Board, you will be notified and given a chance to respond.

If neither a request for Board hearing nor a Request for Reconsideration is received within 30 days from the date of this letter, the Decision and Recommendation will be presented to the Board for final consideration and action. Official notice of the Board's action will then be mailed to you.

Sincerely,

Carl J. Bessent
Staff Counsel
CJB:ct
Enclosure
cc:

Mrs. Mary Ann Stumpf (MIC:81)
Business Tax Appeals Analyst
Board Proceedings Division (w/enclosure)
Principal Tax Auditor (MIC:49) (file attached)
San Bernardino - District Administrator (EH) (w/enclosure)
City of Industry - District Administrator (AP) (wj.enclosure)

STATE OF CALIFORNIA
BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:

Petitioners

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DECISION AND RECOMMENDATION
No. _____

The Appeals conference in the above-referenced matter was held by Staff Counsel Carl J. Bessent on September 29, 1994 in Arcadia, California. Appearing for Petitioners (hereinafter "petitioner"):

Appearing for the
Sales and Use Tax Department:

Charles K. Spaeth
Tax Auditor
George Fong
Supervising Tax Auditor

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

State, Local and County

Disallowed sales for resale

$30,598

Petitioner's Contentions

1. The directories are periodicals and exempt from sales and use tax.
2. The partners relied upon a prior audit of a sole proprietorship.
3. The directories are exempt from tax on the basis that they are printed sales messages.
4. The interest should be waived.

Summary
Petitioner is a partnership doing business as --- --- Petitioner's business is that of a printer, primarily commercial work. The start date of the partnership was January 1989. There was no prior audit of the partnership. On a bi-monthly basis, petitioner prints a magazine for the --- --- ---. Once a year, petitioner prints the --- directory. Petitioner contends that the directory should be nontaxable under Revenue and Taxation Code Section 6362.7 and 6362.8 and Sales and Use Tax Regulation 1590(a) (2). At the conference, the Sales and Use Tax Department (Department) pointed out that Section 6362.7 and 6362.8 did not take effect until after the 1991 directory was issued. Petitioner contends that the directory is issued as a seventh edition of an exempt periodical which is distributed to subscribers of the periodical at no extra cost. However, the Department states that the directory is different in format, size, and name from the bi-monthly magazine. Petitioner states that --- printed the --- magazine and --- directory while a sole proprietor. --- was audited through March 31, 1987 and according to petitioner, the Department did not inform --that the directory was taxable. Petitioner believes that it should not be held liable for the tax because the partnership relied on the audit of the sole proprietorship. The Department stated that the sole proprietorship of --- --- and the current partnership of --- and
--- are two separate “persons” for sales and use tax purposes. At the conference, I asked the auditor, Mr. Spaeth, to review the audit of --- to see if there were any mention of directories. In a subsequent phone conversation with Mr. Spaeth, he said he did not see any discussion of directories in the audit of ---. At the conference, petitioner contended that the directories in question are exempt from tax on the basis that they are printed sales messages. Petitioner stated that they met the requirements of Regulation 1541.5(b) (1) through (3), which should exempt the directories. In a memorandum dated November 17, 1994, the auditor stated that petitioner is correct with the exception of compliance with Regulation 1541.5(b) (3). The auditor stated that the directories do contain more than 50 percent advertising; thus, the principal purpose requirement was met. The auditor verified compliance with Regulation 1541.5(b) (1) and (2). However, the auditor concluded that Regulation 1541.5(b) (3) was not met with respect to approximately 275 copies of the' directory a year because the recipients of these copies were the members of an organization who pay an annual fee which includes the right to receive a copy of the annual directory. The Department believes that the interpretation of “cost” as defined in Regulation 1541.5(a) (5) includes such annual fees. The Department concluded that the remainder of the directories should qualify as exempt as they meet the requirements of Regulation 1541.5. In a letter dated December 14, 1994, petitioner stated that they would agree to pay a percentage based on 275 directories not being exempt. However, petitioner further indicated that it should not have to pay any interest on the tax.

Analysis and Conclusions
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 or 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…” It is consistently being 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 in content. {See, e.g., Sales and Use Tax Annotation 385.0840 {4/23/57}, 385.0930 {2/18/77}, and 385.1600 {12/15/65}. Petitioner contends that the --- directory is like an extra issue of the --- magazine and thus exempt. However, Sales and Use Tax Annotation 385.0900 {6/26/52} clarifies that a “directory issue” is “not considered as thirteenth issue of monthly magazine where the format size, and name is [sic] different from the monthly magazine”. The directory does not bear a relationship to prior or subsequent issues of the magazine in respect to continuity of literary character or similarity of subject matter. There is no connection between the different issues of the series and the nature of the articles appearing in the --magazine and the directory. The ---magazine is described volume and number and has a featured article “President's Message”. I conclude that the directory does not qualify as a periodical. Next, petitioner states that when --- operated the business as a sole proprietorship, he was audited through the period March 31, 1987 and the Department did not inform --- that the directory was taxable. Revenue and Taxation Code Section 6596 gives authority to the Board to relieve taxpayers of tax, interest or penalty where the Board finds that the taxpayer reasonably relied upon written advice from the Board. However, a condition that must be satisfied to use this statute is a request in writing to the Board for advice whether a particular activity or transaction is subject to the sales or use tax. In this matter, there is no request in writing from petitioner. On September 30, 1992, the Board delegated to the Department authority to relieve taxpayers of tax, interest and penalty as provided by Section 6596 under the following limited circumstances: "(2) Where the issue in question was clearly discussed in the prior audit and the essence of the advice to the taxpayer is set forth in writing and the working papers. Both staff and the taxpayer must agree that the erroneous advice was provided in the prior audit. In all other cases, claims of reliance on erroneous advice must be ruled upon by the Board members." (State Board of Equalization Operations Memo 1012, p. 4, August 13, 1993.) I reviewed the audit of --- and found no indication that directories were to be treated as nontaxable. Petitioner must show that the claimed exempt directories were examined in --- prior

audit, found to be nontaxable, and stated as such in writing in the audit workpapers. There is no such writing in the prior audit workpapers. Furthermore, there must be an agreement between the parties that erroneous written advice was provided in the prior audit. The Department denies that it gave any erroneous advice to ---. Thus, petitioner cannot receive relief under Section 6596. Both petitioner and the Department agree that the directory should be treated as a printed sales message except for 275 copies a year which do not meet the requirement of Regulation 1541.5(b) (3). I see no reason to disagree with petitioner and the Department. Therefore, the remainder of the directories qualify as exempt as they meet the requirements of Regulation 1541.5. Petitioner contends that the interest should be deleted. Petitioner did not elaborate on his reasons why interest should be deleted. Interest applies to all determinations from the date on which the tax becomes due and payable until the date of payment. (Rev. & Tax. Code § 6482.) The interest cannot be deleted. Petitioner was charged interest for the use of the money not timely received by the Board in the same manner petitioner would have been charged if they had borrowed the funds from a lending institution, such as a bank. Recommendation Reduce the measure of tax to only 275 copies of the directory per year. The remainder of the directories are exempt as they meet the requirements of Regulation 1541.5.

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Carl Bessent, Staff Counsel

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Date