Were leased credit-reference books exempt periodicals when revised every two months, and what happened to a similar book revised only twice a year?

Plain-English summary

Redacted company B gathered, compiled, and evaluated business credit data across the United States and Canada. The live annotation identifies it as Dun & Bradstreet, while the supporting memo does not expose the name.

B's Basic Service Contract entitled subscribers to a minimum number of narrative and financial reports and the “loan” of four to six reference books. The books were not loaned separately; subscribers had to return them before receiving revisions. They were published every two months and available for distribution. B had reported tax on its book cost, treating the arrangement as lending rather than selling.

The January 17, 1967 audit memo asked about California contracts entered or renewed after August 1, 1965. Charges of $75 and $100 per reference book made the transfers leases under section 6006.3. Section 6006(g) included any lease of tangible personal property for consideration within a sale, so the “loans” were sales under section 6006.

The service-business label did not change that result. Market Street Railway Co. v. California State Board of Equalization, 137 Cal. App. 2d 87, 96, said a service organization was a retailer of tangible property it sold. Former Ruling 1's incidental-property rule did not apply because a post–August 1, 1965 lessor was treated as selling rather than using the property. The books were also not incidental to the service: they were the means of obtaining the information.

The main books nevertheless qualified as exempt periodicals under former Ruling 50 because they appeared six times yearly, contained information for a particular group, and related to earlier and later issues through similar subject matter. Under that 1967 analysis, B did not have to collect or remit tax on them.

For an additional $100 per issue, B also supplied a “Reference Book of Manufacturer's.” Counsel contacted B's local office and learned that it shared the general format but focused on manufacturing-firm credit data and appeared only twice yearly. It failed Ruling 50's period requirement, making the rental receipts taxable; the contract appeared to charge $100 per copy.

Later authority and source limits

A February 5, 2002 official staff email published with Annotation 385.0920 warns that, under then-current section 6362.7 and Regulation 1590, periodicals were no longer exempt unless sold by subscription and delivered by mail or common carrier, or covered by another exemption such as nonprofit distribution. The live 385.1040 annotation continues to call the main books exempt periodicals. The sources do not establish present treatment.

The official 385.1040 PDF does not include the January 17 audit memo, Basic Service Contract, narrative or financial reports, reference books or revisions, subscribers or California customers, book-return or distribution records, local-office communication, charges or invoices, leases, sales, returns, cost or tax calculations, tax collection or remittance, audit, assessment, claim, appeal, or outcome. Company B, the subscribers, transactions, and amounts beyond stated charges are redacted or unidentified.

The source prints “in representing its similarity,” “Reference Book of Manufacturer's,” and switches quotation styles around B and the books. The original-text section preserves those forms rather than silently correcting the official record.

The live annotation preserves the credit-data business, customer leases, six-times-yearly schedule, particular-group information, subject-matter continuity, Regulation 1590, and exempt-periodical conclusion. It adds Dun & Bradstreet's name. It omits the audit memo and contract date, reports and four-to-six books, return and update mechanics, cost-based tax reporting, $75/$100 charges, lease-as-sale statutes, Market Street, Ruling 1 and service/incidental analysis, no-collection/remittance conclusion, manufacturers' book and local-office facts, separate $100 charge, twice-yearly failure and taxable rental receipts, later 2002 warning, missing records, redactions, source forms, and absent outcome.

What this means for you

Information services, publishers, and tax professionals

Do not rely on labels such as “loan” when customers pay for physical publications. Preserve every contract, report and book issue, charges, return and update records, publication and delivery schedules, subscriptions, invoices, leases, sales, returns, tax calculations, collections, remittances, and current exemption analysis.

Common questions

Q: Were the reference books treated as loans?

A: No. The charges made them leases and therefore sales under the historical provisions.

Q: Did the main bimonthly books qualify as periodicals?

A: Yes.

Q: Why was the manufacturers' book taxable?

A: It was revised only twice a year and failed the historical frequency requirement.

Q: Did B's status as an information service make the books incidental?

A: No. The memo treated the physical books as the means by which subscribers obtained the information.

Q: Does the source establish a current periodical exemption?

A: No. Later official staff guidance warns that periodical status alone no longer established exemption under then-current law.

Citations and references

• Former California Revenue and Taxation Code §§ 6006, 6006(g), and 6006.3
• Former California Sales Tax Rulings 1 and 50
• Market Street Railway Co. v. California State Board of Equalization, 137 Cal. App. 2d 87
• California Revenue and Taxation Code § 6362.7 and Regulation 1590 — discussed in the February 5, 2002 staff email published with Annotation 385.0920
• January 17 audit memo, contract, reports, books, subscribers, returns, invoices, transactions, tax records, and outcome — described or implicated but not documented

Verbatim support

From the official Headquarters Tax Counsel memorandum:

Although the contract between “B” and its subscribers refers to the “reference books” as merely being “loaned”, we are of the opinion that these books are leased within the meaning of Section 6006.3 of the Sales and Use Tax Law since a charge of $75 and $100 per “reference book” is made by “B”.

the printed materials are not incidental to the information services; they are the very means by which the desired information is obtained.

It, therefore, does not come within the exemption of Ruling 50 because of the period requirement. The rental receipts are accordingly subject to sales tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 385.1040
• Original supporting opinion: 385.1040 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Out-of-State - Auditing (FLZ)

From:

Tax Counsel (EHS:GLR)

385.1040

Date:

March 7, 1967

Subject:

This is in reply to your memo of January 17, 1967 regarding the taxability of the reference books issued by “B” It is our understanding that “B” is engaged in the business of gathering, compiling, and evaluating various credit data on business throughout the United States and Canada. Anyone interested in receiving this information may subscribe to “B”'s service. The Basic Service Contract provides that the subscriber is entitled to receive a minimum number of narrative and financial reports and the “loan” of four to six “reference books.” The “reference books” are not loaned separately and must be returned to “B” prior to receipt of a later revised and updated issue. These issues are published every two months and are available for distribution at this time. “B” has been reporting its tax liability based upon its cost of the “reference books” it furnishes its subscribers under the theory it is merely lending the books and not selling them. You ask our opinion as to the taxable status of the “reference books” “B” supplies its California customers under contracts entered into or renewed after August 1, 1965. The essential question is whether or not “B” is making sales of tangible personal property to its customers. In this regard, it is immaterial whether or not it is basically a service organization. “As to tangible personal property that it sells, it is a retailer.” Market Street Railway Co. v. California State Board of Equalization, 137 Cal. App. 2d 87, 96. Although the contract between “B” and its subscribers refers to the “reference books” as merely being “loaned”, we are of the opinion that these books are leased within the meaning of Section 6006.3 of the Sales and Use Tax Law since a charge of $75 and $100 per “reference book” is made by “B”. Since a sale is defined in Section 6006(g) as including “Any lease of tangible personal property in any manner or by any means whatsoever for consideration…” it is

clear that the “loan” of the “reference books” for a consideration constitutes a sale within the meaning of Section 6006. Although the Board recognized that a so-called service enterprise which makes an incidental use of tangible personal property should be regarded as receiving consideration for its services only and has embodied this interpretation in Ruling 1, the theory is not applicable to the facts of this case since a lessor who leases tangible personal property on or after August 1, 1965, is considered selling the property instead of using it. As already indicated, an organization which is primarily engaged in rendering nontaxable services is nevertheless the retailer of tangible personal property which it sells to customers. The fact that its retail activity is “incidental” to its principal activities is unimportant. In any event, the publication and distribution of the “reference books” could hardly be considered an incidental activity of "B". We believe it is evident, too, that the printed materials are not incidental to the information services; they are the very means by which the desired information is obtained. Notwithstanding our conclusion that the “reference books” are sold, we are of the opinion that the “reference books” qualify as exempt periodicals under Ruling 50; they are revised and published six times per year, they contain information of interest to a particular group, and each issue bears a relationship to prior and subsequent issues in representing its similarity of subject matter. Under these circumstances, “B” is exempt from collecting and/or remitting tax on the publication to the state. It is noted that “B” will loan to its subscribers, for an additional fee of $100 per issue, the “Reference Book of Manufacturer's.” I contacted the local “B” office and was informed that this book was of the same general format of the "reference books", except it concerned itself more specifically with credit information on manufacturing firms and was only revised and published twice a year. It, therefore, does not come within the exemption of Ruling 50 because of the period requirement. The rental receipts are accordingly subject to sales tax. It appears from the contract that the rental is $100 per copy.

GLR:lt [lb]