How did California tax one annual charge covering a quarterly professional newsletter and a yearly manual revision?

Plain-English summary

A redacted publisher sold the Professional Responsibility Manual for $27.50 and reported sales tax on it. Purchasers could add a $20 annual updating service consisting of the quarterly Professional Responsibility Update newsletter and annual revisions to the manual.

California classified the quarterly “Professional Responsibility Update” as an exempt periodical, assuming it contained information of interest to the manual's subscribers.

The annual revision was not an exempt periodical because it appeared only once a year and was assumed to differ substantially in style and format from the quarterly update.

Because one price covered both items, the publisher had to allocate the charge between the exempt newsletter and taxable revision. Legal Counsel said separate prices would limit tax to the nonexempt item and that, for the combined charge, the revision's replacement cost was a proper allocation basis.

Source and live-annotation limits

The official PDF does not include the February 6 request, manual, newsletters, annual revisions, subscription or updating-service agreement, publisher records, enclosed Regulation 1590 copy, evidence about content, subscribers, style or format, replacement costs, other prices, invoices, sales or uses, allocation workpapers, returns, exemption documentation, tax calculations or payments, audit, assessment, claim, appeal, or later outcome. The publisher, subscribers, transactions, quantities, replacement cost, allocated amounts, and tax amounts are redacted or unidentified.

The source prints substantially similar different, news1etter, Manua1, and nonexempt, and ends its final office sentence without a period. The original-text section preserves those forms rather than silently correcting the official record.

The live annotation preserves the publication title, quarterly schedule, periodical result, annual-revision classification, once-yearly reason, and date. It omits the request and personnel, publisher and manual, manual price and tax reporting, optional service and combined annual price, assumed subscriber-interest content and style-and-format difference, section 6362 and Regulation 1590, statutory and regulatory tests, separate-pricing guidance, allocation and replacement-cost basis, missing records, redactions, source forms, and absent outcome.

What this means for you

Publishers and tax professionals

Classify each item in an updating service separately. If one bundled price covers exempt and taxable publications, keep the issues, revisions, content and format evidence, price lists, replacement-cost support, contracts, invoices, allocation workpapers, returns, tax calculations, and payments.

Common questions

Q: Was the quarterly newsletter exempt?

A: Yes, on the stated assumption about its subscriber-interest content.

Q: Was the annual manual revision exempt?

A: No.

Q: Could tax apply only to the revision if prices were separate?

A: Yes.

Q: How could the publisher allocate a single bundled charge?

A: The opinion approved using the annual revision's replacement cost as a basis.

Q: Did the source show the actual replacement cost or allocation?

A: No. It stated the allocation method but supplied neither amount.

Citations and references

• Former California Revenue and Taxation Code § 6362
• California Sales and Use Tax Regulation 1590(a)(2)
• February 6 request, enclosed regulation copy, publications, pricing, sales, replacement-cost and allocation records, tax records, and outcome — described or implicated but not documented

Verbatim support

From the official Legal Counsel opinion:

It is our opinion that your news1etter, “Professional Responsibility Update” qualifies as an exempt "periodical" as defined in Regulation 1590 as it is issued quarterly and we assume contains news or information of interest to subscribers of the “Professional Responsibility Manua1".

The annual revision to the manual, however, cannot be classified as a “periodical” as it is only issued once each year and is, we assume, substantially different in style and format from the quarterly “Update”.

An allocation of the cost of the two items may properly be based on the replacement cost of the revision.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 385.1850
• Original supporting opinion: 385.1850 PDF

Original ruling text

385.1850

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

(916) 445-2488

March 7, 1978

Dear Mr. --This is in response to your letter of February 6, 1978 to Mr. T. P. Putnam which has been referred to the undersigned for reply. As we understand it, you publish a book entitled “Professional Responsibility Manual”, which you sell for $27.50, and on which you report sales tax. You also provide an optional updating service for purchasers of the book. The updating service consists of a quarterly newsletter, entitled “Professional Responsibility Update” and annual revisions to the manual. The cost of both of these services is $20.00 per annum. You wish to know whether tax applies to the sale of the quarterly newsletter and the annual revisions. Revenue and Taxation Code Section 6362 provides that: “(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 regularly issued at average intervals not exceeding three months and any such newspaper or periodical.” (Emphasis added.) Sales and Use Tax Regulation 1590 (a) (2) (copy enclosed) defines “periodical” as “limited to 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 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. Effective April 1, 1975, an annual report of a corporation which is substantially similar different in style and format from the corporation's quarterly reports is not part of a series with the quarterly reports.”

It is our opinion that your news1etter, “Professional Responsibility Update” qualifies as an exempt "periodical" as defined in Regulation 1590 as it is issued quarterly and we assume contains news or information of interest to subscribers of the “Professional Responsibility Manua1". The annual revision to the manual, however, cannot be classified as a “periodical” as it is only issued once each year and is, we assume, substantially different in style and format from the quarterly “Update”. You state that a single charge of $20.00 per year is made for the "Update" and annual revision. If the exempt and non-exempt items are priced separately, tax would only apply to the price of the non-exempt item. In the present case, however, in order to determine an amount upon which to base the measure of tax as between the exempt item, the "Update", and the nonexempt item, it is necessary to allocate the cost of the two items. An allocation of the cost of the two items may properly be based on the replacement cost of the revision. If you have further questions concerning this matter, please write this office

Very truly yours,

Mary C. Armstrong
Legal Counsel

MCA: jw
Enclosed