Did UPS delivery from a printer to an affiliated directory-distribution company make the printer's sale exempt?

Plain-English summary

A local telephone-directory publisher bought printing from an unrelated printer. The directory was assumed to contain more than 50 percent yellow-page advertising and otherwise qualify as a printed sales message. The printer shipped copies by UPS to another company owned by the publisher, whose employees then hand-delivered them free to users.

The Board agreed that UPS involvement could satisfy the rule requiring a common carrier at some delivery stage. But that fact alone did not make the printer's sale exempt.

The affiliated distributor also had to be truly separate and distinct from the publisher—not merely one of its divisions—and had to qualify as a mailing house. That meant engaging for compensation in stamping, addressing, sealing, or otherwise preparing property for mailing. The opinion made exemption conditional on those facts and invited correction if its assumptions about the transaction were wrong.

What this means for you

Directory publishers, affiliated fulfillment companies, and tax professionals

Do not stop the analysis when a common carrier appears in the chain. Confirm who receives the printed materials, whether an affiliate is legally distinct, and whether it performs the compensated preparation activities required of a mailing house.

Common questions

Q: Did UPS participation satisfy the common-carrier element?

A: Yes, because the regulation required carrier involvement at some stage of delivery.

Q: Was carrier involvement enough for exemption?

A: No. The affiliated recipient also had to be separate from the purchaser and qualify as a mailing house.

Q: Would an internal distribution division qualify?

A: No under the opinion's stated condition; the distributor had to be a truly separate and distinct entity.

Q: What activities made the affiliate a mailing house?

A: For compensation, it had to stamp, address, seal, or otherwise prepare the property for mailing.

Citations and references

• California Sales and Use Tax Regulation 1541.5(a), (b), and (b)(5)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 432.0034
• Original supporting opinion: 432.0034 PDF

Original ruling text

432.0034

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

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

January 4, 1994

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Mr. C--- J. M--President
F--- D---, Inc.
P. O. Box XX,
---k, CA XXXXX-XXXX
Re:

SR --- XX-XXXXXX

Dear Mr. M---:
This is in reply to your October 26, 1993 letter regarding the application of sales tax to charges for a directory. You explained that you are a directory company which provides a local telephone directory to the --- area. We understand that the directory consists of more than 50 percent of yellow page advertising and qualifies as a printed sales message as defined at Sales and Use Tax Regulation 1541.5 at subdivision (a)(1). You did not explain the nature of your transaction; however, we assume that you sell advertising space in the directory, and you purchase the printing of the directories from a printer. If our assumption is wrong, please provide us with the correct facts, because this opinion would not apply to other facts. You note that the printer, which is an unrelated company, ships the directories by way of United Parcel Service (UPS) to another company which you own. Your company uses its employees to hand-deliver the directories to the ultimate user. You asked whether the shipment by way of UPS to the distribution company satisfies the common carrier requirement of Regulation 1541.5. Subdivision (b) of Regulation 1541.5 provides that tax does not apply to the sale or use of printed sales messages which are: (1)

Printed to the special order of the purchaser;

Mr. C--- J. M---

-2-

January 4, 1994
432.0034

(2)

Mailed or delivered by the seller, the seller's agent or a mailing house, acting as the agent for the purchaser, through the United States postal service or by common carrier;

(3)

Received by any other person at no cost to that person who becomes the owner of the printed material.

As you noted, subdivision (b)(5) of the Regulation provides it is only necessary that a common carrier be involved in some stage of the delivery to satisfy the common carrier requirement. Although we agree that shipment by UPS to a distribution company would satisfy the common carrier requirement of the regulation, that alone does not make the sale of the printed matter to you exempt. We believe that the printer's sale of the printed directories to you would be exempt provided that your "distribution company" is truly an entity separate and distinct from F--- D---, Inc., rather than a division of F--- D--- Inc., and is engaged in the business of stamping, addressing, sealing or otherwise preparing property for mailing for compensation to qualify as a "mailing house" as defined at subdivision (a)(3) of Regulation 1541.5. 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:plh