Did sweepstakes mailers promoting premium-rate 900-number calls and distributing retailer coupons have the principal purpose of advertising goods or services?

Plain-English summary

A direct-mail marketer bought mailers ex tax and distributed them free to the public. The mailers promoted a sweepstakes through premium-rate 900 telephone calls and included discount coupons from participating retailers. The Department argued that the contest, not goods or services, was the mailer's principal purpose.

The Appeals Section looked at the entire program rather than the mailer's appearance alone. The marketer earned its income when recipients called the 900 number, and the sweepstakes was a device for selling that service. The coupons also helped client retailers sell goods or services. The recommendation therefore treated the mailers' principal purpose as advertising or promoting services under section 6379.5.

Delivery remained a possible exception. Copies delivered to the petitioner could not qualify because the statute required the seller, seller's agent, or purchaser's mailing-house agent to send them through a carrier or the Postal Service directly to the recipient. The recommendation allowed the Department to seek reconsideration if that occurred.

The Appeals Section recommended granting the petition and deleting the disputed printing-expense item. The source does not disclose final Board action.

What this means for you

Direct marketers and tax professionals

Evaluate the business model and the mailer's role in generating revenue, not just whether a contest dominates its visual presentation. Separately trace delivery: purchaser possession can defeat the exemption even when the content qualifies.

Common questions

Q: Did promoting a sweepstakes automatically prevent exemption?

A: No. The sweepstakes was the means used to sell the 900-number service.

Q: Why did the full program matter?

A: It showed how the marketer earned money and how the mailer promoted both the phone service and coupon-supported retailer sales.

Q: Could copies delivered to the marketer qualify?

A: No. The statute required direct delivery to the donee through the specified channels.

Q: Was the recommendation final Board action?

A: The source does not show final action.

Citations and references

• California Revenue and Taxation Code § 6379.5
• California Sales and Use Tax Regulation 1541.5(a)(1)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 432.0071.400
• Original supporting recommendation: 432.0071.400 PDF

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

432.0071.400

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

)
)
)
)
)
)
)

D--- A--- M--- INC.
Petitioner

DECISION AND RECOMMENDATION

No. SR --- XX-XXXXXX-020

The Appeals conference in the above-referenced matter was held by Tax Counsel Steve Ryan on April 10, 19XX, in Santa Ana. Appearing for Petitioner:

Mr. B--- K--Chief Financial Officer
Mr. A--- F--Price Waterhouse

Appearing for the
Sales and Use Tax Department:

Mr. Ed Moore
Tax Auditor
Ms. Angela Vu
Supervising Tax Auditor

Type of Business: Direct mail marketing company
Protested Item
The protested tax liability for the period January 1, 1991 through June 30, 1994, is measured by:

Item

State, Local
and County

B. “Printing expenses subject to tax”

$7,692,913

Petitioner's Contentions
The printed sales message exemption applies.

Summary

D--- A--- M--- INC.
SR --- XX-XXXXXX-020

-2-

December 31, 1996
432.0071.400

Petitioner has operated as a direct mail marketing company which mails materials to others. The last Board audit covered a period which ended on December 31, 1989. The Board’s Sales and Use Tax Department (“Department”) established a use tax deficiency against petitioner. This tax is measured by petitioner’s ex-tax prices paid to suppliers to purchase mailers pursuant to resale certificates. However, rather than reselling those mailers, petitioner gifted them to the public in mass mailings. The auditor represented that all but one of the requirements of the printed sales message exemption were met by petitioner. The auditor focuses on the part of petitioner’s marketing actions regarding the printed sales message requirement that the mailers have the principal purpose of advertising or promoting goods or services (see Regulation 1541.5(a)(1)). A 2-page sample mailer is attached hereto as exhibit 1. The Department’s position is that a substantial portion of each mailer promotes/solicits a contest and the contest prizes through the use of 900 telephone numbers, but not goods or services. Also attached hereto is petitioner’s business marketing brochure (exhibit 2). Reference is made to the contents of the two exhibits for the particulars, including the subjects of the 900 telephone number and the discount coupons. The Department represented that as to these contests, petitioner was not paid by the retailers who supplied the discount coupons, but that petitioner received its sole income from its 900 telephone number services. The Department’s Legal Section concedes that petitioner’s offer of the 900 telephone number is a service within the meaning of the applicable statute (Revenue and Taxation code section 6379.5) and that this is a close case, but the principal purpose of the mailer is not to promote the 900 number service [a “secondary matter”] or to offer the $100 discount coupons, but merely petitioner’s contest itself which does not constitute goods or services. We note that two of the three purchase invoice copies in the audit workpapers indicate the requirement that the supplier ship the property to petitioner. We do not know if these invoices are related to the mailers in dispute. Analysis and Conclusions Although at first glance solely to the contents of the exhibit 1 mailer it might appear that advertising or promoting goods or services may not be the principal purpose thereof, an understanding of the entire situation in and for which the mailer is used shows that the principal purpose is the advertising and promoting of petitioner’s 900 telephone number services. Since the Department’s counsel concedes that such 900 telephone services constitute services within the meaning of section 6379.5, the exemption applies to petitioner (with one possible type of exception, infra).

D--- A--- M--- INC.
SR --- XX-XXXXXX-020

-3-

December 31, 1996
432.0071.400

The evidence, including the contents of the two exhibits, shows that the bottomline aspect of petitioner’s sweepstakes program is for petitioner to make money when people call the 900 telephone number. That is how it makes a profit, and that is the real reason why the program exists. The sweepstakes is just a gimmick to sell the 900 number services. Petitioner uses the sweepstakes scheme: (1) to sell its 900 number services so that it can make money; and (2) to distribute the discount coupons so that its client-retailer-marketers can also make money by having significantly more customers purchase their products or services (while redeeming the discount coupons). Through the scheme itself as well as the highlighted 900 number provisions on the mailer, those printed sales messages directly push the 900 number as the preferred method of response. Thus, although in a manner which is not immediately apparent in form, the principal purpose of petitioner’s mailers is to advertise or promote certain services. The one possible type of exception is any disputed printed matter which was delivered to petitioner. No exemption can then apply to petitioner’s cost thereof since the statute requires that the printed sales messages be delivered by the seller, seller’s agent, or a mailing house, acting as the agent for the purchaser, through a carrier or the U. S. Postal Service directly to the donee (Rev. & Tax. Code § 6379.5). The Department can file a request of reconsideration if that situation exists. Recommendations Grant the petition to delete audit item B.

_________
Steve Ryan, Tax Counsel

(w/Exhibits 1 & 2)

December 31, 1996
Date