Were subscription fees for multiclient research reports taxable when the publisher first tested market demand and then sold reports to interested subscribers?

Plain-English summary

A research company periodically canvassed current and potential clients to see whether enough buyers were interested in a proposed study. If demand justified the investment, it completed the research and sold subscriptions. Each subscriber received five copies of the main report, additional copies on request without extra charge, and later follow-up reports when world events materially affected the conclusions.

California treated the company as selling printed reports, not custom research services. The projects were speculative and unfunded when undertaken, the customers did not agree to fund the research costs, and each buyer primarily sought the finished report's information value.

Tax therefore applied to the total subscription fee.

The primary and follow-up reports also did not qualify as exempt periodicals. The opinion viewed them as complete books rather than separate issues of a related publication.

The memorandum contrasted this arrangement with an ongoing original study performed under a specific commission and a single contract for project sponsors, which could support service treatment.

What this means for you

Research firms and publishers

Testing demand and later selling the same completed research to subscribers looked like publication sales, not commissioned research.

Accountants and tax professionals

Review who funds the study, when the obligation arises, whether customers commission the work, how many buyers receive it, copy quantities, update obligations, and periodical characteristics.

Common questions

Q: Was the subscription fee taxable?

A: Yes, in full.

Q: Were the follow-up reports exempt periodicals?

A: No.

Q: Could commissioned original research be treated differently?

A: Yes, if performed under the specific sponsored-project conditions described in the memorandum.

Citations and references

• California Sales and Use Tax Regulation 1590

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.1184
• Original supporting opinion: 515.1184 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Mateo - Auditing

From:

Charles J. Graziano

515.1184

Date:

March 29, 1984

This is in reply to your memorandum of January 17, 1984 with regard to the current audit of the above-referenced taxpayer. You request our opinion as to the correct application of tax to taxpayer’s multi-client research reports. We understand that the taxpayer conducts an ongoing research project entitled [a] and
[b]. At approximately one to one and one-half year intervals, the taxpayer furnishes its clients a written report and several “follow-up” reports. The follow-up reports are provided on an irregular basis, and only when there is a significant change in world events which has an effect upon the conclusions made in the previous report. Because of the costly nature of the research required to produce each primary report, the taxpayer determines the report’s marketability by canvassing both its current and prospective clients. Apparently, the taxpayer undertakes these research projects in response to the general needs and interests of a specific pool of potential customers. When there appears to be sufficient interest among this group of potential clients in the project to make the taxpayer’s investment worthwhile, the taxpayer will complete the research and produce a report on its findings. A customer obtains the final report by subscribing to taxpayer’s “service” and paying a predetermined fee. Each subscriber obtains five copies of the completed report with additional copies furnished upon request without an additional charge. Presumably, each client also receives the same number of “follow-up” reports when they are issued. Essentially, taxpayer contends that it only furnishes nontaxable services to its clients, and that the transfer of written reports is incidental to the performance of these nontaxable services. We would agree with taxpayer’s contention in this matter provided, however, the taxpayer actually performs an ongoing original research study in accordance with a specific commission, and that pursuant to a single contract the taxpayer delivers written report(s) to the sponsor(s) of the project. From the facts as we understand them, however, it does not appear that the taxpayer performs custom multi-client studies in which the customers agreed to fund the project’s cost. Instead, the taxpayer sells reports, which are based on unfunded or speculative research, to all interested persons.

San Mateo – Auditing

-2-

March 29, 1984
515.1184

With regard to taxpayer’s claim that it only furnishes nontaxable services to its client, it is our opinion that taxpayer’s services are not bargained for under the several subscription contracts, since the amount charged for each subscription does not represent the value of the services required to produce the reports. The real object sought by each buyer is the report itself which has an intrinsic value due to the information it contains. Taxpayer’s customers are not purchasing taxpayer’s services; instead, they are purchasing the reports produced by the services. Therefore, it is our opinion that the taxpayer is a seller of printed matter and that tax applies to the total fee charged for the reports. Furthermore, we are of the opinion that both the primary reports and follow-up reports do not qualify as tax exempt “periodicals” under Regulation 1590, since the reports appear to be more like books complete in themselves rather than separate issues of a related publication. As requested, we are returning to you all volumes and supplemental reports which you provided for our review.

CJG:ba
Enc.