Does a retailer owe sales or use tax on cooperative direct-mail advertising materials produced and mailed by a third-party advertiser?
Plain-English summary
The Colorado Department of Revenue ruled that a retailer does not owe sales or use tax on advertising materials produced and mailed by a cooperative direct-mail advertiser — a company that bundles ads for several different businesses into one mailer (think the envelope of coupons from many local stores). The advertiser designs, prints (or hires printers), and mails the materials; the retailer reviews and approves the ads and pays a flat fee, but never takes possession or title of the printed pieces.
The Department concluded the advertiser — not the retailer — is the consumer of the materials, for two reasons:
- It's like a newspaper running inserts. A cooperative direct-mail advertiser aggregates several clients' ads and distributes them, just as a newspaper publisher does with advertising supplements. The common understanding is that the publisher provides an advertising service and owns the paper the ads are printed on — so the retailer isn't buying tangible property. The contracts here fit that view (one advertiser expressly said it owns the materials).
- The statute points the same way. Colorado excludes materials distributed by businesses engaged solely and exclusively in cooperative direct-mail advertising from the definition of "tangible personal property" (§ 39-26-102(15)(a)(I)) — and sales/use tax only reaches tangible personal property. By focusing on the advertiser's activity, the legislature treated the advertiser as the user/consumer, who provides a service rather than selling the materials. The Department's contemporaneous guidance said sales of these materials (by printers) to such advertisers are taxable — i.e., the advertiser is the taxable consumer.
The Department also clears up an old conflict: a 1977 advertising-agency regulation (Special Regulation 1) had treated direct-mail materials as sold to clients, but the later statute takes precedence over the regulation.
Important contrast: this applies to cooperative (multi-client) direct mail. A retailer that hires a company to design, print, and distribute its own catalogue is the owner of that catalogue and is liable for tax (Talbots, Inc. v. City and County of Denver, 928 P.2d 822 (Colo. App. 1996); see also PLR 11-004). The dividing line is whether the materials advertise many businesses (advertiser is consumer; client untaxed) or a single client (client is owner; client taxed).
What this means for you
Retailers and businesses that advertise by mail
If you participate in a shared mailer that promotes many businesses (coupon packs, "of-the-month" bundles), you generally don't owe Colorado sales or use tax on those materials — the advertiser is the consumer. But if you commission your own catalogue, flyer, or mailer (single-client), you're the owner and you owe use tax on it (and sales tax may apply to your purchase). How the piece is structured — multi-client vs single-client — drives the result.
Cooperative direct-mail advertisers and printers
The cooperative advertiser is the consumer of the materials, so the printer's sale to the advertiser is the taxable event. Price and document accordingly.
Accountants and tax professionals
Two independent grounds: the newspaper-insert "advertising service" characterization, and the statutory exclusion of cooperative direct-mail materials from "tangible personal property" (§ 39-26-102(15)(a)(I)), defined via § 39-26-102(2.7)/(2.8). Statute beats the older Special Regulation 1. Keep the single-client Talbots rule firmly distinct.
Common questions
Q: Do I owe Colorado tax on a shared coupon mailer my store appears in?
A: In this ruling, no. For cooperative direct-mail advertising (many businesses in one mailer), the advertiser is the consumer of the materials and the client retailer owes no sales or use tax.
Q: What about my own catalogue or flyer?
A: That's different. A single-client catalogue makes the retailer the owner, who is liable for use tax (and sales tax may apply) — the Talbots rule.
Q: Who pays the tax on cooperative mailers, then?
A: The cooperative advertiser, as the consumer of the materials — the printer's sale to the advertiser is taxable.
Q: Does this ruling apply to my business?
A: Not automatically. A private letter ruling binds the Department only for the taxpayer and facts it was issued to and cannot be relied on by anyone else. It shows the Department's reasoning; your facts may differ.
Q: Does this cover city sales tax?
A: No. The Department administers state and state-collected local taxes only; self-collected home-rule cities set their own rules — check with each.
Citations and references
Statutes, rules, and cases:
- § 39-26-102(2.7), C.R.S. (definition of cooperative direct mail advertising)
- § 39-26-102(2.8), C.R.S. (definition of direct mail advertising material)
- § 39-26-102(15)(a)(I), C.R.S. (tangible-personal-property definition excludes cooperative direct mail materials)
- § 39-26-104, C.R.S. (sales/use tax applies only to tangible personal property)
- Special Regulation 1 (advertising agencies; adopted 1977 — superseded here by the later statute)
- Talbots, Inc. v. City and County of Denver, 928 P.2d 822 (Colo. App. 1996) (single-client catalogue: retailer is owner, taxable); PLR 11-004
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-17-010.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
PLR 17-010
December 27, 2017
XXXXXXXXXXXXXXXX
Attn: XXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXX
Re: Tax on Direct Marketing Material
Dear XXXXXXXXXX,
You submitted a request for a private letter ruling on behalf of XXXXXXXXXXXXXXX
(“Company”) to the Colorado Department of Revenue (“Department”) pursuant to
Department Rule 1 CCR 201-1, 24-35-103.5. This letter is the Department’s private
letter ruling. This ruling is binding on the Department to the extent set forth in
Department Rule 1 CCR 201-1, 24-35-103.5. It cannot be relied upon by any
taxpayer other than the taxpayer to whom the ruling is made.
Issue
Is Company liable for sales or use tax on materials produced and mailed by a
third-party cooperative direct marketing advertiser that advertises for multiple
parties in the same mailer?
Conclusion
Company is not liable for sales or consumer’s use tax on materials produced
and mailed by a third-party cooperative direct market advertiser that advertises
for multiple parties in the same mailer.
Background
Company is a retailer of tangible personal property. Company hired two
cooperative direct mail advertisers1 (“Advertiser No. 1 and No.2” and
1
“Cooperative direct mail advertising” is defined as “advertising for one or more businesses
which is in the form of discount coupons, advertising leaflets, or other printed advertising
which are delivered by mail in a single package or bundle to potential customers of such
businesses participating in such advertising.” 39-26-102(2.7), C.R.S. “Direct mailing
advertising” is defined as “discount coupons, advertising leaflets, and other printed
advertising, including, but not limited to, accompanying envelopes and labels. 39-26102(2.8), C.R.S.
collectively referred to as “Advertisers”) to design, produce, and distribute
promotional material (“Materials”). Advertiser No. 1 produces printed Materials,
which are mailed directly to Company’s potential customers, as well as digital
postcards that are mailed or emailed to potential customers. Customers who
receive these email postcards can download and print them and present them
to Company to redeem promotions. Advertiser No. 2 produces printed
Materials and distributes them primarily by mail.
The contracts between Advertisers and Company are similar in many respects.
Company reviews and approves the Materials before Advertisers distribute the
Materials. Advertisers either print or engage third-party printers to print the
Materials. Company is not a party to the contract, if any, between Advertisers
and third-party printers.
Advertisers charge a flat fee, which does not separately state charges for
various goods and service components, such as the cost of design, printing, or
mailing. Company’s potential customers do not pay to receive the Materials.
Advertisers own the copyright for artwork, ad copy, and ad concept developed
and produced. Company grants Advertisers a non-exclusive license to use
Company’s artwork in the Materials. Advertiser No.2’s contract specifically
states that it is the owner of all Materials furnished by, or that represents the
creative work of, the Advertiser.
Discussion
The question presented in this request for ruling is whether the Company is
liable for sales or use tax for Materials designed, printed, and distributed by
Advertisers.2 More specifically, whether Advertisers are the users and
consumers of the Materials (and, therefore, liable for sales or use tax on their
purchase of Materials) or has Company purchased Materials from Advertisers
and, therefore, Company is liable for sales tax (for the purchase of the
Materials) or use tax (for the distribution of the Materials to Company’s potential
customers in Colorado). The Department concludes that Advertisers are the
consumers of the Materials. We rule so for two reasons.
First, cooperative direct mail advertisers are similar to newspapers that
distribute newspaper inserts. In both cases, a company aggregates the
advertisements for several clients and distributes them to potential customers.
The common understanding of newspaper advertisements, supplements, and
inserts printed by a newspaper is that the newspaper publisher is providing
advertising services to retailers, and that the newspaper publisher (and not the
retailer) is the owner of the paper on which the advertisements are printed.
2 See, §39-26-102(2.7) and (2.8), C.R.S. defining cooperative direct mail advertising and direct
mail advertising material.
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Cooperative direct mail advertising is similar in that the marketing company
aggregates several clients’ promotional material and distributes them to
potential customers. The same general perception applicable to newspapers
as providers of advertising services for retailers also applies to these
cooperative direct mail advertisers.3
This characterization of the transaction is also consistent with the terms of the
Company’s contracts. Advertiser No. 2 states that it is the owner of the
materials, which suggests that the Materials are not sold to the Company.
Advertiser No.1’s contract does not expressly state whether it is the owner of
the Material or whether there is a sale of the Materials to Company, but there is
no indication either in the contract itself or in the facts that suggests that
Company has possession or title to the Materials.
The second reason for concluding that Advertisers are providers of a service is
based on legislation addressing cooperative direct mail advertisers and direct
mail advertising. Prior to 2010, the Colorado legislature excluded direct mail
marketing materials distributed by persons who are engaged solely and
exclusively in cooperative direct mail advertising from the definition of “tangible
personal property.”4 By excluding these materials from the definition of tangible
personal property, the legislation exempted these materials from sales and use
tax.5 The statute defines the exemption in terms of the advertiser’s activity
(materials distributed by persons solely and exclusively engaged as
cooperative direct mail advertisers). One inference that can be drawn from this
focus on the advertiser’s activity is that the legislature assumed that the
advertiser is the user and consumer of the materials.6 This necessarily means
that they are providers of a service (advertising) and, more importantly, are not
selling the materials to either their client or to their client’s potential customers.
The Department issued guidance in response to this 2010 legislation and
stated that the sale of these materials (presumably by printers) to such
advertisers is now subject to tax. This guidance treats the cooperative direct
mail advertiser as the consumer of the materials.7 Given the assumption
3 We do not address here an advertising company engaged by a single client to distribute
advertisements. In Talbots, Inc. v. City and County of Denver, 928 P.2d 822 (Colo. C.A.
1996), the court ruled that a retailer who engages a company to design, print, and distribute
catalogues of retailer’s goods is the owner and purchaser of the catalogue.
4 §39-26-102(15(a)(I), C.R.S.
5 Sales and use tax generally only apply to the sale and use of tangible personal property. §3926-104, C.R.S.
6 This is not the only inference that is possible. If Advertisers were not considered consumers
of these materials, then the incidence of taxation for use tax would fall on Advertiser’s client.
This statute would also exempt purchases of the Materials by a client from Advertisers and
exempt the client’s use (distribution) of these materials in Colorado.
7 It is difficult to interpret this guidance otherwise. If the advertisers are reselling these
materials to their clients, then sales to advertisers are not taxable because they would be a
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underlying this guidance is that advertisers are providers of a service and given
that this interpretation is consistent with the statute’s language, the Department,
in the absence of convincing argument to the contrary, is not persuaded to
overturn its guidance given contemporaneously with the enactment of this
legislative change.
Finally, it is important to address Department Special Regulation 1, which
governs advertising agencies. This regulation essentially draws a distinction
between transactions in which the advertising agencies are providing nontaxable services (advertising) and transactions in which advertising companies
are selling tangible personal property. Among the materials that are considered
sold to the clients, and, therefore, subject to tax, are direct mail marketing
materials. This regulation was adopted in 1977, which is prior to the 1990
legislation that excluded direct mail advertising materials distributed by
cooperative direct mail advertisers from the definition of tangible personal
property. The statute takes precedence over the regulation.
For these reasons, we conclude that Company does not incur sales or use tax
liability pursuant to the contracts with Advertisers No. 1 and 2.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department.
Please note that the Department administers state and state-collected city and
county sales taxes and special district sales and use taxes, but does not administer
sales and use taxes for self-collected home rule cities and counties. You may wish
to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at
www.colorado.gov/revenue/tax for more information about state and local sales
taxes.
This ruling is premised on the assumption that Company has completely and
accurately disclosed all material facts. The Department reserves the right, among
others, to independently evaluate Company’s representations. This ruling is null and
void if any such representation is incorrect and has a material bearing on the
non-taxable purchase for resale and this legislation would have been unnecessary. Indeed,
in Service Merchandise and H.J. Wilson v Service Merchandise and H.J. Wilson v. Colo.
Dept. of Revenue, Colo. Dist. Ct., Dkt. No. 94-CV-3143, 5-31-95.. Colo. Dept. of Revenue,
Colo. Dist. Ct., Dkt. No. 94-CV-3143, 5-31-95., the retailer, not the printer / distributor, is the
owner of the material and was subject to use tax for those materials distributed in the city.
This case addressed a city’s ordinance but the discussion is informative. See, also, Colorado
Private Letter Ruling No. PLR-11-004, 06/15/2011 (client is owner of advertising materials
produced by an advertising agency, who engaged a third-party printer to print and mail the
material to recipients located outside Colorado). Clients of cooperative direct mail advertisers
are in contrast to a single retailer who is treated as the owner of catalogues printed and
distributed by an advertising company and, therefore, is liable for city use tax. Talbots Inc. v.
City and County of Denver, et al., 928 P.2d 822 (Colo. C.A. 1996)
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conclusions reached in this ruling. This ruling is subject to modification or revocation
in accordance to Department Regulation 24-35-103.5.
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this
redacted version of the ruling will be made public within 60 days of the date of this
letter. Please let me know in writing within that 60 day period whether you have any
suggestions or concerns about this redacted version of the ruling.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue
This ruling cannot be relied upon by any other taxpayer other than the taxpayer
to whom the ruling is made.
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