Was a magazine with mostly free one-year subscriptions a controlled-circulation publication, and what Texas tax applied?

Plain-English summary

A publisher distributed a monthly voice-processing magazine mostly through free one-year subscriptions, while maintaining 800 to 1,000 paid subscriptions out of 23,000 total and listing subscription prices of $6 per issue or $24 per year.

The Comptroller said the publication was not a controlled-circulation magazine. Paid subscriptions had existed since the first issue, showing that it was published for subscription sale; the free subscriptions functioned like trial subscriptions.

Annual subscription sales were not taxable because the magazine was entered as second-class mail. The publisher nevertheless owed tax on the cost of free copies mailed to Texas subscribers. Manufacturing exemptions applied to magazines sold by subscription, but not to the free copies.

What this means for you

A publication does not become controlled circulation merely because most copies are currently free. In this letter, the continuing paid-subscription program controlled the classification, while free Texas copies remained taxable to the publisher at cost.

Common questions

Why was the magazine not controlled circulation? It had paid subscribers from the first issue and was offered for sale by single issue and annual subscription.

Were paid subscriptions taxable? No. The letter said yearly subscriptions to this second-class-mail magazine were not taxable.

What tax applied to free copies? The publisher owed tax on the cost of free copies mailed to in-state subscribers.

Did the manufacturing exemption cover every copy? No. It applied to subscription copies, not the free magazines.

Did the Texas Monthly court case matter? The memo said it applied to subscription sales made before August 28, 1989, while tax remained due on the free magazines.

Citations and references

• 34 Tex. Admin. Code Rule 3.299 — cited by the Comptroller's memo for the magazine classification
• Texas Monthly court case — discussed for subscription sales before August 28, 1989; the memo did not provide a reporter citation

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9106L1112E01

Original ruling text

DATE: June 3, 1991

TO: DEBORAH A NANCE, HOUSTON NORTH AUDIT, 2I30

FROM: Jo Ann Dieck, Tax Administration Division

SUBJECT: Magazines - Free Distribution vs. Controlled Circulation Rule 3.299

SITUATION: The taxpayer publishes a magazine of interest to the
voice processing market. This magazine has been distributed free of charge to
anyone interested in the voice processing industry. These "free" subscriptions
are generally one year in length. After the free subscription expires, readers
are invited to renew with a paid subscription. There are between 800 and 1000
paid subscriptions and 23,000 total subscriptions at this time. The taxpayer
has had a few paid subscriptions since the first issue. The taxpayer hopes to
expand the paid subscription customer base to 100%. Subscription rates are
listed in the back of the current magazine as $6 per single issue or $24 per
year in the U.S. The magazine is published monthly.

The taxpayer also sponsors and attends trade shows and conferences within
the industry. Their mailing lists are augmented by people signing up to receive
free subscriptions of the magazines at these events.

The taxpayer also sells tapes of conferences and special reports as
evidenced by ads in the current issue. Revenues to date have mainly been
attributable to the sale of ads in the magazine.

The magazine is actually printed and mailed directly from an outside
printer using the publisher's mailing list. Some copies are returned to the
publisher for distribution. All writing, ad sales, and layout work are done by
the publisher.

QUESTION: Is this magazine considered a "controlled circulation publication"?

ANSWER: This magazine is not a controlled circulation magazine. It is
published for the purpose of selling on a subscription basis as evidenced by
paid subscriptions since the first issue. The free subscription is like a trial
subscription that many magazine publishers offer.

QUESTION: What is the tax basis, if any, for the magazine?

ANSWER: The taxpayer owes tax on the cost of the magazines that are
mailed as "free" subscriptions to in-state subscribers. The magazines are
entered as second class mail and are sold on a yearly subscription; therefore,
sales of subscriptions to the magazine are not taxable.

QUESTION: Do manufacturing exemptions apply?

ANSWER: Manufacturing exemptions apply to the publishing of the magazines
sold on subscription, but not to the free magazines.

QUESTION: Does the Texas Monthly court case apply?

ANSWER: The Texas Monthly court case applies to subscription sales made
before August 28, 1989. The taxpayer owes tax on the cost of the free
magazines.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.