A printer sold newspaper inserts/flyers to retail stores. Some inserts were delivered directly to newspapers for distribution, some went to a mailing service instead, and some were shipped out of state. Are any of these exempt from Texas sales and use tax, and should the assessed penalty and interest be waived?

Plain-English summary

This is a Comptroller's Decision (Hearing No. 34,249) resolving a sales-and-use-tax redetermination hearing for a printer that produced newspaper inserts, flyers, and advertising supplements for retail stores. The Comptroller had audited the taxpayer for January 1, 1991 through July 31, 1992 and issued a Notice of Tax Due. The taxpayer requested a redetermination hearing and, because it asked for the decision to be based on written submissions, an Administrative Law Judge (ALJ) decided the case on the paper record — and after the record was reopened to let the taxpayer supply more support, the taxpayer never responded.

The taxpayer raised three contentions:

1. Inserts delivered to a newspaper. The taxpayer argued some inserts sold to retail stores were exempt because they were shipped directly to a newspaper rather than to the stores themselves. Under Tax Code § 151.319(c), a handbill, circular, flyer, or advertising supplement printed to a customer's special order is exempt from sales tax if it is (a) printed for the exclusive purpose of being distributed as part of a newspaper, (b) actually distributed as part of that newspaper, and (c) delivered to the person responsible for distributing the newspaper — not to the customer. The taxpayer submitted two invoices with "run listings" showing that 59,031 inserts on each were actually delivered to a real newspaper. The ALJ agreed those specific invoiced inserts qualified and ordered the audit amended to delete them (citing § 151.319(c) and Rule 3.299(a)(4) and (5)). But the same run sheets also showed inserts delivered to a business the decision calls "MAILER" — described as a mailing service, not a newspaper — and those inserts did not qualify for the exemption and stayed in the audit.

2. Sales shipped out of Texas. The taxpayer also argued some sales to two other companies were exempt under § 151.330 because the goods were shipped outside Texas. The Tax Division had already agreed to delete those items if the taxpayer produced documentation showing the goods were shipped out of state by common carrier. The ALJ's recommendation simply held the Tax Division to that agreement, directing that any still-outstanding documentation be submitted during the exceptions period.

3. Waiver of penalty and interest. The taxpayer asked that penalty and interest be waived. This was denied. Under § 151.703(a), penalty is imposed automatically on tax not paid when due (typically totaling around 10% for a multi-year audit). Under § 111.103 and Rule 3.5 (adopted under § 111.002), the Comptroller may waive penalty or interest if the taxpayer showed "reasonable diligence," weighing factors like audit history, prior similar errors, whether returns were filed on time, and completeness of records — and interest waiver specifically requires evidence of Comptroller-caused delay, harmful reliance on Comptroller advice, or natural disasters. The taxpayer had no late returns, but it had been audited twice before with similar disallowed-deduction errors (error rates of 6.45% and 38.10% in the two prior audits) and had a 38.95% error rate in this audit, and it offered no evidence on any of the interest-waiver factors. The ALJ concluded the taxpayer had not exercised reasonable diligence, so no waiver was recommended.

The Comptroller (John Sharp) adopted the ALJ's decision in full as the final Order, making the taxpayer's liability (as set out in an attached schedule) due and payable within 20 days, with additional penalty and continuing interest if unpaid, and giving the taxpayer 20 days to file a Motion for Rehearing.

What this means for you

Printers and advertisers producing newspaper inserts

The exemption in § 151.319(c) is narrow and fact-specific: the insert must be custom-printed for a customer, made exclusively to be distributed as part of a newspaper, and physically delivered to whoever distributes that newspaper — not to the retail customer who ordered it, and not to a mailing house or other intermediary. This decision shows that even within the same order/invoice, some units can qualify (those actually delivered to the newspaper) while others on the identical invoice do not (those delivered to a mailing service), so you need delivery records (like the "run listings" used here) tying specific quantities to an actual newspaper distributor.

Retailers and businesses relying on the out-of-state shipment exemption (§ 151.330)

An agreement by the Comptroller's Tax Division to remove out-of-state sales from an audit is conditioned on the taxpayer actually producing proof — documentation showing the items were shipped out of Texas by common carrier. Without that paperwork, the exemption doesn't apply no matter what the underlying facts might have been.

Businesses facing an audit and hoping for penalty/interest relief

Waiver of penalty or interest is discretionary and evidence-driven. A clean record of timely-filed returns helps, but it isn't enough on its own — the Comptroller also weighs your audit history (repeat errors across audits count against you) and, for interest specifically, requires evidence of Comptroller-caused delay, harmful reliance on Comptroller advice, or a natural disaster. Silence on those points, as happened here, results in denial.

Common questions

Q: Are all newspaper inserts sold by a printer exempt from Texas sales tax?
A: No. Only inserts that are printed to special order, made exclusively for distribution as part of a newspaper, actually distributed as part of that newspaper, and delivered to the newspaper's distributor (not the customer) qualify under § 151.319(c).

Q: What happened to the inserts delivered to a mailing service instead of a newspaper?
A: They remained taxable. The decision specifically found that "MAILER is not a newspaper, but is a mailing service," so those deliveries did not qualify for the § 151.319(c) exemption even though they appeared on the same invoices and run sheets as the exempt newspaper deliveries.

Q: Were the sales the taxpayer claimed were shipped out of state automatically exempt?
A: No. The Tax Division agreed to delete those sales only if the taxpayer submitted documentation proving the items were shipped out of Texas by common carrier under § 151.330. The recommendation left it to the taxpayer to supply that proof during the exceptions period.

Q: Why were penalty and interest not waived even though the taxpayer had no late returns?
A: Because the ALJ found the taxpayer had not exercised "reasonable diligence" overall — it had similar disallowed-deduction errors in two prior audits, a 38.95% error rate in the current audit, and offered no evidence of Comptroller delay, harmful reliance on Comptroller advice, or natural disasters, which are the factors considered for interest waiver under Rule 3.5.

Q: What is the practical effect of the Comptroller's Order at the end?
A: The ALJ's decision was adopted in full. The taxpayer's remaining liability became due and payable within 20 days of the Order, with an additional 10% penalty and continuing interest if not paid in time, and the taxpayer had 20 days to file a Motion for Rehearing if it disagreed.

Q: Can another taxpayer rely on this decision for their own newspaper insert sales?
A: This is a redetermination decision resolving one taxpayer's specific audit and factual record; it illustrates how the Comptroller applies § 151.319(c) and § 151.330 but is not a substitute for a ruling addressed to your own facts.

Citations and references

• Tex. Tax Code § 151.319(c) (exemption for newspaper inserts/handbills/circulars/flyers/advertising supplements delivered to the newspaper distributor)
• Tex. Tax Code § 151.330 (exemption for sales shipped outside Texas by common carrier)
• Tex. Tax Code § 151.703(a) (automatic penalty on tax not paid when due)
• Tex. Tax Code § 111.103 (discretionary waiver of penalty or interest)
• Tex. Tax Code § 111.002 (Comptroller's rulemaking authority)
• 34 Tex. Admin. Code Rule 3.299(a)(4) and (5) (newspaper insert exemption)
• 34 Tex. Admin. Code Rule 3.5 (factors considered for penalty/interest waiver)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606H1416G06

Original ruling text

HEARING NO. 34,249

IN RE**
TAXPAYER NO.: *
AUDIT OFFICE: ****
AUDIT PERIOD: 01/01/91 THROUGH 07/31/92

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

ELIZABETH WILSON DAVIS
Administrative Law Judge

EDWARD WOOLERY-PRICE
Representing Tax Division

Representing Taxpayer

COMPTROLLER'S DECISION

PRELIMINARY DISCUSSION:

At Petitioner's request, the Administrative Law Judge (ALJ) based this
Comptroller's Decision on a review of the parties' written submissions.

The ALJ took official notice of all records of the Comptroller's office
that pertain to the Petitioner and the issues involved in the case. Unless
otherwise indicated, all Section references are to Title 2, Texas Tax Code Ann.
(Vernon 1992). References to Rules are to sections of Title 34, Texas
Administrative Code.

The record in this hearing was reopened by an Order issued on March 29,
1996. The Order allowed Petitioner additional time to provide the legal and
factual grounds in support of items that it was contesting. Petitioner did not
respond to that Order. Thus, this Proposed Decision is based on the ALJ's best
understanding of the pleadings and documents in the hearing file, which do not
clearly state the contested issues other than waiver of penalty and interest.

The Tax Division agreed to delete sales to **and **
if documentation is submitted to show that the items were shipped out of Texas.

CONTENTIONS OF PETITIONER:

1. Petitioner contends that some of the inserts sold to
   *****("STORES") were exempt because the inserts were shipped directly to
   a newspaper.

2. Petitioner contends that some of its sales to **
   and** were exempt under 151.330 because they were shipped outside of
   Texas.

3. Petitioner contends that penalty and interest should be waived.

FINDINGS OF FACT:

1. Petitioner prints newspaper inserts for retail stores. Many of
   the inserts were shipped directly to newspapers and not included in the audit.

2. The Comptroller audited Petitioner for sales and use tax
   compliance for the period from January 1, 1991, through July 31, 1992. On
   August 3, 1994, the Comptroller issued the Petitioner a Texas Notice of Tax Due
   in the amount of $*****, including tax, penalty, and interest through the
   date of the Notice. The Petitioner timely requested a redetermination hearing.

3. The Tax Division agreed to delete items sold to ** and
   ** if documentation is submitted to show that the items were shipped
   out of Texas.

4. The auditor made adjustments in the audit for additional
   taxable sales of newspaper inserts.

5. Petitioner submitted invoice no. * to STORES dated
   November 7, 1991, with a "run listing" showing that 59,031 of the inserts
   purchased by the STORES on that invoice were delivered to the NEWSPAPER, a
   newspaper, on November 13, 1991. Petitioner submitted invoice no. *****
   to STORES dated September 30, 1991, with a "run listing" showing that 59,031 of
   the inserts purchased by the STORES on that invoice were delivered to the
   NEWSPAPER on October 2, 1991. The two run sheets also included deliveries of
   inserts to Beaumont Enterprise/Shopp ("MAILER"). MAILER is not a newspaper,
   but is a mailing service.

6. Petitioner filed no late returns during the audit period.

7. Petitioner was previously audited for the period from April 1,
   1985, through April 30, 1987, and from May 1, 1987, through December 31, 1990.
   Both the prior audits had similar errors relating to disallowed deductions.

8. Petitioner's overall error rate in the current audit was
   38.95%. [FOOTNOTE: Overall error rates were computed by comparing the combined
   total of tax assessed on sales and purchases to the combined total of reported
   tax on sales and purchases and assessed tax on sales and purchases.]

9. Petitioner's overall error rate in the 1985-1987 audit was
   6.45%, and, in the 1987-1990 audit, it was 38.10%.

10. Petitioner presented no evidence of a change in comptroller
    policy during the audit period relating to the items assessed in the audit.

11. Petitioner presented no evidence regarding the following: (1)
    undue delay caused by Comptroller personnel; (2) reliance on advice provided by
    the Comptroller's office that caused imposition of penalty and interest; and
    (3) natural disasters.

CONCLUSIONS OF LAW AND DISCUSSION:

Petitioner's first contention should be granted in part and denied in part.

Petitioner contends that some of the inserts sold to ***** ("STORES")
were exempt because the inserts were shipped directly to a newspaper.

Section 151.319(c) provides as follows:

A transaction involving the sale of a handbill, circular, flyer,
advertising supplement, or similar item that is printed to the special order of
a customer is exempted from the taxes imposed by this chapter if the item is
printed for the exclusive purpose of being distributed as a part of a
newspaper, is actually distributed as a part of the newspaper, and is delivered
to the person who is responsible for the distribution of the newspaper in which
the item is distributed and not to the customer.

Petitioner submitted invoice no. * to STORES dated November 7,
1991, with a "run listing" showing that 59,031 of the inserts purchased by the
STORES on that invoice were delivered to the NEWSPAPER, a newspaper, on
November 13, 1991. Petitioner submitted invoice no. ***** to STORES
dated September 30, 1991, with a "run listing" showing that 59,031 of the
inserts purchased by the STORES on that invoice were delivered to the NEWSPAPER
on October 2, 1991.

Based on 151.319(c), the audit should be amended to delete the inserts
on these invoices that were delivered directly to the NEWSPAPER. Also see,
Rule 3.299(a)(4) and (5).

But the inserts delivered to MAILER should not be deleted from the
audit because MAILER is not a newspaper, but a mailing service, and the sale
does not qualify for the exemption found in 151.319(c).

In its second contention, Petitioner contends that some of its sales to
Advo Dallas and Advo Houston were exempt under 151.330 because they were
shipped outside of Texas. The Tax Division agreed to delete items sold to
** and ** if documentation is submitted to show that the
items were shipped out of Texas by use of a common carrier. If this
documentation has not been submitted to the Tax Division, it should be
submitted during the exceptions period. Additionally, the ALJ requests the Tax
Division, during the exceptions period, to identify the audit schedule and the
record no. for these sales .

Petitioner's third contention should be denied.

Section 151.703(a) automatically imposes a penalty on taxes not paid
when due. The penalty is imposed incrementally; five percent on taxes not paid
when due, and an additional five percent on taxes not remitted within thirty
days after they are due. Since most audits cover between three and four years,
the penalty is generally ten percent of the assessed tax.

Section 111.103 provides the Comptroller discretionary authority to
waive penalty or interest upon making a determination that a taxpayer exercised
reasonable diligence to comply with the tax laws during the audit period.

Under the authority of Section 111.002, the Comptroller promulgated
Rule 3.5 setting out certain factors to consider in determining whether a
taxpayer exercised reasonable diligence. General Rule 3.5(d) states, "When
reviewing an interest waiver request under ... this rule or in a contested
case, the following factors regarding a taxpayer's account will be considered:
(1) undue delay caused by Comptroller personnel; (2) reliance on advice
provided by the Comptroller's office which caused imposition of penalty and
interest; and (3) natural disasters."

The record contains no evidence regarding these factors; thus, interest waiver
must be denied.

General Rule 3.5(a)(1) provides that "[p]enalty or interest on an audit
liability may be waived if the taxpayer exercised reasonable diligence to
comply with the tax laws of this state...."

General Rule 3.5(c) sets out the factors to be considered when
reviewing a request for penalty waiver as follows:

(1) the taxpayer's audit history;
(2) the tax issues involved;
(3) a change in comptroller policy during the audit period;
(4) size and sophistication of the taxpayer;
(5) whether tax was collected but not remitted;
(6) whether returns were timely filed;
(7) completeness of records;
(8) delinquencies in other taxes; and
(9) reliance on advice provided by the comptroller's office which
caused imposition of penalty and interest.

The ALJ concludes that penalty should not be waived because the
Petitioner has not exercised reasonable diligence based on the factors
discussed above. Although Petitioner had no late returns during the audit
period, Petitioner had similar errors in two prior audits and still has an
overall error rate in the current audit of 38.95%.

RECOMMENDATION:

Based upon the findings of fact, conclusions of law, and discussion
contained herein, the ALJ recommends the following:

1. The assessment should be amended to delete the newspaper
   inserts determined in Conclusions of Law, contention one, to be delivered to
   the NEWSPAPER.

2. The assessment should be amended to make any agreed deletions
   in the Tax Division's Position Letter dated July 28, 1995, if Petitioner
   submits the documentation requested by the Tax Division in the Position Letter.
   See Conclusions of Law, contention two.

3. Penalty and interest not be waived.

SIGNED this the 13th day of June, 1996.

ELIZABETH WILSON DAVIS
Administrative Law Judge

Hearing No. 34,249

ORDER OF THE COMPTROLLER

The above decision of the Administrative Law Judge, resulting in
Petitioner's liability as set out in Attachment A, which is incorporated by
reference, is approved and adopted in all respects. This decision becomes
final twenty (20) days from the date of this Order, and the total sum of the
tax, penalty and interest amounts is due and payable within twenty (20) days
thereafter. If such sum is not paid within such time, an additional penalty of
ten percent of the taxes due will accrue, and interest will continue to accrue.

If a rehearing is desired, a Motion for Rehearing must be filed with
the clerk of the Administrative Law Judges within twenty (20) days from the
date of this Order, and must state the grounds upon which the motion is based.

RENDERED and ISSUED this 13th day of June, 1996.

JOHN SHARP
Comptroller of Public Accounts
of the State of Texas

NOTE: Previous Accession Number 9606345H