A monthly publication is distributed free of charge at over 250 locations, funded by advertisers who pay for ad space. The publisher currently pays tax on its own printing materials. Does the publisher instead qualify as a 'controlled-circulation' publication — letting it buy printing materials tax-free with a resale certificate and instead collect tax from advertisers — and do the advertisers owe tax on their ad space purchases?

Plain-English summary

A publisher distributes a monthly publication free of charge at over 250 locations around Austin, printed on 30-pound newsprint with 50-pound-paper covers, funded by advertisers who pay for ad space. The publisher currently pays sales tax on the materials used to print the publication and asked whether advertisers should instead owe tax on their advertising space purchases.

The Comptroller explained that the answer turns entirely on whether the publication qualifies as a "controlled-circulation" publication. Publishers of magazines given away for free generally owe tax on the taxable items (materials) they buy to produce the magazine. But publishers of TRUE controlled-circulation magazines get a different deal: they may use a resale certificate to buy production materials tax-free, while instead collecting tax from advertisers on the PREMIUM charged specifically for the guarantee that the magazine will reach a defined list of readers.

Citing the Third Court of Appeals decision in Sharp v. Cox Texas Publications, the Comptroller laid out the five-part test a publisher must satisfy to qualify as controlled-circulation: (1) the magazine is distributed to a specific list of readers; (2) the publisher guarantees advertisers the magazine will reach that list; (3) that reader list is actually provided to advertisers; (4) the advertiser contract states the advertisers are paying a PREMIUM above the normal cost of advertising specifically for that distribution guarantee; and (5) that premium is separately stated from the normal advertising cost/space charge.

Applying that test, the Comptroller found this publication did NOT appear to meet the controlled-circulation criteria — nothing in the facts suggested a specific reader list, a distribution guarantee to advertisers, or a separately-stated distribution-guarantee premium. As a result, the publisher (not the advertisers) must pay tax on the taxable items purchased to produce the publication. If an out-of-state printer doesn't collect Texas tax on printing charges, the publisher must self-accrue that tax and remit it directly, using the taxable purchases line on its own sales and use tax return.

What this means for you

Free-distribution publishers hoping to shift the tax burden to advertisers

Simply giving your publication away for free and charging advertisers for ad space does NOT automatically make you a controlled-circulation publisher. You need to affirmatively meet all five elements of the Sharp v. Cox Texas Publications test — a specific reader list, a distribution guarantee, providing that list to advertisers, and a separately-stated premium for the guarantee — or you'll continue owing tax on your own production materials.

Publishers using out-of-state printers

If your printer doesn't collect Texas sales tax on the printing charge, you're responsible for self-accruing and remitting that tax yourself via your sales and use tax return's taxable purchases line — don't assume an out-of-state printer's non-collection means no tax is due.

Accountants and tax professionals advising publishers

This letter is a clean, citation-backed walkthrough of the Sharp v. Cox Texas Publications five-part controlled-circulation test — useful for evaluating any free-distribution publication's tax posture, since the difference between "ordinary free magazine" (publisher pays tax on materials) and "controlled-circulation magazine" (advertisers pay tax on the distribution premium) hinges entirely on these specific contractual and structural facts.

Common questions

Q: Does giving a magazine away for free automatically make it a controlled-circulation publication?
A: No — it must separately satisfy all five elements from Sharp v. Cox Texas Publications: a specific reader list, a distribution guarantee to advertisers, providing that list to advertisers, a stated premium for the guarantee, and separately stating that premium from normal advertising costs.

Q: If my publication doesn't qualify as controlled-circulation, who pays sales tax — me or my advertisers?
A: You (the publisher) owe tax on the taxable items purchased to produce the publication; advertisers wouldn't owe tax on ordinary ad space purchases under this analysis.

Q: What if my out-of-state printer doesn't charge me Texas sales tax on the printing?
A: You must self-accrue and remit that tax directly to the Comptroller, via the taxable purchases line of your own sales and use tax return.

Q: What does a TRUE controlled-circulation publisher get to do differently?
A: It may use a resale certificate to buy production materials tax-free, but must then collect tax from advertisers on the specific premium charged for the reader-list distribution guarantee.

Q: Can I rely on this letter for my own publication?
A: No. It's based on the facts presented, and the letter notes the opinion may change on additional or different facts.

Citations and references

• Sharp v. Cox Texas Publications, 943 S.W.2d 206 (Tex. App.-Austin 1997, no writ) (five-part controlled-circulation magazine test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9803323L

Original ruling text

March 11, 1998

Dear **:

Thank you for your recent letter. You asked that we address the taxability of

your publication.

As I understand it, you publish a monthly publication. The publication is

distributed free of charge at over 250 locations throughout Austin. The

publication is printed on 30-pound newsprint. The covers are printed on

50-pound paper. Advertisers pay you for advertising space in the publication

and you pay tax on the cost of the materials used to publish the publication.

You asked if advertisers owe tax on the purchase of advertising space in the

publication.

The question of whether advertisers owe tax on the advertising space turns on

whether the publication is a controlled-circulation publication. Publishers of

magazines given away free of charge owe tax on taxable items purchased to

produce the magazine. Publishers of controlled-circulation magazines may issue

a resale certificate in lieu of paying tax on taxable items used to print the

magazine. However, the publisher must collect tax from the advertisers on the

premium charged for the guarantee to distribute the magazine to a specific list

of readers.

In a recent decision, the Third Court of Appeals (Sharp v. Cox Texas Publications,

943 S. W. 2d 206 (Tex. App.-Austin 1997, no writ) clarified the necessary

criteria publications must meet to qualify as controlled-circulation magazines.

A publisher of a controlled-circulation magazine must show that:

1. the magazine is distributed to a specific list of readers;

2. the publisher guarantees advertisers that the magazine will be delivered to

this list of readers;

3. the list of readers is provided to the advertisers;

4. the contract between the publisher and advertisers states that the

advertisers are paying a premium over and above the normal cost of advertising

for the guarantee that the magazines will be distributed to the qualified

readers list; and

5. the premium charge is separately stated from the normal cost of advertising

services and advertising space.

The publication you publish does not appear to meet the criteria of a

controlled-circulation magazine. Therefore, you must pay tax on the taxable

items you purchase to publish the publication. If the out-of-state printer

does not collect Texas tax on the printing charges, you must accrue tax on the

charges and remit the tax directly to this office. You may do so by including

the purchase price on the taxable purchases line of your sales and use tax

return.

This opinion is based on the facts presented. If there are any additional or

different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is

512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of

Public Accounts.

Sincerely,

Lindey Osborne

Sales Tax Policy Division