Presenting a live 110‐minute teleconference with interactive Q&A
Direct Mail Advertising and Sales Tax Challenges: Navigating Differing State Policies
Tracking and Managing Exemption, Nexus, Sourcing, Use Tax and Other Related Issues
THURSDAY, JULY 28, 2011
1pm Eastern
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12pm Central | 11am Mountain
|
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Today’s faculty features:
Don Fuga,
Fuga Principal Tax Research Analyst,
Analyst Vertex Inc.,
Inc. Berwyn,
Berwyn Pa
Pa.
Joseph Geiger, Senior Tax Consultant, Vertex Inc., Berwyn, Pa.
Martin Eisenstein, Member, Brann & Isaacson, Lewiston, Maine
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Direct Mail Advertising and Sales Tax Ch ll
Challenges: Navigating Differing State N i ti Diff i St t Policies Seminar
July 28, 2011
Don Fuga, Vertex Inc.
don.fuga@vertexinc.com
Martin Eisenstein, Brann & Isaacson
meisenstein@brannlaw.com
Joseph Geiger, Vertex Inc.
joseph.geiger@vertexinc.com
Today’s Program
Introductory Concepts
[Don Fuga]
Slide 7 – Slide 14
Examples Of Specific State Treatments
[Joseph Geiger]
Slide 15 – Slide 31
Nexus Issues
[Martin Eisenstein]
Slide 32 – Slide 41
Printer's Liability To Charge Tax
[Martin Eisenstein]
Slide 42 – Slide 51
How SSTP Treats Certificates Printers May Need
[Don Fuga]
Slide 52 – Slide 53
Don Fuga, Vertex Inc.
INTRODUCTORY CONCEPTS
Definition SSUTA Agreement
 “Direct mail” means printed material delivered or distributed by U.S.
mail or other delivery
y service to a mass audience or to addressees on
a mailing list provided by the purchaser or at the direction of the
purchaser, when the cost of the items are not billed directly to the
recipients. “Direct mail” includes tangible personal property supplied
directly or indirectly by the purchaser to the direct mail seller for
inclusion in the package containing the printed material. “Direct mail”
does not include multiple items of printed material delivered to a single
address.
dd
8
Definition Qualifiers That Broaden Scope
 Included in the definition is the term “advertising materials,” examples
of which include the following:
 Video and audio tapes
 Pens
 Key rings
 Computer disks
 Coffee mugs
9
Definition Qualifiers That Limit Scope
 Examples of qualifiers that limit scope include the following:
 Method of delivery limited to the U.S. Postal Service
 Specify only limited printed materials (e
(e.g.,
g include or exclude
catalogs)
 Exclude advertising materials
 Limit printed matter content to price and item
 Limit to free publications published on a regular basis
 Exclude multiple items of printed matter
 Limit exemption to cooperatives
10
Examples Of Printed Material That Qualify
 The following items are generally considered to qualify but some may
be excluded in certain jurisdictions:
 Mail
M il order
d catalogs
t l
 Advertising circulars
 Coupons
 Advertising folders
 Printed envelopes
 Electoral literature
 Newspaper inserts
 One-time license fee for a mailing list
11
Examples Of Items That May Not Qualify
 The following items are generally not considered to qualify, but some
may in certain jurisdictions:
 Advertising
g materials ((unless allowed by
y definition))
 Stockholder reports
 Personalized information
 Legally required mailings
 Privacy notices
 Informal informational literature that is not in the form of
advertising
d ti i
12
Typical Tax Issues For Taxpayers
 Does the advertising printed matter or materials qualify for an
exemption and if so, in which jurisdictions?
 Is p
postage
g exempt
p and if so, in which jjurisdictions?
 Does the printer have the ability to charge the appropriate tax where
applicable?
 Does my IT system have the ability to accrue the correct use tax when
the printer fails to charge the appropriate tax?
 What is the correct exemption certificate to issue the printer, where
applicable?
 Are there storage issues with direct mail advertising literature or
materials?
 Are my records adequate to sustain exempt transactions?
13
Typical Tax Issues For Printers
 Does my IT system have the ability to charge the appropriate tax?
 Does the mailing list received from my customer contain information
needed to comply with sourcing rules?
 What exemption certificates are acceptable?
 Are there storage issues with direct mail literature?
14
Joseph Geiger, Vertex Inc.
EXAMPLES OF SPECIFIC STATE TREATMENTS
Defining Direct Mail Advertising
 “Direct mail advertising” includes catalogs, letters, circulars, brochures,
and p
pamphlets
p
that consist of p
printed sales messages
g if the advertising
g
material is printed to the purchaser’s special order; delivered by the
seller, the seller’s agent or a mailing house acting as the purchaser’s
agent, via mail or common carrier; and received by any other person
who becomes the owner of the material at no cost to the recipient.
16
Taxability Of Direct Mail Advertising
 Direct mail advertising is taxable in most states.
 Direct mail advertising is generally not taxable in the following states:
 CA
 MO
 NY
 OH
 PA
17
California
 An exemption exists for the gross receipts from the sale of, and the
storage,
g , use,, or other consumption
p
in California of catalogs,
g , letters,,
circulars, brochures, and pamphlets that consist substantially of printed
sales messages for goods and services and are printed to the special
order of the purchaser and mailed or delivered by the seller, the seller's
agent, or a mailing house, acting as an agent for the purchaser,
through the U.S. Postal Service or by common carrier to any other
person at no cost to that person who becomes the owner of such
printed
i t d sales
l messages. (S
(Sec. 6379
6379.5,
5 R
Rev. & T
Tax C
Code)
d )
18
Florida
 Exempt are free,
free circulated publications
publications, the content of which is
primarily advertising, that are published on a regular basis and
distributed through the mail. (Fla. Stat. Sec. 212.08(7)(w))
19
Iowa
 Envelopes used to contain advertising materials are exempt. (Rule
701-18.41 (422, 423))
20
Kentucky
 Effective July 1, 2011, commercial printers or mailers engaged in
business in Kentucky are not required to collect use tax on sales of
printing, "advertising and promotional direct mail," or "other direct mail"
printed outside Kentucky and delivered outside Kentucky to the U.S.
Postal Service for mass mailing to third-party Kentucky residents who
are not purchasers of the mail if the commercial printers or mailers (1)
maintain
i t i records
d related
l t d tto th
those sales
l tto assist
i t th
the K
Kentucky
t k
Department of Revenue in the collection of use tax, and (2) file sales
and use tax reports if requested to do so by the department. (KRS Sec.
139 365(1)) If a commercial printer or mailer meets these two criteria
139.365(1))
criteria,
the purchaser of the printing or mail is solely responsible for reporting
and paying use tax. (KRS Sec. 139.365(2))
21
Louisiana
 Catalog distribution exemption: No sales or use tax shall be imposed
by the state or any political subdivision on the value of catalogs
distributed, or intended for distribution in the state, without charge to
the recipient.
p
((La. Rev. Stat. Sec. 47:305.49))
22
Maryland
 Charges for printing direct marketing materials are taxable. Tax
applies to the total charge without deduction for separately itemized
charges for property or services required to bring the printed matter to
its completed state. (Sec. 11-101(m), Tax Gen. Art.; Reg.
03.06.01.11(A))

Sales of direct mail advertising literature and mail order catalogues
that will be distributed outside the state are exempt. Sales of
computerized mailing lists are also exempt to the extent used for the
purpose of providing addresses to which direct mail advertising
literature and mail order catalogues will be distributed outside the state.
(Sec 11-215(d)(1)
(Sec.
11 215(d)(1), Tax Gen.
Gen Art.)
Art )
23
Minnesota
 Non-taxable advertising is creative promotional services that meet
three criteria: (1) there is no functional use of the medium except to
carry the message, (2) the agency must be involved in the creation of
advertising, and (3) the agency must have a direct relationship with the
advertiser. When the three nontaxable advertising criteria are met,
direct mail advertising materials are among a group of items, used to
promote
t or advertise,
d ti
that
th t are usually
ll considered
id d tto b
be nontaxable
t
bl
advertising services.
 Charges for delivery and distribution of direct mail are exempt from
Mi
Minnesota
t sales
l and
d use ttax if th
they are separately
t l stated.
t t d (S
(Sec.
297A.68(36), Min. Stat.) Separately stated fees for preparing direct
mail for delivery or distribution are also exempt. (Revenue Notice No.
07 07 Minnesota Department of Revenue
07-07,
Revenue, April 30
30, 2007)
24
Missouri
 In general, if a sale of advertising involves the transfer of tangible
personal property, it is a sale of tangible personal property subject to
tax unless it is preliminary art or the sale is made by an exempt
business. If the sale is made by an exempt business, the transaction is
the sale of a service and is not subject to tax when the true object of
the sale is the advertising. When the true object of a sale by an exempt
b i
business
iis ttangible
ibl personall property,
t it iis subject
bj t tto ttax. (12 CSR 10
10103.610(1))
25
New York
 Printed advertising materials mailed or shipped to customers or
prospective customers of the purchaser of the such materials are
exempt
p from tax. The p
printed p
promotional materials can be mailed or
shipped directly by the purchaser of the materials using a common
carrier, the U.S. Postal Service or a like delivery service, or the mailing
or shipping can be arranged by a third party (such as a printer/mailer)
on behalf of the purchaser. There must be no charge to the purchaser's
ultimate recipient for the printed advertising materials. Finally, the
purchaser of the materials is expected to provide a properly completed
F
Form
ST-121.2,
ST 121 2 Certificate
C tifi t off Exemption
E
ti for
f Purchases
P h
off Promotional
P
ti
l
Materials, to the seller of the materials. (N. Y. Tax Law Sec.
1115(n)(4))
26
Ohio
 Exempt are sales where the purpose of the consumer is to use or
consume the things transferred in making retail sales
sales. Examples of
such items are newspaper inserts, catalogues, coupons, flyers, gift
certificates, or other advertising material that prices and describes
tangible
g
p
personal p
property
p y offered for retail sale. ((Rev. Code Ann. Sec.
5739.02(B)(35))
27
Pennsylvania
 Exempt are advertising literature or materials that are distributed
directly to intended recipients through the United States Postal Service.
Advertising literature or material is defined as tangible personal
property that is intended to promote business interest, create goodwill
or engage the attention or interest of a recipient. Included in this term
is printed matter, brochures, calendars, price lists, investment
prospectuses,
t
financial
fi
i l and
d corporate
t annuall reports,
t electoral
l t l
literature or materials, envelopes, address labels, reply envelopes, and
application forms. (Reg. Sec. 31.29)
 Advertising literature or materials that are distributed in a manner other
than by the United States Postal Service are taxable.
28
Wisconsin
 A Wisconsin sales and use tax exemption was created in 2007
Wisconsin Act 20 ((effective April
p 1,, 2009)) for the g
gross receipts
p from
the sale of and the storage, use, or other consumption of catalogs, and
the envelopes in which the catalogs are mailed, that are designed to
advertise and promote the sale of merchandise or to advertise the
services of individual business firms. (Wis. Stat. 77.54(25m))
29
West Virginia
 Exempt are sales of advertisements of goods and services in
preprinted advertising circulars; provided, that pre-printed advertising
circulars shall include the purchase of direct-mailing advertising
services,, but does not include wholesale,, and retail catalogs
g through
g
which tangible personal property, and services may be directly ordered.
(Reg. Sec. 110-9.9(2)(4))
30
Summary
 State exemptions and qualifying conditions cover a broad spectrum.
 Types of advertising materials (catalogs, envelopes, etc.)
 Method of distribution (U
(U.S.
S Postal Service)
 Manner in which charges are stated on invoices
31
Martin Eisenstein, Brann & Isaacson
NEXUS ISSUES
N
Nexus Issues: General
I
G
l
• Quill (504 U.S. 298 (1992)) sets the
constitutional standard.
• Q
Quill
ill requires
i
th
thatt a retailer
t il h
have a physical
h i l
presence.
• Through its own employees,
employees properties or
facilities
• Attribution nexus: Agent/representative.
Agent/representative
33
N
Nexus Issues: General (Cont.)
I
G
l (C
)
• Q
Quill states (q
(quoting
g Bellas Hess):
)
• There is a “sharp distinction … between mail-order sellers with
retail outlets, solicitors, or property within a state and those
who do more than communicate with customers in the state by
and or common carrier as a part of general interstate
business.” (505 U.S. at 307) (emphasis added)
•
Few court cases regard
d presence off iinventory
•
Advance Magazine Publishers, Inc. v. Huddleston, Chancery Court, 20th
Judicial District (Tennessee), ¶ 400-560, (Aug. 20, 1997) – Presence of
i
inventory
off paper at printer
i
d
does not establish
bli h ffranchise
hi tax nexus.
•
But. see statement in Quill that Quill did not have nexus because it did
not own tangible personal property; also see AOL v. Johnson (Tenn. Ct.
App 2002) (Presence of modems in state creates nexus.)
App.
nexus )
34
N
Nexus Implications To Mailer
I
li i
T M il
•
Storage of paper
•
Most large promotional materials mailers contract with
paper brokers or directly with mills to purchase paper and
cause paper to be supplied to the printer or printers.
•
Paper must be stored at the printer for short or longer
periods.
periods
•
Storage of paper creates a high nexus risk in the state of
the printer, but an argument can be made otherwise.
•
See previous slide
•
Does the activity “make a market” in the state for the out-of-state
mailer? (see Tyler Pipe Industries, Inc. v. WA. State Dept. of Revenue
483 U.S.
U S 232 (1987)
35
Nexus Implications To Mailer (Cont.)
l
l (
)
•
Solutions
•
Transfer of title to printer
•
Accomplished with bill of sale and invoice price from
printer; includes cost of paper (avoid up-charge or paper
management fee)
•
Need accounting for paper
•
But, note potential issue for materials distributed in
Indiana: See Ameritech Publ’g, Inc. v Ind. Dep’t of State
) No. 49T10-0305-TA-26, slip
p op.
p ((Ind. Tax Ct.
Revenue ((API I),
Oct 19, 2006) and AOL , LLC v Ind. Dep’t of State Revenue,
No. 49T10-0903-TA-7, slip op. (Ind. Tax Ct. Dec. 29, 2010)
•
Since catalogs/promo materials are purchased, they will be
taxable, as opposed to non-taxability of printing services.
36
Nexus Implications To Mailer (Cont.)
l
l (
)
•
S l ti
Solutions
re: paper storage:
t
P
Print
i t iin states
t t with
ith safe
f h
harbors
b
STATE
Connecticut
Florida
g
Georgia
Illinois
Indiana
Kentucky
Maine
Minnesota
STATUTE – REGULATION ‐ CODE
CGA §§ 12‐407(15)(b)
( )( )
FL ST § 212.0596(2), 212.06(2)(d) Technical Assistance Advisement, No. 06A‐03
OCGA § 48‐8‐2, 48‐7‐1
,
35 ILCS § 105/2(1), 35 ILCS § 5/205(f)
IN Code § 6‐2.5‐3‐1, 6‐2.5‐8‐8.5, 6‐3‐2‐2.3
KRS § 139.340(2), 139.470(13)
36 MRSA § 1754‐B(1)(G)(5)
MN ST § 297A.66 (Subdivision 3)(b)
37
Nexus Implications To Mailer (Cont.)
l
l (
)
•
S l ti
Solutions
re: paper storage:
t
P
Print
i t iin states
t t with
ith safe
f h
harbors
b
STATE
Ohio
Oklahoma
y
Pennsylvania
South Carolina
Utah
Virginia
West Virginia
Wisconsin
STATUTE – REGULATION ‐ CODE
ORC §§ 5741.17, 5733.09(D), 5747.30b
,
( ),
68 OS § 1376
72 PS § 7201
SC Code § 12‐36‐75, § 12‐6‐555
UT Code § 59‐7‐102(2)
VA Code § 58.1‐401(7), 58.1‐612(D)
TAA 96‐003
WSA § 77.51(13h), 71.23(3)
38
Nexus Implications To Mailer (Cont.)
l
l (
)
•
Possible limitations on safe harbors
•
Maine and Minnesota do not specifically permit storage of paper
at printer.
•
Storage of catalogs is not necessarily exempt.
•
Don’t take title to catalogs or mailings until sent by
interstate commerce, and not when invoiced by printer
•
Visits by personnel of mailer to state may not be protected in
Florida, Kentucky, Maine and Minnesota, because the safe
harbor provisions in the statutes don’t address whether visits
create nexus.
nexus
•
Constitutional argument: Infrequent visits to state don’t create
nexus. (See Dept of Rev. v. Share International, Inc. 676 So.2d. 1362 (Fla.
1996), Appeal of Intercard, Inc., 14 P.3d 1111 (Kan. 2000) but see Orvis Co., Inc.
v. Tax App. Tribunal of New York 654 N.E.2d 954 (N.Y. 1995)
39
Nexus Implications To Mailer (Cont.)
l
l (
)
•
•
Potential issues
•
Work done in more than one state, of which one state has a safe
harbor and the other state does not. Example: One facility prints
pages 1-25,
1 25 and facility in another state prints the remaining pages
pages.
•
Make sure that contract specifies that a printing facility in safe
state is responsible for printing job, including mailing of materials.
Useful tips
•
Include anti-agency clauses in contracts
•
Don’t store catalogs or promotional materials with printers unless,
unless
based on review of statute, it is safe to do so
•
Contract with printer should specify states where printing takes
place
l
40
Other Nexus Implications To Mailer
h
l
l
•
Basic principle: Mailing promotional materials from outside of state into a
state does not create nexus in the destination state.
•
But, distributing promotional materials in a state may create nexus.
•
Example: Catalogs at trade shows or kiosks?
•
Example: Coupons
•
Tax authorities could argue that the person distributing is an agent or
representative soliciting sales in the state,
state ii.e.
e the person is helping to make
a market in the state for the advertiser.
•
•
(See Borders Online, LLC v. Cal. Board of Equalization, 129 Cal.App. 4th 1129 (Cal.
App. 2005) and the Appeal of Scholastic Book Clubs, Inc., 920 P2d 947 (Kan. 1996)
Electronic catalogs
•
New California statute passed June 28, 2011 (Act ABX1-28 to amend Ca. Rev.
and Tax. Code § 6203)
•
If not commission-based, then it does not create nexus.
41
Martin Eisenstein, Brann & Isaacson
PRINTER’S LIABILITY TO CHARGE TAX
Lack Of Nexus Of Mailer: Is Tax
Due From The Printer?
•
The problem
•
Printers frequently have nexus with
many states other than where printing
takes place.
•
Is a printer required to collect tax on
promotional materials mailed/sent to a
state where the mailer does not have
nexus?
•
For a state other than one in which
materials are printed; i.e., a use
tax
43
Lack Of Nexus Of Mailer: Is Use Tax Due?
•
Constitutional argument against use tax in destination states
because of lack of substantial nexus with transaction under
Complete Auto Transit four prong test: Complete Auto Transit, Inc.
v. Brady, 430 U.S. 274 (1977); also D.H. Holmes Company, Ltd. v.
McNamara, 486 U.S. 24 (1988) based on nexus aplenty of the
purchaser of catalogs
p
g
•
Most state laws impose use tax on purchaser and require the seller
to collect.
•
Argument is that since tax cannot be imposed on the purchaser,
the printer has nothing to collect.
44
Lack Of Nexus Of Mailer: Is Use Tax Due? (Cont.)
•
Sect. 313 of SSTA would indicate that
printer is required to obtain a certificate
of exemption approved by destination
state.
•
Does the lack of nexus constitute an
adequate basis for an exemption
certificate?
•
Most state laws provide an
exemption or exclusion from tax if
it is unconstitutional.
45
Lack Of Nexus of Mailer: Is Use Tax Due? (Cont.)
•
Most printers permit a no-nexus
letter or certificate.
46
Lack Of Nexus of Mailer: Is Sales Tax Due?
•
Is the situation different for catalogs
g shipped
pp
within the state where the printer’s facility is
located?
•
Arguably a difference, since this is a sales tax
•
The state has a substantial nexus with the
transaction.
•
But, if sales tax under the statute is imposed
on the purchaser and not the seller, then the
argument is that like the use tax, a sales tax
should
h ld nott b
be iimposed
d on th
the purchaser
h
since
i
it
does not have nexus with the state.
• Conclusion: It is critical for printers and mailers to
determine kind of tax at issue (sales or use) and the
incidence of the tax.
47
T
Taxability Of Postage/Shipping
bili Of P
/Shi i
STATE
SALES TAX ON SHIPPING COSTS
Excluded if (1) shipped by common carrier and (2) charges are billed Alabama
separately and paid by the purchaser
Arizona
Excluded if charges are separately stated
Arkansas
Taxable Excluded for “separately stated” charges if shipping directly to the California
purchaser by common carrier, USPS, or independent contractor Excluded if charges are both (1) separable from the sales transaction, Colorado
and (2) stated separately on a written invoice or contract
Connecticut
Taxable
Excluded if charges are separately stated and delivery occurs after District of Columbia
the sale
Excluded if charges are (1) separately stated and (2) may “be avoided Florida
by a decision or action solely on the part of the purchaser”
Georgia
Taxable
Hawaii
Taxable
Idaho
Excluded if charges are separately stated
Indiana
d
Taxable
bl
48
Taxability Of Postage/Shipping (Cont.)
STATE
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
SALES TAX ON SHIPPING COSTS
Excluded if charges are separately contracted for and separately stated
Taxable
Taxable
Excluded if charges are separately stated and delivery occurs after the sale Excluded if (1) shipment is made direct to the purchaser, (2) charges are separately stated, (3) the transportation occurs by means of common carrier, contract carrier or USPS
Excluded if separately stated Excluded if charges (1) reflect the costs of preparing and delivering goods to a location designated by the purchaser, (2) are separately stated on the bill, (3) are set in good faith and reasonably reflect the actual costs incurred by the vendor
Taxable
Taxable
49
Taxability Of Postage/Shipping (Cont.)
STATE
Nebraska
Nevada
New Jersey
SALES TAX ON SHIPPING COSTS
Excluded if the charges are (1) separately stated and (2) not required to pay the delivery service price as part of the sale price (i.e., shipping service is optional)
Taxable
Excluded if the charges are separately stated
Taxable
New Mexico
Taxable
Missouri
New York
N
Y k
North Carolina
Michigan
Minnesota
Ohi
Ohio
Oklahoma
Pennsylvania
Rhode Island
S th C li
South Carolina
TTaxable
bl
Taxable
Taxable
Taxable
T bl
Taxable
Excluded if separately stated on invoice
Taxable
Taxable
T bl
Taxable
50
Taxability of Postage/Shipping (Cont.)
STATE
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
W Vi i i
West Virginia
Wisconsin
Wyoming
SALES TAX ON SHIPPING COSTS
Taxable
Taxable
Taxable
Excluded if charges are separately stated
Taxable Excluded if charges are separately stated
Taxable
T bl
Taxable
Taxable
Excluded if interstate delivery
51
Don Fuga, Vertex Inc.
HOW SSTP TREATS CERTIFICATES PRINTERS MAY NEED
SSUTA Certificate
 The Streamlined Sales Tax Certificate of Exemption Form F0008 in
Sect. 5, line K provides a place to identify an exemption for direct mail.
An identification number is required. Form F0003 Certificate of
Exemption, Multi-State Supplemental, needs to be completed for
exempt direct mail transactions covering more than one jurisdiction. A
reason for the exemption and an identification number are required. On
th supplemental
the
l
t l fform updated
d t d 5/11/2011
5/11/2011, it is
i noted
t d that
th t the
th SSUTA
direct mail provisions do not apply to Tennessee and Wyoming. The
latter are the only two states mentioned.
53