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1 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, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Don Fuga, Principal Tax Research Analyst, Vertex Inc., Berwyn, Pa. Joseph Geiger, Senior Tax Consultant, Vertex Inc., Berwyn, Pa. Martin Eisenstein, Member, Brann & Isaacson, Lewiston, Maine For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Direct Mail Advertising and Sales Tax Challenges: Navigating Differing i State t Policies Seminar July 28, 2011 Don Fuga, Vertex Inc. don.fuga@vertexinc.com Joseph Geiger, Vertex Inc. joseph.geiger@vertexinc.com Martin Eisenstein, Brann & Isaacson meisenstein@brannlaw.com

6 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

7 Don Fuga, Vertex Inc. INTRODUCTORY CONCEPTS

8 Definition SSUTA Agreement Direct mail means printed material delivered or distributed by U.S. mail or other delivery 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. 8

9 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

10 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.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

11 Examples Of Printed Material That Qualify The following items are generally considered to qualify but some may be excluded in certain jurisdictions: Mail order catalogs Advertising circulars Coupons Advertising folders Printed envelopes Electoral literature Newspaper inserts One-time license fee for a mailing list 11

12 Examples Of Items That May Not Qualify The following items are generally not considered to qualify, but some may in certain jurisdictions: Advertising materials (unless allowed by definition) Stockholder reports Personalized information Legally required mailings Privacy notices Informal informational literature that is not in the form of advertising i 12

13 Typical Tax Issues For Taxpayers Does the advertising printed matter or materials qualify for an exemption and if so, in which jurisdictions? Is postage exempt and if so, in which jurisdictions? 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

14 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

15 Joseph Geiger, Vertex Inc. EXAMPLES OF SPECIFIC STATE TREATMENTS

16 Defining Direct Mail Advertising Direct mail advertising includes catalogs, letters, circulars, brochures, and pamphlets p that consist of printed sales messages if the advertising 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

17 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

18 California An exemption exists for the gross receipts from the sale of, and the storage, use, or other consumption in California of catalogs, 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 sales messages. (Sec , Rev. & Tax Code) 18

19 Florida Exempt are free, circulated publications, the content of which is primarily advertising, that are published on a regular basis and distributed through the mail. (Fla. Stat. Sec (7)(w)) 19

20 Iowa Envelopes used to contain advertising materials are exempt. (Rule (422, 423)) 20

21 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 records related to those sales to assist the Kentucky 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 (1)) 365(1)) If a commercial printer or mailer meets these two criteria, the purchaser of the printing or mail is solely responsible for reporting and paying use tax. (KRS Sec (2)) 21

22 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. (La. Rev. Stat. Sec. 47:305.49) 22

23 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 (m), Tax Gen. Art.; Reg (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 (d)(1) 215(d)(1), Tax Gen. Art.) 23

24 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 or advertise, that t are usually considered d to be nontaxable advertising services. Charges for delivery and distribution of direct mail are exempt from Minnesota sales and use tax if they are separately stated. t (Sec. 297A.68(36), Min. Stat.) Separately stated fees for preparing direct mail for delivery or distribution are also exempt. (Revenue Notice No , Minnesota Department of Revenue, April 30, 2007) 24

25 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 business is tangible personal property, it is subject to tax. (12 CSR (1)) 25

26 New York Printed advertising materials mailed or shipped to customers or prospective customers of the purchaser of the such materials are exempt from tax. The printed 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 Form ST-121.2, 2 Certificate t of Exemption for Purchases of Promotional Materials, to the seller of the materials. (N. Y. Tax Law Sec. 1115(n)(4)) 26

27 Ohio Exempt are sales where the purpose of the consumer is to use or consume the things transferred in making retail sales. Examples of such items are newspaper inserts, catalogues, coupons, flyers, gift certificates, or other advertising material that prices and describes tangible personal property p offered for retail sale. (Rev. Code Ann. Sec (B)(35)) 27

28 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, financial i and corporate annual reports, electoral l literature or materials, envelopes, address labels, reply envelopes, and application forms. (Reg. Sec ) Advertising literature or materials that are distributed in a manner other than by the United States Postal Service are taxable. 28

29 Wisconsin A Wisconsin sales and use tax exemption was created in 2007 Wisconsin Act 20 (effective April 1, 2009) for the gross receipts 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 (25m)) 29

30 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 through which tangible personal property, and services may be directly ordered. (Reg. Sec (2)(4)) 30

31 Summary State exemptions and qualifying conditions cover a broad spectrum. Types of advertising materials (catalogs, envelopes, etc.) Method of distribution (U.S. Postal Service) Manner in which charges are stated on invoices 31

32 Martin Eisenstein, Brann & Isaacson NEXUS ISSUES

33 Nexus Issues: General Quill (504 U.S. 298 (1992)) sets the constitutional standard. Quill requires that t a retailer have a physical presence. Through its own employees, properties or facilities Attribution nexus: Agent/representative. 33

34 Nexus Issues: General (Cont.) Quill states (quoting 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 presence of inventory Advance Magazine Publishers, Inc. v. Huddleston, Chancery Court, 20 th Judicial District (Tennessee), , (Aug. 20, 1997) Presence of inventory of paper at printer does not establish franchise 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.) 34

35 Nexus Implications i To Mailer 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. 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. 232 (1987) 35

36 Nexus Implications To Mailer (Cont.) 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 Revenue (API I), No. 49T TA-26, slip op. (Ind. Tax Ct. Oct 19, 2006) and AOL, LLC v Ind. Dep t of State Revenue, No. 49T 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

37 Nexus Implications To Mailer (Cont.) Solutions re: paper storage: Print in states t with safe harbors STATE STATUTE REGULATION CODE Connecticut CGA (15)(b) ) Florida FL ST (2), (2)(d) Technical Assistance Advisement, No. 06A 03 Georgia OCGA , Illinois 35 ILCS 105/2(1), 35 ILCS 5/205(f) Indiana IN Code , , Kentucky KRS (2), (13) Maine 36 MRSA 1754 B(1)(G)(5) Minnesota MN ST 297A.66 (Subdivision 3)(b) 37

38 Nexus Implications To Mailer (Cont.) Solutions re: paper storage: Print in states t with safe harbors STATE STATUTE REGULATION CODE Ohio ORC , (D), b Oklahoma 68 OS 1376 Pennsylvania 72 PS 7201 South Carolina SC Code , Utah UT Code (2) Virginia VA Code (7), (D) West Virginia TAA Wisconsin WSA 77.51(13h), 71.23(3) 38

39 Nexus Implications To Mailer (Cont.) 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. Constitutional argument: Infrequent visits to state don t create nexus. (See Dept of Rev. v. Share International, Inc. 676 So.2d (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

40 Nexus Implications To Mailer (Cont.) 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, and facility in another state prints the remaining 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, based on review of statute, it is safe to do so Contract with printer should specify states where printing takes place 40

41 Other Nexus Implications To Mailer 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, i.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. 4 th 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

42 Martin Eisenstein, Brann & Isaacson PRINTER S LIABILITY TO CHARGE TAX

43 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

44 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 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

45 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

46 Lack Of Nexus of Mailer: Is Use Tax Due? (Cont.) Most printers permit a no-nexus letter or certificate. 46

47 Lack Of Nexus of Mailer: Is Sales Tax Due? Is the situation different for catalogs shipped 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 not be imposed on the purchaser since 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

48 Taxability Of Postage/Shipping i STATE Alabama Arizona Arkansas California Colorado Connecticut District of Columbia Florida Georgia Hawaii Idaho Indiana SALES TAX ON SHIPPING COSTS Excluded if (1) shipped by common carrier and (2) charges are billed separately and paid by the purchaser Excluded if charges are separately stated Taxable Excluded for separately stated charges if shipping directly to the purchaser by common carrier, USPS, or independent contractor Excluded if charges are both (1) separable from the sales transaction, and (2) stated separately on a written invoice or contract Taxable Excluded if charges are separately stated and delivery occurs after the sale Excluded if charges are (1) separately stated and (2) may be avoided by a decision or action solely on the part of the purchaser Taxable Taxable Excluded if charges are separately stated Taxable 48

49 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

50 Taxability Of Postage/Shipping (Cont.) STATE Missouri Nebraska Nevada New Jersey New Mexico 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 Taxable New York Taxable North Carolina Taxable Michigan Taxable Minnesota Taxable Ohio Taxable Oklahoma Excluded if separately stated on invoice Pennsylvania Taxable Rhode Island Taxable South thcarolina Taxable 50

51 Taxability of Postage/Shipping (Cont.) STATE South Dakota Tennessee Texas Utah SALES TAX ON SHIPPING COSTS Taxable Taxable Taxable Excluded if charges are separately stated Vermont Taxable Virginia Excluded if charges are separately stated Washington Taxable West Virginia i i Taxable Wisconsin Taxable Wyoming Excluded if interstate delivery 51

52 Don Fuga, Vertex Inc. HOW SSTP TREATS CERTIFICATES PRINTERS MAY NEED

53 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 the supplemental l form updated d 5/11/2011, it is noted that t the SSUTA direct mail provisions do not apply to Tennessee and Wyoming. The latter are the only two states mentioned. 53