WIXLIB

SSourcingi Issues:ITaxabilityTbili (Cont.)(C) The structure of a direct mail transaction may create challenges indetermining what state’s law applies. If a printer does not also arrange for mailing to end user recipients, butinstead delivers in bulk to a purchaser or letter shop to complete themailing, then the purchase of direct mail may be viewed as a bulk sale. If a printer lacks sufficient information to allocate and source a sale ofdirect mail based on the delivery location(s), the printer may be requiredto collect sales tax under a default assumption. The SSUTA requires the printer to source to the shipping location foradvertising and promotional direct mail, and to the address of thepurchaser for “other” direct mail. (SSUTA, Section 313.A.4, B.1) Non-SSUTA states may vary, creating challenges for the printer.22

SSourcingi Issues:IWhoWh MustMReport?R? Typically, a seller must determine sourcing and collect anyapplicable sales/use tax. (Note: The purchaser is only relievedof the obligation if the seller collects.) Because direct mail is delivered to multiple jurisdictions, as towhich the seller mayy have insufficient information for taxpurposes, direct mail presents potential difficulties for theseller. The SSUTA, and some non-SSUTA states, offer procedures orexemptionspthat pplace sourcingg and reportingpg burdens on thepurchaser.23

Sourcing Issues: WhoMust Report? (Cont.) Under the SSUTA, a seller is relieved of the obligation to collect taxwhen the purchaser provides a direct pay permit or a “direct mailcertificate” indicating that the purchaser will report tax. (SSUTA,S ti 313Section313.A.2,A2 BB.2)2) Some states pprovide expresspexemptionspfrom tax for direct mailmaterials delivered to locations outside the state. (Such exemptionsdo not mean that the destination state’s tax is inapplicable,however.) The issue may be complicated where a purchaser lacks nexus in thedestination state(s).state(s)24

Matthew P. Schaefer, Brann & IsaacsonLATEST STATE ACTIONSAFFECTING DIRECT MAIL

Expanded Catalog ExemptionIn Wisconsin Existing statutory provisions (§77.54(15), §77.54(25m)) exempt specificcategories of direct mail materials, including in particular catalogs. Wis. Stat. §77.54(59) expands the exemption, effective July 1, 2013, toencompass all advertising and promotional direct mail. Exempt from salesand use tax is “[t]he sales price from the sales of and the storage, use, orother consumption of advertising and promotional direct mail.” SSUTA definition (same as Wis. Stat. §77.51(1ag)): “Advertising andpromotional direct mail” means direct mail that has the primarypurpose of attracting public attention to a product, person,business, or organization or to attempt to sell, popularize, or securefinancial support for a product, person, business, or organization.”26

Val‐Pak East Valley, Inc. v.Arizona Dept. Of Revenue Vendor/franchisee of cooperative direct mail advertisingargued that it was not subject to sales/use tax on direct mailmaterials distributed in Arizona. Val-Pak East Valley assembled orders for advertising flyersand coupons, then sent orders to a Florida affiliate. Affiliate created, packaged and mailed envelopescontaining flyers and coupons to Arizona residents fromout-of-state.27

Val‐Pak East Valley v. ArizonaDept. of Revenue (Cont.) Arizona Court of Appeals agreed that no sales/use tax was due, ontwo grounds: First, the Court agreed that under the “dominant purpose” and“common understanding” tests, Val-Pak East Valley waspurchasing non-taxable “design, printing, and mailing” services,not taxable tangible personal property, from its Florida affiliate.28

Val‐Pak East Valley v. ArizonaDept. Of Revenue (Cont.) Second, the Court rejected the department’s argument that Val-PakEast Valley controlled the distribution of the direct mail pieces. Affiliate purchased all physical supplies (e.g. paper, ink,envelopes, postage, etc.), and had control over design andcreation of catalogs. Decision contrasted Val-Pak East Valley’sy business with retailers’control over catalog distribution in earlier Service Merchandise(1996) case, refined in Sharper Image (1998) case. The Court found that ValVal-PakPak is exempt because it is not“exercising any right or power over tangible personal propertyincidental to owning the property.”29

EExtensioni Of VirginiaVi i i EExemptionsi Virginia has three established statutory exemptions, recently extended by theVirginia General Assembly (Senate Bill 393 (Chapter 477) amending VA Code Ann.§58.1-609.6) The bill leaves in place the exemption for direct mail such as catalogs, letters,brochures and reports when stored at a Virginia printer for less than 12 monthsand then distributed outside the state (but envelopes, containers, labels andpaper are not exempt). papplicablepptoIn addition,, the statute continues a sales and use tax exemptionthe purchase of printing/printed materials by “advertising businesses,” whenthe resulting printed material is distributed outside Virginia within 12 months. Finally, the exemption for advertising businesses that purchase newspaper ormagazinei insertsit forf distributiondi t ib ti isi extendedt d d ffrom JJulyl 11, 2012 tto JJulyl 11, 20172017.According to the Taxation Department, newspaper supplements purchased byadvertising agencies for placement in in-state or out-of-state publications arealso exempt. (Virginia Department of Taxation Legislative Summary 2012)30

Indiana Department of StateRevenue v. AOL , LLC Under prior Indiana Tax Court decisions (Ameritech I (2006)and Ameritech II (2009)), Indiana law provided an exemptionfor direct mail materials when the purchaser supplied rawmaterials that were entirely consumed by the vendor inproducing the final product distributed to recipients in thestate. In this case, AOL contracted for the creation and distributionof promotional materials to recipients in Indiana by thirdpartyt contractors.t t31

Indiana Department of StateRevenue v. AOL, LLC (Cont.) AOL argued that it had acquired raw goods that it supplied to itsvendors, then paid for assembly and printing services, and did notacquire the finished promotional direct mail materials in any retailttransaction.ti The Indiana Supreme Court held that AOL was subject to use tax onthe direct mail materials. In response to the argument that AOL was purchasing services asopposed to tangible personal property, the court ruled that “theassembly houses and letter shops were selling at retail,” despitethe fact that AOL supplied the raw material. Because it found that AOL acquired goods in a retail transaction,the court ruled that use tax appliedppwhen AOL used the ggoods inIndiana.32

DiDirectMMailil SSourcingi InI OklahomaOkl h The Oklahoma Tax Commission recently amended its ruleregarding direct mail sourcing to adopt definitions of“advertising and promotional direct mail” and “other directmail,” in accordance with the SSUTA (Okla. Rule 710:65-18-6). The revised rule makes clear that “advertising andpromotional direct mail” is taxable and sourced in accordancewith the SSUTA (Sect. 313). The rule states that “other direct mail” is not taxable underOkl hOklahomalaw.lThTherefore,fno sourcingi rulesl are specified.ifi d33

WWestVirginiaVi i i SSUTA MatrixM i For a number of years, it was the practice ofthe West Virginia Revenue Department toallow the exclusion of postage charges fromthe tax base for direct mail. In connection with its membership to theSSUTA, the department has stated, andrevised its taxability matrix to reflect, thatall delivery related charges, includingpostage, associated with direct mail aresubjectjto sales/use tax.34

Martin I. Eisenstein, Brann & IsaacsonEXAMPLES OF SPECIFICSTATES

Examples Of Specific States:Pennsylvania Statute (72 P.S. §7204(35)) exempts: Mail order catalogs Advertising literature or materials, which are definedas tangible personal property that is intended topromote business interest, create goodwill or engagethe attention or interest of a recipient, which includesenvelopes, address labels, reply envelopes andapplication forms (Reg. Sect. 31.29) Advertising inserts as part of a newspaper One-time use of a list of names (list rental) andmailing addresses36

Examples Of Specific States:Pennsylvania (Cont.)(Cont ) Keyy requirement:qDistributed throughg the U.S. Postal Service Will be deemed taxable if distributed by other means (SeeReg. Sect. 31.29)Key exclusion from exemption: If the advertiser supplies paper, printing charges aresubject to sales tax and direct advertising exemption doesnot apply (61 PaPa. ADC §32.36).§32 36) Quaere whether printing on advertiser-supplied paperoutside of Pennsylvania is subject to use tax.Note: NoNN requirementithath advertiserdibbe theh maileril MerionM iPublications, Inc. v. Commonwealth, 890 A.2d 436(Commonwealth Court 2006)37

Examples Of Specific States: Florida Statute (Fla. Stat. §212.08(7)(w)) exempts: Free Ci l t d publicationsCirculatedbli ti Published on a regular basis Composed of primarily advertising Distributed through the mail, home delivery ornewsstandDepartment strictly construes exemption38

Examples Of Specific States:Fl id (Cont.)Florida(C) Catalogs and other direct advertising materials arguablyfit within this definition. The biggest issue regarding promotional materials isshowing regular basis. Department argues that catalogs distributed ondifferent days in a month, from year to year, may notmeet the regularity requirement.39

ExamplespOf SpecificpStates: Ohio Statute exempts sales on which: (1) The “purpose” of the consumer is to use or consume thethings transferred in making retail sales; and (2) The itemsare newspaper inserts, catalogs, coupons, flyers, giftcertificates or other advertising material that prices anddescribes tangible personal property offered for retailsale. (Rev. Code Ann. Sec. 5739.02(B)(35)) Also exempts printed matter that offers free merchandiseor chances to win a sweepstakes,sweepstakes if mailed to potentialcustomers with materials described in the first bullet40

Examples Of Specific States:Ohio (Cont.)(Cont ) DistributionDit ib ti bby ttaxpayer tto retailt il storestoff storetdidisplaysldoes not satisfy the requirement that the consumer usethe materials transferred in making retail sales Opinion of Tax Commissioner 94-004Ohio statute suggests requirements that materials bedistributed by advertiser to consumer for ordering. Thiscontrasts with PA statute.41

Martin I. Eisenstein, Brann & IsaacsonNEXUS ISSUES

NNexusIssues:IGeneralGl Quill (504 U.S. 298 (1992)) sets theconstitutional standard. QQuillill requiresiththatt a retailert il hhave a physicalh i lpresence. Through its own employees,employees properties orfacilities Attribution nexus: Agent/representative43

NNexusIssues:IGeneralGl (Cont.)(C) Quill states (quoting Bellas Hess): There is a “sharp distinction between mail-order sellerswith retail outlets, solicitors, or property within a stateand those who do more than communicate with customersin the state by and or common carrier as a part of generalinterstate business.” (505 U.S. at 307) (emphasis added)Few court cases regard presence of inventory. AdvanceMagazineMagae Publishers,ubl s e s, Inc.c. v. Huddleston,uddlesto , CChancerya ce y CouCourt,t,th20 Judicial District (Tennessee), ¶400-560, (Aug. 20, 1997)– Presence of inventory of paper at printer does notestablish franchise tax nexus. But, see statement in Quill that Quill did not havenexus because it did not own tangible personalproperty; also, see AOL v. Johnson (Tenn. Ct. App.2002) (presence of modems in state creates nexus)44

NNexusImplicationsIli iToT MailerM il Storageg of paperp p Most large promotional materials mailers contract with paperbrokers or directly with mills to purchase paper, and causepaper to be supplied to the printer or printers.printers Paper must be stored at the printer for short or longerperiods. Storage of paper creates a high nexus risk in the state of theprinter, but an argument can be made otherwise. See previous slide Does the activity “make a market” in the state for theout-of-state mailer? (see Tyler Pipe Industries, Inc. v.WA. State Dept. of Revenue, 483 U.S. 232 (1987))45

Nexus Implications To Mailer (Cont.) Solutions Transfer of title to printer AccomplishedAli h d withith bill off salel tto printeri t Invoice price from printer includes cost of paper((Avoid up-chargepg or paperp p managementgfee)) Issues Requires accounting for paper Credit risk? Is there economic substance?46

Nexus Implications To Mailer (Cont.) S l tiSolutionsre: paper storage:tPPrinti t iin statest t withith safef dianaKentuckyMaineMinnesotaSTATUTE – REGULATION ‐ CODECGA § 12‐407(15)(b),( )( ), 12‐213(a)(20)(B)( )( )( )FL ST § 212.0596(2), 212.06(2)(d) TechnicalAssistance Advisement, No. 06A‐03OCGA § 48‐7‐135 ILCS § 105/2(1), 35 ILCS § 5/205(f)IN Code § 6‐2.5‐3‐1, 6‐2.5‐8‐8.5,6‐3‐2‐2.3KRS § 139.340(2), 139.470(13)36 MRSA § 1754‐B(1)(G)(5)MN ST § 297A.66 (Subdivision 3)(b)47

Nexus Implications To Mailer (Cont.) S l tiSolutionsre: paper storage:tPPrinti t iin statest t withith safef hharborsbSTATEOhioOklahomayPennsylvaniaSouth CarolinaUtahVirginiaWest VirginiaWisconsinSTATUTE – REGULATION ‐ CODEORC § 5741.17,, 5733.09(D),( ), 5747.30b68 OS § 137672 PS § 7201SC Code § 12‐36‐75, § 12‐6‐555UT Code § 59‐7‐102(2)VA Code § 58.1‐401(7), 58.1‐612(D)TAA 96‐003WSA § 77.51(13h), 71.23(3)48

Nexus Implications To Mailer (Cont.) Possible limitations on safe harbors Maine and Minnesota do not specifically permit storage of paperat printer. g of catalogsg is not necessarilyy exempt.pStorage Don’t take title to catalogs or mailings until sent byinterstate commerce, not when invoiced by printer. Visits by personnel of mailer to state may not be protected inFlorida, Georgia, Kentucky, Maine and Minnesota; because thesafe harbor in the statute doesn’t address whether visits createnexus. Constitutional argument: Infrequent visits to state don’t createnexus. (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 CoCo., Inc.Inc v.v Tax AppApp. Tribunal of New York 654N.E.2d 954 (N.Y. 1995))49

Nexus Implications To Mailer (Cont.) Potential issues: When work is done in more than one state, of which one state has a safeharbor and the other state does not; for example, one facility prints pages 125 and25,d ffacilityilit iin anotherth statet t printsi t ththe remainingi i pages Make sure that the contract specifies that the printing facility in the safestate is responsible for the 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 onreview of statute, it is safe to do so. printer should specifypy states where pprintingg takes pplace.A contract with p50

Other Nexus Implications To Mailer Basic principle: Mailing promotional materials from outside of state into a state doesnot 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 orrepresentative soliciting sales in the state; i.e. the person is helping to makea market in the state for the advertiser. See Borders Online, LLC v. Cal. Board of Equalization, 129 Cal.App. 4th1129 (Cal. App. 2005) and the Appeal of Scholastic Book Clubs, Inc., 920P2d 947 (Kan. 1996)Electronic catalogs California statute in effect on Sept. 15, 2012 (Act ABX1-28 to amend Ca. Rev. and Tax. Code§6203) If not commission-based, then does not create nexus51

Lack Of Nexus Of Mailer: Is TaxDue From The Printer? The problem: Printers frequently have nexus withmany states other those in whichprinting takes place. Is a printer required to collect tax onpromotional materials mailed/sent to astate where the mailer does not havenexus? For a state other than one in whichmaterials are printed, i.e. a use tax52

Lack Of Nexus Of Mailer: Is UseTax Due From The Printer? (Cont.) Constitutional argument against use tax in destination statesbecause of lack of substantial nexus with transaction underComplete 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 thepurchaser of catalogspg Most state laws impose use tax on purchaser and require the sellerto collect. Argument is that since tax cannot be imposed on the purchaser,printer has nothing to collect.53

Lack Of Nexus Of Mailer:Is Sales Tax Due? Is the situation different for catalogs shipped withinthe state where the printer’s facility is located? Arguably a difference, since this is a sales tax The state has a substantial nexus with thetransaction. ButBut, if sales tax under the statute is imposedon the purchaser and not the seller, then theargument is that like the use tax, a sales taxshould not be imposed on the purchaser since itdoes not have nexus with the state. Conclusion: It is critical for printers and mailers todetermine the kind of tax at issue (sales tax or usetax) and the incidence of the tax.54

Lack Of Nexus Of Mailer:Is Use Tax Due? Most printers permit a no nexusletter or accept an exemptioncertificate that is a variation of theMTC Multijurisdictional TaxCertificate or the SSTUA ExemptionCertificate (see attached).attached)55

Lack Of Nexus Of Mailer:Is Use Tax Due? (Cont.) Sect. 317 of SSTA, and Rule 317.1, providethat a seller is relieved of liability if itobtains a fully completed paper exemptioncertificate or an electronic filing that hasall of the information contained in theSSTA form. Sect. 5 of SSTA form provides anexemption category (L) of "Other. Lack of nexus can be deemed “Other.”56

Lack Of Nexus Of Mailer:Is Use Tax Due? (Cont.) Does the lack of nexus constitute an adequate basis for anexemption certificate? Most state laws provide an exemption or exclusion fromtax, if imposition of tax is unconstitutional. See, e.g., Code of Iowa §423.3; WY Statutes §39-16105(a)(i)(A) Good faith basis for printer to receive such a certificate57

Martin I. Eisenstein, Brann & IsaacsonTAXABILITY OFPOSTAGE/SHIPPING

Taxabilityy Of Postage/Shippinggpp gSTATESALES TAX ON SHIPPING COSTSExcluded if (1) shipped by common carrier and (2) charges are billedAlabamaseparatelyt l

direct mail than for other products (such as consumer goods). Many states exclude separately stated delivery charges from the sales price, for purposes of calculating sales and use tax. The SSUTA permits its members to have special rules for the tax treatment of delivery charges for direct mail. 14