Since this Regulation change, the Sales and Use Tax Department has taken the position that “Ultimately subject to tax” doesn’t really mean what it says. For example, printing aids used for the printing of newspapers which will ultimately be subject to tax are not exempt under this new Regulation.
When asked to clarify their position in light of the apparent contradiction to the Regulation we received a letter from their legal staff’s tax counsel. In that letter, the argument was that the logical intent of the law change was not to let printers buy printing aids without tax unless title to the printing aid went with the printed matter sold to the consumer. For example, if I as a consumer purchased taxable employee manuals for my company, I would have purchased the manuals and the special printing aids used to print those manuals. Conversely when I buy a newspaper, I am not buying the printing aid used to print that newspaper. Therefore, the printer of that newspaper is not reselling those aids and must pay tax on the purchase.
Although this is a plausible and logical explanation and correctly distinguishes two separate situations, it still does not reconcile the all-encompassing wording in the Regulation with their position. Moreover, an equally logical argument could be made that the intent of this Regulation change was simply to stop taxing printing aids twice. If a printer buys a printing aid and pays tax and if the printed matter is also taxed somewhere down the line, the argument is the price of the printing aids is directly or indirectly included in the price of the printed matter. The real point, however, is the Regulation only requires that the sale of the printed matter be ultimately subject to tax.
If a newspaper company has newspapers printed (either by using an outside printer or prints them in house) and if the ultimate sale of those papers is taxable, the strict reading of the Regulation would exempt the purchases of those printing aids from tax. The Sales and Use Tax Department has effectively come up with their own additional set of criteria and tried to make this new tax law logical. Tax law and logic rarely go together and using logic works better in many aspects of life but usually is not a reliable authority to interpret the law. If this were the case I’m sure we could all rewrite the tax code to make it more logical. We may have a problem, however, when asked to defend our position based on that logic. Any printer selling printed matter which is subject to tax or for resale but will ultimately be subject to tax should file a protective claim for refund until this issue is decided in Appeals.
On a go forward note, the flip side is we are finding printers are now swinging 100% the other way and not paying tax on any printing aids. Remember, printing aids used for printed matter that is shipped out of state and/or exempt from tax (e.g. Printed sales messages, labels used on exempt food products, exempt publications, etc.) should be purchased tax paid, or if purchased for resale the cost must be reported on line 2 of the sales tax return. To determine this cost a proration of the printing aids purchased may be used based on a analysis of taxable sales, qualifying resales, and exempt sales. This analysis should be done each reporting period for which a return is filed.
PERIODICALS AND SUBSCRIPTIONS
Newspapers and periodicals sold by subscription and delivered by mail or common carrier are exempt from sales tax. To qualify, these publications must be issued at least 4 but less than 60 times each year which means a daily newspaper does not qualify. Also, tax does not apply to the sale or use of tangible personal property which becomes an ingredient or component part of a copy of a newspaper or periodical regularly issued at average intervals not exceeding 3 months when that copy of such newspaper or periodical is distributed free of charge, nor does tax apply to such distribution.
Periodicals may be issued in the traditional form of printed matter or on computer diskettes or on CD ROMs. If, however, the subscriber can manipulate data on a personal computer, this will be regarded as a taxable prewritten program. When a publication contains information which is placed on a compact disk, initially a compact disk, a software program and a reference manual are sold. New compact disks, upgraded software, and a new manual may be issued monthly or infrequently as once a year. Tax applies to the initial set of compact disks software and binder or reference material. Tax also applies to the annual sale of the new compact disks, upgraded software and reference manual. Sale of the compact disk updates or reference manual updates qualify for exemption only when issued at least four times a year and not more than sixty times a year when sold by a subscription and delivered by mail or common carrier. (see Annotation 385.0525)
PENALTIES
Like all tax law, penalties associated with Sales and Use Tax issues come in all forms and sizes. Some of the more common penalties included the 6% late payment penalty on prepayments required for taxpayers on a quarterly/prepayment reporting basis, and a 10% penalty for other late payments. An additional 10% penalty is assessed on returns not filed or filed late.
Some of the more obscure penalties include a 10% penalty for misuse of a resale certificate based on the taxes not paid by the person who misuses the resale card with a minimum of $600. A hard to swallow 10% penalty is imposed on taxpayers required to pay by electronic fund transfers. The thought of being penalized for timely filing and paying tax to the State Board of Equalization hits these people pretty hard. Generally, any person whose tax liability is $20,000 or more each month is required to pay using this method. The penalty for not making the prepayments electronically is 6%.
Relief of these penalties may be granted if the person’s failure to make a timely return, payment, prepayment, or failure to pay via EFT, is due to reasonable cause and circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect. Any person seeking relief should file a statement under penalty or perjury setting forth the facts upon which relief is requested.
