Who Pays the Costs?

State auditors are targeting direct mailers in an effort to collect new sales- and use-tax revenue.

Haven’t got your audit notice yet? Count yourself fortunate — you probably aren’t located in one of the first states to enact legislation conforming to the Streamlined Sales Tax Agreement. The SSTA is part of an on-going project that gained momentum when it was adopted by a consortium of states on Nov. 12, 2002. The agreement is an effort by states to simplify sales tax reporting so participating states and interested businesses can convince Congress to allow states to impose sales tax collection responsibilities on remote sellers. Businesses supporting the SSTA include storefront retailers who believe they are at a competitive disadvantage from remote sellers who don’t collect sales tax. While direct mailers aren’t the primary target of the national SSTA initiative, certain provisions in the SSTA will nonetheless immediately and directly affect them.

Though the SSTA will affect all retailers in every adopting state, several of its elements will have a specific impact on direct mailers and printers. Besides requiring printers to collect sales tax according to its sourcing guidelines, the SSTA taxes mailing services and postage charges incurred in the sale of printed material.

Mailing Services

Many states don’t regard mailing, addressing and inserting services as taxable. Printers that provide these services on printed material produced for a customer do not have to charge sales tax as long as they are separately stated from the printing charges on the invoice. This may change as states adopt Part I (6) of Appendix C of the SSTA, which defines a taxable sale to include charges for any services necessary to complete the sale. (The SSTA may be viewed in its entirety at www.streamlinedsalestax.org.)

Officials in at least one state are interpreting this to mean that separate pricing and invoicing for mailing services will not render them non-taxable if performed in connection with the sale of printed material. While this state’s position may not hold up under closer analysis, taxpayers should plan ahead to ensure that their contracts and invoices support the position that non-taxable mailing services are not taxable merely because they are preformed on materials printed by the printer or mailer.

Postage Charges

Pass-through postage charges by a printer traditionally are non-taxable. Some state regulations provide that when a printer sells an envelope with postage affixed, the postage charge is not taxable when separately stated. Officials in these states tend to interpret this type of regulation broadly and don’t tax postage charges passed through by a printer. The SSTA notes that delivery charges — including postage — are taxable when incurred in connection with the sale of tangible personal property. Thus, if a printer sells printed material and also incurs postage to mail the material, the postage is regarded as taxable.

There is an optional measure in the SSTA that exempts pass-through postage charges in connection with the sale of direct mail. Of the 19 states that had enacted SSTA legislation through July 7, only three exclude postage from the tax base. While mailers and printers may not support some of the SSTA’s goals, consideration should nonetheless be given to actively supporting the postage exclusion as legislation is pushed through at the state level.

Tax Collection by Printers

Under current law — as established by the U.S. Supreme Court in Quill vs. North Dakota, states can’t force out-of-state printers to collect sales or use tax on sales of printed material to in-state customers. If the SSTA initiative is successful and Congress allows the states to require remote sellers to collect sales tax, printers will be required to collect sales tax from their customers. Printers will collect sales tax for all participating states based on information from the purchaser showing the distribution of the printed material. The SSTA stipulates that if the purchaser gives a direct pay permit or a yet-to-be-created direct mail form to the printer, the printer won’t have to collect the tax.

If the states are successful and Congress supports the SSTA, it does not necessarily mean that printers who issue their own advertising publications would have to pay use tax on the distribution of their own printed material in every state. Under the U.S. Supreme Court case Complete Auto Transit Inc. vs. Brady, the activity being taxed must have substantial nexus with the taxing state. While Congress may allow the states to require remote vendors to collect a sales tax, that’s quite different from allowing states to impose a use tax on a remote activity. The distribution of printed material by the U.S. Postal Service in a state may not be sufficient physical activity in a state to allow the imposition of a use tax on that activity if the publisher has no nexus in the state and doesn’t sell the goods that are advertised.

In addition to the changes we discussed regarding participation in the SSTA, states may insert other statutory changes along with this legislation. North Carolina added changes to its use tax statute along with SSTA changes on the premise that its use-tax definition needed to be more in line with other states’ definition.

Distribution as a Use

Use tax typically is applied to taxable purchases from out-of-state vendors of tangible personal property used in the state. The U.S. Supreme Court upheld the use tax imposed on the distribution of printed material from out of state in Louisiana’s landmark D.H. Holmes case. Before 2002 only eight states, including Louisiana, defined distribution as a use. While some states have used the Holmes case to impose use tax on the distribution of out-of-state printed material (even though their statutes did not define distribution as a taxable use), the revenue departments in other states were emphatic in not following Holmes, due either to judicial determination or department policy. The North Carolina Department of Revenue recommended a change in its use-tax statute as part of its SSTA legislation in order to conform that statute to those of neighboring states.

Interestingly, its neighbor to the north, Virginia, does not follow Holmes in taxing the distribution of material printed out of state. SSTA legislation should be closely monitored to see if it includes changes in the definition of use which would tax distribution of printing from out of state.

Due to this change in definition, North Carolina is now in a position to impose use tax on out-of-state printing not previously taxed. Since this is a new tax base in this state, the initial audits and assessments of direct mailers came as a surprise to many in North Carolina since many direct mailers are not registered for sales tax. Taxpayers in states that have not previously followed the Holmes decision as a matter of policy should also be vigilant in monitoring for changes in departmental policy in this area.

Because these changes are buried in legislation adopting SSTA provisions, most printers and mailers may be unaware of the impact on their business. Local mailers may be able to focus their review on the state where they do business. But it’s absolutely critical for mailers to determine whether they, the printer or the advertiser legally own the printed material that is distributed. The owner usually decides who owes the tax on the distribution and the tax base on which the tax is assessed.

Due to the magnitude of the changes — legislation proposed or enacted in 38 states — multistate operators are advised to consider a nationwide sales- and use-tax policy. A good place to begin for multistate operations is with an analysis of the SSTA in those states where direct mailers haven’t had to pay use tax on the distribution of printed material, postage or mailing services.

Melanie Hill is a tax specialist with Dow, Lohnes & Albertson in Greenville, SC.

The State of Use Tax

As of July 7, 19 states had enacted legislation conforming to the SSTA:

Although Alaska, Montana and Oregon do not have a state sales tax, legislation to enact a sales tax conforming with the SSTA is under consideration. Other states are mulling similar legislation.