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Sales and Use Tax Memorandum Opinions

Marvin H. Lincoln

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Page paste-ups do not become an "ingredient or component" part of magazines that are ultimately produced, distributed and sold. The role of a person furnishing paste-ups in the production and sale of a magazine is more like that of a contributing author and an editor with respect to the concept and like that of a producer of finished art work sold and used by someone else to actually produce the magazine as far as the actual paste-up is concerned. The sale of a paste-up is a sale of finished art which was used and did not become an ingredient part of the magazine periodical produced from the art.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petition of MARVIN H. LINCOLN & WILLIAM A. NEW dba NEW LINK ENTERPRISES for Redetermination of Sales Tax

Appearances:

MEMORANDUM OPINION

This petition was filed by William O. New pursuant to a sales tax deficiency determination in the amount of $2,330.00 for the period of February 1, 1966 through October 31, 1966.

Petitioners make up a two-man partnership business that was engaged in producing motion picture stills and negatives along with other activities, some of which are indirectly in issue as far as their description is concerned.

The real issue presented by the petition is whether the gross receipts, amounting to $58,250, from the sales of page paste-ups used to manufacture printing aids which are, in turn, used to print magazines, are exempt under section 6362 of the Sales and Use Tax Law and ruling 50 (now regulation 1590) as sales of periodicals or sales of ingredients or components of periodicals, or whether they are receipts from the sale of finished art.

A page paste-up is a large single sheet of heavy paper on which printed copy and photographs are carefully placed and pasted. The size of the copy and photographs is in proportion to what is desired when the page paste-up is reduced, by photography, to the actual size of the page in the magazine to be reproduced. Arrangement of photographs and copy, therefore, becomes the format of what is to be produced. Inextricable with the physical property produced is the intangible idea of what is intended to be conveyed to the ultimate readers.

Petitioners created the idea for the magazine content and format and produced it in the form of page paste-ups. The entire package was then sold to Golden State News, a national distributor of magazines and paperback books. The sale was for a lump-sum price and Golden State News received all right, title and interest in the paste-ups, including the intangible idea they conveyed.

Golden State News Company had the page paste-ups photographed, and from the negatives produced a printing aid used to print the finished pages that were assembled, cut and bound into magazines. Petitioners had nothing to do with the printing, distribution or sale of the magazines, and did not share in the proceeds from the sales made by Golden State News Company or by those who sold them at retail, regardless of how many were printed and sold.

Petitioners contend that the sale of the paste-ups was a sale of a "concept" of a publication and was, therefore, the sale of a publication which was a periodical and under section 6362 and ruling 50, the gross receipts from the sale of the paste-ups are exempt from sales tax.

This argument must be considered in the light of the well-established rule that exemptions, such as the one we are herewith concerned, are to be strictly construed against the taxpayer. (Good Humor Co. v. State Board of Equalization (1957) 152 Cal.App.2d 879.)

Section 6362, subdivision (a) provides:

"(a) There are exempted from the taxes imposed by this part, the gross receipts from the sale of, and the storage, use, or other consumption in this state, of tangible personal property which becomes an ingredient or component part of any newspaper or periodical regularly issued at average intervals not exceeding three months and any such newspaper or periodical."

Regulation 1590 (formerly ruling 50) contains the test of what constitutes a periodical, as far as content and frequency of publication are concerned. Subsection (3) of regulation 1590 contains a provision which, though adopted in the form of a regulation rather recently, i.e., April 8, 1970, describes a view which we have consistently taken:

"The term 'ingredient or component part of a newspaper or periodical' includes only those items that become physically incorporated into the publication and not those which are merely consumed or used in the production of the publication. A photograph, for example, does not become an ingredient or component part of a newspaper or periodical merely because the image of the photograph is reproduced in the publication."

It is readily apparent that the theory underlying the exemption presupposes that the publisher who sells the periodical is going to produce, publish and sell more than only one copy of the periodical. Petitioner sold only one copy of each page paste-up.

In the strict sense of the word, the tangible personal property sold by the petitioner was not, in and of itself, a magazine, and for that reason it cannot be deemed to be a periodical, as the term is used under section 6362 and regulation 1590.

Clearly, the page paste-ups did not become an "ingredient or component" part of the magazines that were ultimately produced, distributed and sold by Golden State News Company, and therefore, and sale of them does not qualify for the exemption under section 6362 and regulation 1590.

Petitioner's role in the production and sale of the magazines is more like that of a contributing author and an editor, as far as the conception for contents is concerned, and like that of a producer of finished art work sold and used by someone else to actually produce the magazines, as far as the actual page paste-ups are concerned.

Petitioners contend they sold the concept of a magazine. While it may be true that petitioners sold an intangible concept of a magazine, they also sold tangible personal property, which was not a magazine, but was property used as a manufacturing aid to actually produce magazines. The true object of the sale agreement wherein the page paste-ups were sold to Golden State News Company was the acquisition of the paste-ups themselves, for without them no magazine could have been produced. Thus, it is concluded that the sale of the paste-ups was a sale of finished art which was used, and which did not become an ingredient or component part of the magazine periodical produced from the finished art.

For the reasons expressed in this opinion, the board rejects petitioners' contention that they sold periodicals, and concludes that the retail sales of the page paste-ups to Golden State News Company were taxable retail sales of tangible personal property.

Done at Sacramento, California, this 5th day of November, 1970.

George R. Reilly, Chairman

John W. Lynch, Member

Paul R. Leake, Member

Richard Nevins, Member

Attested by: H. F. Freeman, Executive Secretary