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Sales and Use Tax Memorandum Opinions

S C W, Inc.

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Advertising service books of printed advertising illustrations accompanied by sets of mats which the publisher may use after it has selected from the display book are not periodicals within the meaning of Section 6362 even though the books are prepared and distributed monthly. Rather, the advertising service companies are the consumers of the mats and books. This is a long continued interpretation incorporated in Sales Tax General Bulletin 55-12 and is entitled to great weight since it is not clearly erroneous.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matters of the Petitions for Redetermination and Claims for Refund of S C W, INC., and STAMPS-CONHAIM-WHITEHEAD, INC.

Appearances:

MEMORANDUM OPINION

S C W, Inc., is the successor of Stamps-Conhaim-Whitehead. Both taxpayers petition for redetermination pursuant to section 6561 and claim refunds pursuant to section 6901 of the California Sales and Use Tax Law. S C W, Inc., petitions against the determination of $18,138.16 plus interest and claims a refund of $1,139.03. Stamps-Conhaim-Whitehead petitions against the determination of $6,644.76 plus interest and claims a refund of $1,943.52. The period involved in the two matters extends from January 1, 1962, to June 30, 1965.

The taxpayer (the singular is used throughout for clarity) argues that the advertising service books and the mats which it furnishes its clients are periodicals within section 6362 of the California Sales and Use Tax Law and ruling 50. In the alternative, the taxpayer contends that it should be treated as a retailer rather than as a consumer for purposes of the tax. It is our opinion that the taxpayer cannot prevail on either ground.

The taxpayer has operated for many years as an advertising service company. Each month it prepares and distributes to its newspaper clients an advertising service book and mats containing advertising art work for use by the newspaper in printing advertising. The proof book is used to illustrate the advertising impressed on the mats. It also is used in making paste-ups which are photographed and reproduced by the photo-offset method of printing. When this method is used, the newspaper does not ordinarily receive the mats. At times, newspapers receive extra proof books for an additional charge. There is no dispute that in such cases the taxpayer is selling tangible personal property and is subject to tax on the additional charge, except where the exemption for the interstate commerce applies.

The taxpayer varies its charge for furnishing the art work depending on the circulation of the newspaper; the larger the newspaper, the greater the charge. The taxpayer is able to do this because a newspaper, by subscribing to the books and mats, does not need to maintain an art department. All of the taxpayer's art is copyrighted. The taxpayer and a single New York competitor are substantially the sole sources of advertising books and mats.

The taxpayer's first contention that its books and mats are exempt periodicals cannot be sustained. A periodical is defined by ruling 50 as a publication "each issue of which contains news or information of general interest to the public, or to some particular organization or group of persons." The books and mats do not contain news or information, but art work exclusively. An accompanying booklet does contain columns of printed matter, but it is clear that its purpose is not to spread news or information. The printed columns are supplied for incorporation into the newspaper along with the advertising.

The taxpayer's alternative contention is that this board has mistakenly classified advertising service companies as consumers of the materials going into the production of the books and mats and that we are required under governing legal principles to treat it as a retailer for sales tax purposes. Such treatment would result in a downward adjustment of the tax in question because the taxpayer would be able to claim the interstate commerce exemption (see ruling 55) as to the great majority of its sales, which would more than offset the increased measure of tax on its California sales. A corresponding increase in tax on the sales of the taxpayer's New York competitor would also be a result of the proposed reclassification.

The board's long-standing interpretation has been that advertising service companies are rendering services and are consumers rather than retailers of the property they furnish in connection with those services. In 1946, this board's sales tax counsel advised the taxpayer that it was the consumer of the materials used in furnishing services to newspapers. In 1955, this interpretation was incorporated in Sales Tax General Bulletin 55-12, as follows:

"1. Advertising Service Companies (Cut and Copy Service)

These companies contract for a fixed sum per month (Usually based on population or circulation) to supply to publishers an advertising book service, consisting of a book or books of printed advertising illustrations which the publishers could use. The books are accompanied by a complete set of mats which the publisher may use after he has made the selection from the display book. The service also includes suggested ad combinations, layouts, copy and fashion information.

"The advertising mat service companies are the consumers of the mats and books. Accordingly, tax applies with respect to the sale to the companies of the mats or books, or if the companies prepare the mats or books, to the sale of the materials becoming a component part of the mats or books."

From 1946 until 1964, the taxpayer followed the interpretation that it was a consumer rather than a retailer of the books and mats which it furnished.

Persons who render services are properly considered as consumers rather than retailers of property which they furnish incidentally to their rendition of the services. This concept has long been recognized in the regulations of the board. (See rulings 1 through 11.) For example, the board has treated as consumers advertising agencies furnishing original manuscripts and statistical and other information (ruling 2); dentists who furnish plates, inlays and other property to their patients (ruling 5); and mailing houses which furnish mailing lists (ruling 7.5).

In General Electric Co. v. State Board of Equalization, (1952) 111 Cal.App.2d 180 [244 P.2d 427], at pages 186 and 188, the court made the following observations concerning the board's authority to distinguish between sales of services and sales of property and to make general classifications:

"… When we come to structures and fixtures attached to realty, the statute does not define, with minute precision, the division line between the sale of tangible personal property, and the sale of services. Close questions are bound to occur. The Legislature has seen fit to leave the determination of these questions to the state board under its rule-making power. In adopting rules that are intended to apply generally it is obvious that borderline cases will occur where it will be very difficult to ascertain whether the sale is primarily of property or of services.

* * *

"Rule-making bodies have a wide discretion in exercising the power to classify. As long as the rule works uniformly upon all persons in a class and the classification is based upon some natural or reasonable distinction, the classification is not invalid."

Although the court was concerned with ruling 11 and its application to construction contractors, the court's observations are applicable to other cases in which distinctions must be made between sales of services and sales of property.

It should be observed, moreover, that the consistent administrative construction of a statute for many years by the agency charged with its administration is entitled to great weight and should not be overturned unless it is clearly erroneous. (Lucas v. Hesperia Golf & Country Club, 255 Cal.App.2d_. [255 A.C.A. 278, 286].)

In developing and regularly supplying to its clients ideas and materials to be used for advertising purposes, the taxpayer undoubtedly provides services even though it furnishes tangible personal property. Although the question of whether it is selling services or is selling property is arguable, we have taken the position for the last 22 years that it is selling services. We do not believe that this long-continued interpretation can be characterized as clearly erroneous. It is our conclusion that the taxpayer uses the property here involved in rendering services and that it is a consumer and not a retailer of the property.

Consistent with the foregoing conclusion, a reaudit has been conducted pursuant to which the determination of tax in the amount of $18,138.16 against S C W, Inc., is hereby reduced to $13,090.04 and the determination of tax in the amount of $6,644.76 against Stamps-Conhaim-Whitehead is reduced to $4,401.72. In all other respects, the petitions and claim for refund are denied.

Done at Sacramento, California, this 8th day of October 1968.

Richard Nevins, Chairman

George R. Reilly, Member

John W. Lynch, Member

Attested by: H. F. Freeman, Executive Secretary