The current sales tax exemption for printed sales messages applies to special order compact discs printed with a promotional message. On September 4, the Fourth District Court of Appeal held that the State Board of Equalization's attempt to assess use tax on such promotional materials as taxable gifts was wrong.
The case involved PeoplePC, which arranged for mailings of the CDs from California at no cost to the recipients. The primary purpose was to induce prospective customers to sign up for the company's low-cost Internet service. The surface of each CD contained a custom silk-screen message, printed to the special order of PeoplePC, stating "$9.95 a month for unlimited Internet … with 250 free hours a month." The primary purpose of the CDs was to promote and advertise the sale of PeoplePC's Internet access service, the company said.
The CDs contained specially designed software, the sole purpose of which was to enable a potential customer to sign up for PeoplePC's service over the Internet. In effect, the software functioned like an order form affixed to a printed catalog, allowing new customers to purchase the service. Recipients could not use the software to access the Internet directly without first signing up for the service.
Upon receipt, the CDs became the property of the recipients. The CDs had no independent value to the recipient, except as an advertisement accompanied by a means to order the Internet service.
The BOE argued that the sales tax exemption for promotional messages is limited to messages printed on "paper."
In support of its view, the board pointed to a 1789 definition from the Merriam-Webster dictionary that defines "circular" as a paper leaflet intended for wide distribution. The BOE also cited some of its annotations to support its argument.
The court noted that the statute is silent with respect to a limitation of "paper" messages.
The court said the exemption was enacted by the Legislature "to eliminate the competitive advantage held by out-of-state printers when, to avoid payment of California taxes, large retail advertisers contracted with the out-of-state firms, instead of California companies, to print advertising materials, which were to be mailed at no cost to California consumers."
The court added: "Review of the history discloses no legislative attempts to require catalogs, letters, circulars, brochures or pamphlets be printed on paper to qualify for the tax exemption. Similarly, the history does not define, or even discuss, a circular as being a printing on paper."
In rebuttal to the BOE, the court decided to "accord the Board's administrative rulings little deference" for several reasons: the BOE's view of words with common meaning has no interpretative value over court interpretations; the annotations were written by a single staff member, and there is no indication they are "probably correct"; and they don't set forth a board policy position.
The court concluded that the parties stipulated that the sole purpose of the software on the CDs was to enable a customer to sign up for Internet service, and that it could not be used to access the Internet without signing up for the service. As such, it functioned as an order form. The court said that since the board stipulated to this, it cannot deny the legal effects of the stipulation.
Thus, the court determined "as a matter of law that the CDs qualified for the sales or use tax exemption as printed sales messages." The case is PeoplePC, Inc. v. State Board of Equalization, No. D054163, (2009).
The decision was written by Justice Richard Huffman, and concurred in by Acting Presiding Justice Patricia Benke and Justice Joan Irion.
Cal-TaxReports, September 14, 2009
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