Monday, December 10, 2012

[Re]Coupon Taxes

World Publications, Inc. v. Vermont Dept. of Taxes, 2012 VT 78

Today’s case concerns the amount of taxes a free newspaper must pay for the coupon section that it offers to readers as a monthly special. 

That’s right, it is a tax appeal case, and the question at the heart of it all is this:

When you break down a newspaper into its component parts, does it include a once-a-month coupon book? 

“No, no it doesn’t,” says the SCOV. 

Let’s step back, though, to understand why this is important.  Apparently, there’s some big-deal exception to sales-and-use taxes for newspapers and their component parts. 

I did not know this. 

Here is how it works.

Newspapers and the stuff used to make them are exempt from sales-and-use tax, as long as the newspaper is at least 10% “newspaper” stuff—editorials, general and local news, community notices and the like.  There’s a statute  and everything. 

Who’d a thunk?        

Taxpayer distributes The World, which is a free weekly newspaper distributed throughout central Vermont.  The paper is exempt under the 10%-newspaper-stuff exemption mentioned above.  But once a month, the printer includes a coupon book for local businesses.  The coupon book is compiled by the paper’s employees, and then sent electronically to the printer.  It is not part of the paper’s print run.   

The Commissioner of Taxes ruled that the coupon books are not “component parts” of the newspaper and so the coupon-book’s production costs are not exempt from sales-and-use tax.  The superior court affirmed.  The SCOV doesn’t break the pattern.     

Basically, the paper is printed and distributed for free to households and newsstands throughout central Vermont.  It’s 35% central-Vermont news and the rest is advertising.  Almost all the paper’s revenue comes from advertising sales.   Once a month, the coupon book is included with the paper.  Ninety percent of the coupon books go in the paper; the rest are distributed on World-branded news racks. 

This whole controversy came about when the Department of Taxes audited the sales and use tax returns and determined that while The World is an exempt newspaper, the coupon books are not exempt.  Assess someone taxes they didn’t think they owed, and they’ll appeal, as happened here. 

The Commissioner concluded that the coupon books were “additional, separate publications” and not component parts of the newspapers.  Hence, the coupon books were not exempt.  Tax exemptions are construed narrowly against the taxpayer.  There’s a case from the Eighties covering grocery-store-advertising newspaper inserts that the Commissioner relied on in large part.  Essentially, the Commissioner found the coupon books are (1) solely ads; (2) contain no content; (3) do not contribute to the newspaper; (4) do not command their own following; and (5) are not separately indexed sections of the newspaper.  Additionally, not all the coupon books are inserted in the newspaper—they’re also available on the news racks.    

Taxpayer appealed and the superior court affirmed without adding anything significant.  And so, Taxpayer appealed to the SCOV.   Taxpayer’s argument on appeal is that the coupon book adds to the paper’s character and must be considered a component part.  The SCOV is unconvinced.  

The SCOV begins by noting that it reviews the Commissioner’s decision independent of the superior court’s conclusions.  The SCOV also defers to agency-based expertise.   But you knew that. 

The standard quoted for a taxpayer’s burden to show entitlement to an exemption seems a bit high: “taxpayer has the burden of clearly establishing the exemption beyond a reasonable doubt.”  Say what?  Are you a former prosecutor?  Interested in tax law?  Have we got an offer for you . . .      

Although there are some significant factual differences between the grocery-store-advertising-inserts case and this one, the SCOV nonetheless concludes that the coupon books here are subject to sales-and-use tax.  This is because tax exemptions are construed narrowly against the taxpayer and none of the Commissioner’s reasoning is clearly wrong.  That’s it.  There’re a lot more words in the opinion, but I’m serious—that’s it. 

So, if you’re ever printing coupon books for your newspaper and you don’t want to pay sales-and-use tax, just put a section letter and number on it and add one page of a “spotlight on local business” for each nine pages of coupons. 

Otherwise, be prepared to pay the taxman for all those savings.  Of course, you could just use Groupon.  But where is the fun trying to clip something from the internet.

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