Proposed New Sales Tax Rules Threaten Print and Mail Providers

Providers of bill print and mail services have not provided their input on the Streamlined Sales Tax Agreement (SSTA)—a collective effort aimed at simplifying sales taxes across multiple states to make things easier on multi-state businesses—but their failure to ante up may come back to haunt them.

Fifteen states that have already passed SSTA legislation are members of the Governing Board of the SSTA, and their votes will be determinative for all 45 states that are expected to pass the legislation. But proposed changes to the sales tax rules relating to postage under SSTA are likely to result in a complex tax burden for print and mail providers. The board’s next vote, slated for June 22 in Detroit, will set a precedent that will matter when the SSTA moves to the federal level. Unless the stakeholders put all of their chips on the table to show the board that the proposed rules are detrimental, they are likely to lose what is becoming a legislative game of poker.

Playing by Which Rules?

When the board votes in June, it will consider the “postage rule” which currently clarifies that postage procured through a mailing agent is not part of the sales price of printed material. In a uniform, simple and ideal sales tax world, the board would largely leave the postage rule as it is. Currently, if outsourced invoicing services are performed in states that regard them as services, then tax is only paid to the state where the service is performed. If the state regards these services as non-taxable, then the billing company—such as a telco—would pay tax to the state only on the paper, envelopes and other materials used in performing the service.

If outsourced invoicing is performed in states that instead regard this service as a sale of printed material, the billing company pays tax on the portion delivered to in-state addresses, and neither the billing company nor its customer is required to remit use tax on distribution of invoices in other states. Most importantly, postage procured through the mailing agent’s permit or meter is not taxable.

If providers of print and mail services do not lobby the board, it is possible—and likely—that proposed new rules will give SSTA states the right to assess taxes on postage as part of the value of a print and mail service. Under this set of rules, print and mail providers will bear the burden of determining what portion of each billing cycle is delivered to SSTA jurisdictions, and whether each jurisdiction regards the service as a sale of printed material; and they will have to collect sales tax from their customers accordingly.

If the SSTA is eventually incorporated into federal legislation, print and mail providers could be required to collect sales tax on every bill delivered into each of thousands of tax jurisdictions. They would therefore need to document the distribution to each tax jurisdiction for each billing cycle and retain the information for audit by each jurisdiction.

Some argue that bill print and mail providers can strongly encourage their customers to procure and administer their own postal permits in order to avoid tax on postage. This sort of operational change is not a more efficient way to do business, and it undermines some of the value of the outsourced service. The print and mail community’s best course of action is to lobby individual state legislatures for a direct mail delivery charge exclusion. Asserting through tax protests or litigation that states recognize agency relationships in the procurement of postage is also a possibility.

When the postage rule was voted on in December, the board consisted of 13 members. Rhode Island and Vermont became members as of January 1, 2007 because they have since adopted SSTA legislation. Delegates from North and South Dakota, Kansas, Oklahoma, Michigan, Indiana, Iowa and West Virginia voted in favor of the current postage rule. Though these eight states represented a majority, a super-majority was needed to change the rules. The five states that voted negatively, for a change in the rules, include Nebraska, Kentucky, New Jersey, Minnesota and North Carolina. Because the board has since expanded by two members, 12 votes will be needed in June to achieve a super-majority.

When You’re on the Losing End

The odds of print and mail providers being dealt a losing hand are increased, because many of the states most likely to support the print and mail industry do not yet have a vote on the board and are not participating in the work group formed at its request. This work group will be influential in developing a recommendation to the board, and many factors could influence the dynamics of this group.

For starters, it appears that a minority is asserting the right to tax postage on bulk mail. In these states, excluding Nebraska, this tax would represent a new tax on postage due to a reinterpretation of the sales price and delivery charge definition. This issue is extremely important to those who print and mail bills, because the SSTA definition for direct mail apparently includes both duplicated materials and customized statements. Most states do not tax mailing services that involve distinct statements, such as telecom invoices, so most billing and telecom companies have not participated much in the SSTA work group and are unaware of the discussions that may impact their businesses.

Most people would regard postage as a payment to the government for delivering mail, not as a delivery charge in the context of a sale. The board has not yet endorsed the principle that sales tax may be imposed on postage under the SSTA’s uniform definition of delivery charges, but the failure of the postage rule leaves the question unanswered.

The board represents 21 states, but only 15 have fully adopted SSTA and can vote. Two dozen other states are expected to adopt SSTA legislation eventually, which means the 15 voting states will drive policy for the other 30 as well. Thus, the board’s interpretation of the delivery charge definition and the rules it adopts will spread to other states, even if they aren’t members of the board and even if the SSTA does not ascend to the federal level.

A Round of Omaha High-Low

Nebraska has a long-standing policy of taxing postage as part of the sales price of printed materials. This policy has repressed the growth of the printing and direct mail advertising industry in the state, led to the adoption of less efficient operating procedures and increased the outsourcing of mailing services to out-of-state providers. Print and mail companies operating out of Nebraska must determine whether their service is a sale of printed materials or a billing service. The determining factor has to do with the amount of data processing involved. The fact that the output itself is individualized is not determinative.

This issue is particularly sensitive, because the Nebraska delegate to the board continues to assert that the Nebraska Supreme Court mandated taxes on postage in Affiliated Foods Cooperative, Inc. v. State of Nebraska et al. This decision affirmed in part, and reversed in part, an earlier ruling. The case involved advertising materials mailed by a grocery cooperative where the postage was reimbursed by the ratepayer. This case, however, involves specific relationships and events that are significantly different from those typical of bill print and mail providers. Further, because the Nebraska statute on transportation and delivery has changed, there is doubt that the case provides binding precedent in the context of the current debate.

While we don’t know whether the Nebraska legislature gave any consideration to this particular issue when it passed SSTA legislation, it is nonetheless notable that every state represented by an elected delegate at December’s board meeting—as opposed to a tax administrator serving as a delegate—voted in support of the current postage rule. Consider also that when the Michigan Legislature was informed last year that some states are reinterpreting the SSTA delivery charge definition in order to impose tax on postage, it voted unanimously to adopt the direct mail delivery charge exclusion retroactively as the most expedient and effective way to resolve the issue for its businesses and their customers.

Given the most recent indications of general legislative intent with regard to this issue, the particular facts of the Affiliated Foods case and subsequent changes to Nebraska’s statute, the Nebraska state tax commissioner has agreed to reevaluate whether this case should bind the vote of the Nebraska delegate to the board on this issue.

South Dakota on the Button

South Dakota taxes almost every service and has a long-standing tradition of taxing the portion of billing and mailing services that result in mail delivered to mailboxes in the state. While the direct mail industry accepts that states have a right to tax services and accepts South Dakota’s tax treatment as a state matter, the issue has broader implications within the multi-state framework of the SSTA. Although billing companies located in South Dakota have managed to comply with this requirement, it is clear that this approach is unacceptable to billing companies as a multi-state application.

South Dakota’s treatment is similar in concept to SSTA Section 313.A, whereby tax would be paid on each individual piece of mail based on the location of the mailbox. In December the South Dakota delegate voted in support of the postage rule, but the state has not yet endorsed other direct mail proposals involving Section 313.

The Stakes in New Jersey

How postage and other items or services relating to direct mail are taxed will impact New Jersey businesses dramatically. The state volunteered for the work group and has been an active participant. Its long-standing practice of taxing mailing services on promotional materials creates another problem for billing companies, because some states in the SSTA project apparently intended the definition of direct mail to include transaction mail and business correspondence.

When New Jersey restated its tax statute in October 2005 as one on “direct mail” processing, the New Jersey Division of Taxation did not foresee that the semantic change could result in an automatic extension of the tax to billing services. In addition to the direct mail definition, the issue of taxes on postage procured through a mailing agent is significant. At the board’s meeting in December, New Jersey’s delegate cast a “reluctant no” against the postage rule and promised to seek legal counsel on the issue.

Other States Show Their Cards

Rhode Island and Vermont will be new players in the upcoming vote. The direct mail industry has the opportunity to ask the delegates from these states to support its position. Because both states enacted the direct mail delivery charge exclusion, securing their votes may only involve explaining the impact that the new proposals would have on businesses in their states.

In December, the delegate from Kentucky voted against the postage rule and has since affirmed that the state does not regard transaction mail as taxable because it is part of a non-taxable billing service. The Direct Mail Coalition, which represents companies that use direct mail and provide direct mail services, argues to take this point of view further. It asserts that separately stated mailing services are distinct from the manufacture of printed material. Under normal sales tax statutes, mailing services would be part of the sales price of the non-taxable mailing service rather than part of the sales price of the manufactured material.

Minnesota and North Carolina both voted against the postage rule in December. The delegates from each state expressed a desire to see the direct mail issue addressed by the State and Local Advisory Council. They are concerned as to whether they should protect the “states’ right” to tax postage procured through a mailing agent for a bulk mailing.

Postal Service Makes a Statement

The U.S. Postal Service opinion on taxation is becoming more vital, because the SSTA project hopes to achieve federal legislation. The USPS filed a public comment indicating that it does not regard mailing agents as postage sellers. Rather, when a mailing agent procures postage for its customers, the USPS views it as an action on behalf of a principal. This issue may turn the direct mail industry against the SSTA project. Postage costs are critical to the direct mail industry, and a tax that would add to those costs would be painful. Jobs and revenue in SSTA states would likely be lost to competitors in non-SSTA states because of the cost imbalance.

The SSTA’s intended goal is to simplify taxation, but paying sales tax on each piece of mail based on the location of the delivery mailbox is extremely complicated. Further, states typically do not charge sales tax at the mailbox, though some states impose use tax on distribution. Arguably it is unconstitutional for legislatures to expand their tax bases by imposing use tax on USPS mail distribution under the guise of a sales tax at the mailbox, particularly when the sender has no nexus in the state.

Print and Mail Must Force the Hand

The SSTA project should consider that its original goal was to increase sales tax collections on sales by remote vendors, rather than seeking sales tax on each piece of mail. This issue can result in an enormous tax increase imposed solely on the direct mail industry. Given state legislators’ propensity to utilize direct mail, it’s reasonable to assume—except in Nebraska—that they did not intend for the SSTA to include new taxes on the postage that mailing agents procure for bulk mail campaigns.

The best way for billers and their print and mail agents to avoid the imposition of new SSTA taxes, and the subsequent legal battles against them, is to provide public comments on these issues to the board and its working group. The Direct Mail Coalition is working with the Mailing and Fulfillment Service Association, the Association for Postal Commerce, the Saturation Mailers Coalition, the Envelope Manufacturers Association, the Printing Industries of America/Graphic Arts Technical Foundation, the Nebraska Grocer Industry Association and the New Jersey Business and Industry Association to inform the SSTA board and state legislatures of the negative and unfair impact their proposed roles would have. Print and mail providers interested in protecting their businesses and staying in the game should make their opposition to any new sales tax on bulk mail postage understood immediately.

Melanie Hill is a tax specialist with Dow Lohnes Price tax consulting group, affiliated with the law firm of Dow Lohnes in Atlanta and Washington, D.C. She can be reached at mchill@dlptax.com. Further information about the Direct Mail Coalition can be obtained from Carole Fralick at cfralick@dowlohnes.com. Billing companies willing to make a public comment on the proposals may contact Fralick for teleconference information.