Myths & Realities: Sales Tax and State Income Taxes for Direct Mail Producers

This article was produced exclusively for Mailers Hub by Martin I. Eisenstein and Jamie Szal of Brann & Isaacson.

Brann & Isaacson is a boutique law firm that represents large and small online and multichannel companies, printers, commercial mail producers, and IT service providers located across the country.  The firm advises companies of all sizes, including many in the Internet Retailer’s Top 500 Guide.

The firm is the Mailers Hub recommended legal counsel for mail producers on legal issues, including tax, privacy, consumer protection, intellectual property, vendor contracts, and employment matters.

The points of contact at Brann & Isaacson are: Martin I. Eisenstein, [email protected]; David Swetnam-Burland, [email protected]; Stacy O. Stitham, [email protected]; and Jamie Szal, [email protected].  They can also be reached by phone at (207) 786-3566.

---

We have practiced state and local tax for many years and have handled many state tax matters affecting our direct mail producer clients and direct mail publishers.

We can say that the area of state taxation is replete with land mines.  The battlefield is even more dangerous in the area of tax on direct mail materials, since there are a number of myths and misunderstandings.

The good news is that the states have not turned their attention, in general, to the direct mail producers, except for the very largest.  The bad news is that the states (especially Georgia, North Carolina, Texas, and Washington) are beginning to audit and assess direct mail producers, as they have been doing for your customers.

Myths and realities

Here are the Myths and Realities (or fiction and fact) for your consideration so that you can make sure you are assessing your risks accurately before the “tax man cometh.”

Myth 1: I sell only services when I print or caused to be printed direct mail materials for my customers.

Reality: Every state treats the sale of printing services as the sale of tangible personal property; i.e., the item that is produced.  The sale of tangible personal property used in the state is taxable unless there is an exemption in the state.

Myth 2: Sales tax on direct mail materials is governed by where I print the materials.

Reality: Actually, tax is based upon the destination of where materials are mailed if the producer has a mailing list from the customer and is responsible for distributing the direct mail to addresses on that list.

If the producer does not have or know the mailing list used to distribute the direct mail, applicable taxes will depend on whether the mail is promotional/advertising (e.g., catalogs or discount postcards) or non-promotional (e.g., privacy policies or constituent newsletters).  Under these circumstances, the general rule is that promotional direct mail is sourced to the origin location, meaning where the materials are produced; non-promotional materials are sourced to the billing address of the customer.

Myth 3: I do not have a physical presence in states other than the state where my company headquarters is; therefore, I am not subject to sales tax of other states.

Reality: Physical presence is no longer a requirement for sales tax, but if your sales to a state exceeded the minimum threshold levels ($100,000 annual revenue is the most common minimum threshold) then your Company is required to collect the state sales tax.  This is called economic nexus.  The revenue threshold is also calculated based on the same geographic sourcing rules highlighted in Myth 2.

Myth 4: Because I have economic nexus for sales tax, I also am required to pay the state’s income tax.

Reality: No, you are likely protected by the federal statute (Public Law 86-272) which precludes the states from imposing an income tax on a company located outside of the state if the company engages in no activities in the state other than the solicitation of the sale of tangible personal property.

But some states – such as California, which maintains one of the highest corporate income tax rate in the country – are taking the position that an out-of-state company’s maintenance of an Internet web site to post help wanted signs or to place cookies for website visitors’ computers voids the Public Law 86-272 exemption.  These “virtual contacts” are activities conducted at the location where the out-of-state company maintains its website and are not activities of the company in other states.  We think the states interpretation of this federal statute is wrong.  Stay tuned for upcoming developments.

Myth 5: I read about the Quad Graphics case in North Carolina, in which the lower court stated that Quad Graphics was not liable for a sales tax assessment.

Reality: That case is on appeal to the North Carolina Supreme Court, but it is an example of an assessment by a state of the wrong tax – the sales tax.  People often mistakenly think sales taxes and use taxes are interchangeable.  They’re not!  All commentators agree that if the state has assessed the use tax on Quad, it would have been liable for the tax.  Fortunately for Quad, states sometimes do not make sound decisions. 

Myth 6: Because I do not pay sales tax to the United States Postal Service for delivery of materials, I need not charge my customers sales tax on postal charges.

Reality: No.  Unless you are acting as an agent for your customers, or you are sending materials to states that do not assess tax on shipping and handling charges, then you are liable for the sales tax on any charges for postage, freight, and/or other shipping and handling.

[Below is an excerpt from an article written by Brann & Isaacson about agency and direct payment that was published in the October 12, 2020, issue of Mailer Hub News:

“… if a mail producer uses its meter to apply postage to a client’s mail, just as when a mail producer pays the postage for a client’s mailing (i.e., it ‘fronts’ the postage for the mail owner), and then 

bills back its customer for the postage applied (or paid), with or without a markup, the producer would not be able to utilize the federal government exemption on its transaction.  Payment for postage is not being made directly to the USPS by the mail owner/ payee, but rather to an intermediary party – the mail producer and/or the meter lessor – who is not acting as an agent.

“Conversely, as we’ve written before, the exemption would clearly apply if (1) the mail owner were using its own permit or meter and paid the USPS directly (e.g., a ‘postmaster’ check or through CMRS); or (2) the mail producer used its permit imprint account to pay the postage for a mailing but acted as the agent for the mail owner by transferring a postage check made out to ‘postmaster’ from the mail owner/ payee to the USPS; or (3) the mail producer is a CMRS customer and the mail owner had previously deposited money into the CMRS account of the mail producer, who is merely acting as an agent of the mail owner vis-a-vis the Postal Service.”] 

Myth 7: I sell to my customers on a price-per-piece basis, but I know what costs are printing and shipping and potentially other nontaxable services; therefore, I am able to charge tax only on the cost for printing.

Reality: It is not quite that simple.  Only if you itemize pricing on your invoices or other agreements with the customers, can you charge tax only on those taxable components of the package sold.

Myth 8: The sale of printing charges is taxable in all states.

Reality: There are 12 jurisdictions that potentially exempt promotional direct mail materials, but only if you satisfy the requirements of the exemption statute.  Those jurisdictions are: California, the District of Columbia, Florida, Illinois, Michigan, Missouri, New York, Pennsylvania, Ohio, Virginia, Wisconsin, and – to a much more limited extent – Massachusetts