Observing the Letter of the Law

by Matt Kelsey

Nearly ten years ago, the Bookbuilders West Tax Committee, spearheaded by Ken Burke, Paul Butzler, and Peter Martin, approached the State Board of Equalization to discuss concerns about inconsistent and confusing rules on sales and use tax for the publishing industry. This eventually resulted in the State Board's adoption of Regulation 1543, Publishers, effective March 1991.

New California Sales and
Use Tax Guide

Now Bookbuilders West has just published California Sales and Use Tax Guide, which has been written to explain the sales and use tax regulations for publishers and for suppliers to the publishing industry. The Guide is the culmination of four more years of effort by several dedicated Bookbuilders members to clarify the tax regulations for the book publishing industry.

The California sales and use tax Regulation 1543 was the subject of a BBW educational seminar on July 25. The seminar, presented by Peter Martin of the Design Office, coincided with the release of the new guide. This publication, written and designed by Peter Martin and reviewed by the legal department of the State Board of Equalization, presents the full text of Regulation 1543 in an elegantly designed and easy-to-use three-column format, with the text printed side by side with an "Explanation" column and a "Points to Remember" column. Other important sections of the Guide are "Examples of Estimates, Purchase Orders, and Invoices" and "How to Survive a Tax Audit."

Applying Regulation 1543

Even though Regulation 1543 is only five years old, in that short time advances in electronic production have had a substantial effect on the workflows and potential tax liabilities of designers, production services, and publishers. The Guide provides insight on the tax impact from the increasing integration of electronic design, production, and prepress services into publishing. The clarifications and explanations in the Guide are based on information from individual audits, seminars by the State Board of Equalization, and interpretations of the regulation by Bookbuilders' own experts. The Guide has been reviewed by a member of the State Board of Equalization. However, it should not be considered a legal document, nor is it equivalent to a written ruling from the State Board.

One particularly valuable feature of the Guide is the section of sample estimates, purchase orders, and invoices. These provide concrete examples of how suppliers and publishers should structure their workflow and documentation to minimize tax liabilities. See the example of the staged contract shown here. In case of an audit, it is essential that the stages of the contract are properly documented and that the publisher gives written approval at the end of each stage, so that there is a clear separation between nontaxable design and production functions and taxable "tangible personal property." The sample forms provided in the Guide will be invaluable for publishers and suppliers who want to remain in compliance with all sales tax regulations while not paying any more tax than is necessary. Ignorance of sales tax regulations can be very costly in case of an audit.

Here are a few other important points concerning sales tax for designers, publishing suppliers, and publishers, and each of these points is further clarified in the Guide:

Composition is not taxable, but if the files include art, the entire charge for composition is taxable.

If files are sent to the publisher or directly to a prepress or printing company on-line, that is by electronic transmission such as by modem, sales or use tax would not apply.

Sales tax applies to "tangible personal property" sold to a California publisher. However, if pursuant to the contract, all the tangible personal property is shipped to an out-of-state prepress or printing company, the sale is exempt from sales tax. The shipping document must be retained as proof.

Sales tax audits are limited to three years, so be sure to keep all of your records for at least that period of time.

Copies of the 48-page California Sales and Use Tax Guide are available for a donation of $10. Send orders with payment to: Bookbuilders West, Box 7046, San Francisco, CA 94120-9727 (see order blank on pages 4 and 5).

Sample Estimate

Staged Contract: Full comprehensive services with final electronic files as final product.

If a book packaging company, editorial group, design or production group provides publishing services from editing through final files and delivers a disk for final film output to the publisher, all editorial, design, and production functions are taxable. However, if the contract groups taxable and non-taxable services by stages and it can be shown that the publisher approved each stage, only the charges for items in stage 3 are taxable.

Note: The designer or production person intends to transfer title to illustration and photography immediately to the publisher. If this clause is not included in the estimate (contract) and the illustrations and photographs are used prior to selling them, use tax must be reported on line 2 of your sales tax return.