WSR 02-12-063

EMERGENCY RULES

DEPARTMENT OF REVENUE


[ Filed May 31, 2002, 11:12 a.m. , effective June 1, 2002 ]

Date of Adoption: May 31, 2002.

Purpose: Persons who distribute or cause to be distributed any article of tangible personal property, except newspapers, the primary purpose of which is to promote the sale of products or services are subject to use tax on the value of the property. RCW 82.12.010, 82.12.020, and chapter 367, Laws of 2002. WAC 458-20-17803 is a new rule explaining how use tax applies when such property is delivered to persons other than the consumer from outside the state of Washington. This rule explains what are considered to be promotional materials, who is liable for the use tax, the measure of the use tax, and how to determine the appropriate local use tax rate/jurisdiction.

Statutory Authority for Adoption: RCW 82.32.300.

Under RCW 34.05.350 the agency for good cause finds that immediate adoption, amendment, or repeal of a rule is necessary for the preservation of the public health, safety, or general welfare, and that observing the time requirements of notice and opportunity to comment upon adoption of a permanent rule would be contrary to the public interest.

Reasons for this Finding: This rule is necessary to implement provisions of chapter 367, Laws of 2002. There is insufficient time to adopt a permanent rule before the effective date because this legislative change takes effect June 1, 2002.

Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 1, Amended 0, Repealed 0.

Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.

Number of Sections Adopted on the Agency's Own Initiative: New 1, Amended 0, Repealed 0.

Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.

Number of Sections Adopted Using Negotiated Rule Making: New 0, Amended 0, Repealed 0; Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 1, Amended 0, Repealed 0.
Effective Date of Rule: June 1, 2002.

May 31, 2002

Russell W. Brubaker, Assistant Director

Legislation and Policy Division


NEW SECTION
WAC 458-20-17803   Use tax on promotional materials.   (1) Introduction. Persons who distribute or cause to be distributed any article of tangible personal property, except newspapers, the primary purpose of which is to promote the sale of products or services, are subject to use tax on the value of the property. RCW 82.12.010, RCW 82.12.020, and chapter 367, Laws of 2002. This rule explains how use tax applies when such property is delivered directly to persons other than the consumer from outside Washington. For the purposes of this rule, the term "promotional material" will be used in describing such property where applicable. This rule provides numerous examples. For the purposes of these examples, presume the promotional material is delivered to persons within Washington.

Persons within this state providing printing or mailing bureau services should refer to WAC 458-20-141 (Duplicating industry and mailing bureaus) and WAC 458-20-144 (Printing industry).

(2) What is the use tax? The use tax compliments the retail sales tax by imposing a tax of a like amount when a consumer uses tangible personal property or certain retail services within this state. RCW 82.12.020. The tax does not apply to the use of any property or service if the present user, donor, or bailor previously paid retail sales tax under chapter 82.08 RCW with respect to the property used or the service obtained. See WAC 458-20-178 (Use tax) for a detailed explanation of the use tax and use tax reporting requirements.

(3) Who is liable for the use tax on promotional material? The use tax is imposed on the consumer. The law provides that with respect to promotional material distributed to persons within this state, the consumer is the person who distributes or causes the distribution of the promotional material. A consumer as defined in this rule is responsible for remitting use tax only if the consumer has nexus in Washington.

For example, a department store located in Washington contracts with a printer in Vancouver, British Columbia, to print a catalog promoting merchandise available during an upcoming sales event. The printer delivers the catalogs to a Seattle mailing bureau with which the department store has contracted for distribution to the department store's customers. The department store is the consumer of the catalogs and is liable for use tax on promotional material distributed to customers located in Washington. Neither the printer, nor the mailing bureau, nor the department store's customers are consumers of this promotional material.

(4) When does tax liability arise? Liability for the use tax arises when a consumer first uses the promotional material in this state. The terms "use," "used," "using," or "put to use" include any act by which a person takes or assumes dominion or control over the article, and include the distribution of promotional material in Washington. Chapter 367, Laws of 2002.

(5) What is promotional material? Promotional material is any tangible personal property displayed or distributed in the State of Washington for the primary purpose of promoting the sale of products or services. Examples of promotional material include, but are not limited to, advertising literature, circulars, catalogs, brochures, inserts (but not newspaper inserts), flyers, applications, order forms, envelopes, folders, posters, coupons, displays, signs, free gifts, or samples (such as carpet or textile samples).

Promotional material does not include invoices, statements of account, and similar documents that are used exclusively for non-promotional purposes.

(a) Are billing statements promotional materials? Billing statements and statements of account generally are not considered promotional materials. However, information promoting the sale of products or services that is affixed to, is attached to, or is an extension of a billing statement or statement of account is promotional material. The value of the promotional material is subject to use tax. If the consumer cannot separately identify the costs attributable to the promotional material, the full value of the billing statement is subject to use tax. For additional information regarding the measure of tax, refer to subsection (6) of this rule.

(i) Example. A Richland attorney contracts with a Umatilla, Oregon, firm to print and mail monthly billing statements and return remittance envelopes to the attorney's clients. The contract also includes the printing and insertion of a flyer promoting the attorney's estate planning services. The flyers are promotional material. The billing statements are not promotional material.

(ii) Example. Store A prints its monthly billing statements for its store credit card in Atlanta, Georgia, and mails them to customers located in Washington. Although the billing statement includes three sentences noting an upcoming sale, this information is not affixed or attached to the billing statement, nor does it otherwise extend the length of the billing statement. The billing statements are not promotional material.

(iii) Example. The following month, Store A's billing statement includes a detachable coupon for fifteen percent (15%) off selected items purchased during a specified period. The detachable coupon is promotional material.

(iv) Example. In the third month, the bottom of Store A's billing statement is lengthened to include information promoting the grand reopening of one of its locations. The lengthened portion of the billing statement containing the information promoting the grand reopening is promotional material.

(b) When are envelopes considered promotional material? Envelopes are considered promotional material if used exclusively to mail promotional material, or accept offers solicited with promotional material. To the extent promotional material is attached, affixed, or otherwise extends the envelope, the consumer is distributing or causing the distribution of promotional material. The value of the promotional material is subject to use tax. If the consumer cannot separately identify the costs attributable to the promotional information, the full value of the envelopes is subject to use tax. For additional information regarding the measure of tax, refer to subsection (6) of this rule.

(i) Example. Bank A mails one million brochures, applications, and return envelopes from Atlanta, Georgia, to Washington addresses promoting the bank's credit card. The envelopes used to mail brochures and applications are promotional material. The return envelopes provided for the return of credit card applications is also promotional material.

(ii) Example. A telephone company mails its monthly billing statements to Washington customers from St. Louis, Missouri. Inserts promoting the sale of various telephone accessories are included. The inserts identify a toll-free number to call for those customers wishing to purchase the accessories. Return envelopes to be used in making payment of the statement amount are also enclosed. Neither the envelopes used to mail the billing statements and inserts nor the return envelopes used to make payment are promotional material.

(iii) Example. A national mortgage company mails its monthly billing statements to Washington residents from its administrative offices in Nevada. The enclosed return envelope for customers to use in making payment includes an attachment promoting additional banking services. The envelopes containing the billing statements are not promotional materials. The attachment to the return envelopes is promotional material.

(6) What is the measure of tax? The measure of the use tax is the value of the article used. For the purposes of computing the use tax due on promotional material, the measure of tax is the total consideration paid for the promotional material without deduction for the cost of materials, labor, author's alterations, or other service charges, even though such charges may be stated or shown separately on invoices. It also includes the amount of any freight, delivery, or other like transportation charge paid or given by the consumer to the seller. The value of the promotional material also includes any tariffs or duties paid. If the total consideration paid does not represent the true value of the article used, the value must be determined as nearly as possible according to the retail selling price at place of use of similar materials of like quality and character. RCW 82.12.010.

A consumer who has paid retail sales or use tax that is due in another state with respect to promotional material that is subject to use tax in this state may take a credit for the amount of tax so paid. RCW 82.12.035. For further information, refer to WAC 458-20-178 (Use tax).

(a) Is postage included in the measure of tax? Postage is included in the measure of tax if the cost is included in the total charge to the consumer by the seller of the promotional material. It is immaterial if the postage charges are stated or shown separately on invoices. Postage is not included in the measure of tax only if it is not included in the consideration paid by the consumer to the seller of the promotional material.

(i) Example. A College Place fast-food restaurant contracts with a Hermiston, Oregon, printer to produce and mail 10,000 coupons to Walla Walla County residents. The printer pays for the postage and invoices the restaurant for the actual amount for the postage. Postage is part of the total consideration paid by the restaurant and is included in the measure of tax.

(ii) Example. A Vancouver coffee retailer contracts with a Portland, Oregon, firm to print and mail 10,000 flyers promoting the retailer's drive-thru window to neighborhood businesses and residents. The retailer provides the printer with retailer's U.S. Postal Service bulk mail permit imprint to be printed on the flyer. While payment to the U.S. Postal Service for use of the bulk mail permit is the exclusive responsibility of the retailer, the printer advances payment to the U.S. Postal Service to ensure the mailing of the flyers. The printer itemizes the cost of the postage the printer paid to the U.S. Postal Service on behalf of retailer on the sales invoice to retailer. The itemized charge for the postage is not included in the measure of tax.

(b) What is the measure of tax when a consumer manufactures its own promotional materials? The measure of tax is the value of the promotional material. Refer to WAC 458-20-112 (Value of products). A consumer who manufactures its own promotional material may also be conducting manufacturing activities and should refer to WAC 458-20-134 (Commercial or industrial use) and WAC 458-20-136 (Manufacturing, processing for hire, fabricating).

(c) What is the tax result when a consumer contracts with separate firms to perform printing activities and to provide mailing bureau services? The acquisition of promotional material and the mailing bureau services associated with the distribution of this material are separate taxable incidents. A consumer who distributes or causes the distribution of promotional material into Washington is the consumer of such material, and thus, is taxable to the extent the promotional material has not been subjected to retail sales tax. Mailing bureau services consist of installing, altering, imprinting, or improving tangible personal property and are retail services. The consumer is subject to use tax on these services if the property upon which the service was performed is distributed into Washington. Chapter 367, Laws of 2002.

(i) Example. A Bellingham real estate company contracts with a Vancouver, British Columbia, company to print 5,000 flyers on a bi-monthly basis to promote its new listings. The flyers are delivered to a Portland, Oregon, mailing bureau that mails the flyers to Whatcom County residents. The measure of tax is the consideration paid to the Vancouver, British Columbia, printer and the Portland mailing bureau.

(ii) Example. A window manufacturer contracts with a Boise, Idaho, printer to produce a flyer offering a discount on purchases of the manufacturer's windows at participating retailers. The printer delivers the flyers to light and power companies in Washington for inclusion in utility statements. The window manufacturer owes use tax on the amount of consideration paid to the printer for producing the flyer and to the utility companies for distributing the flyers.

(7) Determining the applicable local use tax rate. For the purposes of determining the applicable rate of local use tax for promotional material, the following guidelines must be followed unless the consumer obtains prior written approval from the department to use an alternative method. Refer to (c) of this subsection for an explanation of the circumstances under which the department will consider approving alternate methods and how to obtain such approval.

(a) Operations directed from within Washington. The applicable local taxing jurisdiction and tax rate is the in-state location from where the consumer directs or manages its Washington operations.

(i) Example. Store A operates ten locations in western Washington. The company's corporate headquarters, the location from where it manages its in-state operations, is in Seattle. The local use tax rate for Seattle is the applicable rate.

(ii) Example. Store B, a national company with headquarters in Chicago, Illinois, operates multiple locations in Washington. The company manages its Washington operations from a location in Spokane. The local use tax rate for Spokane is the applicable rate.

(b) Operations directed from outside Washington. A consumer that manages or directs its Washington activities from outside the state must equally apportion the value of the promotional material among the local tax jurisdictions and tax rates from where the consumer conducts its business activities. Promotional material that is targeted to specific business locations of the consumer must be apportioned solely between those business locations. Targeted material is material the consumer can demonstrate was specifically distributed to promote sales of products or services solely at a specific location(s) and at a different price(s) or terms than those offered at all other Washington locations.

(i) Example. Retailer C directs the operations of its four Washington stores from its headquarters in Sacramento, California. The store locations are in Seattle, unincorporated King County, Tacoma, and Everett. For purposes of determining use tax liability, twenty-five percent (25%) of the value of the promotional material must be equally apportioned to Seattle, unincorporated King County, Tacoma, and Everett.

(ii) Example. Store C, headquartered in Nevada, orders 100,000 flyers from a Portland, Oregon, printer to be mailed to Washington households announcing the opening of its new store in Spokane. Customers will receive a ten percent (10%) discount on all items purchased at the Spokane store. This discount will not apply to purchases made at Store C's other Washington locations. The local use tax rate for Spokane is the applicable rate.

(iii) Example. A regional restaurant with locations in western Washington manages the operations of all Washington locations from its headquarters located in Portland, Oregon. The restaurant contracts to have coupon books printed and mailed to households in Clark and Cowlitz counties. The coupons are accepted only at the Vancouver and Longview locations. The value of the promotional material must be equally apportioned to both locations.

(iv) Example. A manufacturer located in Ohio has no offices, warehouses, or storefront locations in Washington. A salesperson operating from her Kent home solicits sales from Washington distributors for the manufacturer. The manufacturer mails promotional material to its distributors' customers in Washington. The local use tax rate for Kent is the applicable rate.

(v) Example. A wholesale business located in Michigan has no offices, warehouses, or storefront locations in Washington, but does send a salesperson into Washington to solicit sales. The wholesale business mails promotional material to potential customers in Washington. The applicable local use tax rate is a uniform statewide local rate of .005.

(c) Are there alternative methods for determining the place of first use? For purposes of reporting use tax on promotional material, the Department may agree to allow a consumer to use another method of determining the applicable local use tax rate provided that the method proposed by the consumer results in an equal or more equitable distribution of the tax. A consumer may request written approval for the use of an alternative method by contacting the department's taxpayer services division at:

Department of Revenue

Taxpayer Services

P.O. Box 47478

Olympia, WA 98504-7478

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Washington State Code Reviser's Office