Thursday, March 25, 2010

What’s Next For Sales Tax (a/k/a Use Tax) On Direct Mail?

Direct marketers know that successful eCommerce strategies often depend upon reaching customers offline as well as online. Direct mail, including the distribution of catalogs, remains one of the most effective ways of driving traffic to a website. Indeed, given the reluctance of some consumers to give out their e-mail addresses, and the protections afforded consumers from unwanted solicitation under anti-SPAM, Do-Not-Call and other consumer privacy laws, traditional “snail mail” marketing techniques remain an important way for Internet sellers to communicate directly with customers.

Although several larger states (including California, New York, and Pennsylvania) provide exemptions from tax for certain types of direct mail, the vast majority of jurisdictions treat direct mail as taxable. And in all states, including those that provide exemptions, there are myriad other complex legal issues affecting taxability, including sourcing rules, taxability of postage, “direct mail” certificates, and nexus considerations, each of which make determining the proper sales tax treatment of direct mail transactions challenging. Add the fact that mailings go to recipients in many, if not all 50 states (and countless localities), each of which has its own tax law, and the difficulty of properly applying tax to any particular direct mail transaction multiplies exponentially.

Perhaps due to this complexity, states historically did not aggressively pursue audits or assessments on direct mail.  But, those days are gone. In recent years, states and localities have begun focusing more and more on sales and use tax application to direct mail, in part due to attention given the issue by the Streamlined Sales and Use Tax Agreement (“SSUTA”). Although it takes no position on whether direct mail should be subject to tax, the SSUTA project raised the issue’s profile by adopting provisions addressing the sourcing of direct mail transactions. Those provisions were amended in late 2009 to separate the treatment of “advertising and promotional direct mail” from other types of direct mail, such as invoices, notices, etc. But, the provisions do nothing to minimize (and, coupled with other provisions in the SSUTA, arguably aggravate) the complexity of taxation of direct mail.

In the last two years, many of the more aggressive states, particularly non-SSUTA states, began to put pressure on large printers and letter shops to collect the use tax on their sales of direct mail pieces, even on sales to clients that lacked any presence in the state. Internet and direct marketers began to receive unwelcome notices from their printers that they would have to pay tax on large print contracts, adding 7-10% to the already high cost of doing business for direct marketers

Given budgetary problems in states throughout the nation, revenue departments will likely continue to look for ways to boost tax collections from direct mail transactions. Direct marketers need to be aware of this issue prior to entering into any negotiation over print and other direct mail contracts; direct mail firms should understand their potential tax obligations and recognize that they may be able to take steps to minimize their tax exposure and thereby offer more competitive fees to their clients.

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