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Supreme court rules inserts subject to use tax The Kentucky Supreme Court ruled May 24 that newspaper inserts and catalogs sent through the mail are subject to the state’s 6 percent use tax, reversing a lower court ruling and a 30-year practice. The Kentucky Board of Tax Appeals and lower courts had ruled that the Revenue Cabinet wasn’t allowed to tax inserts and catalogs because it had failed to do so for some 30 years. Lower courts had ruled that cabinet auditors had failed to assess the use tax in a total of 18 audits against six retailers over a 30-year period and that the inserts, then, were not subject to being taxed. The Supreme Court disagreed, saying the “doctrine of contemporaneous construction cannot be founded upon an administrative agency’s failure to correctly apply the law.” The ruling will be used by the cabinet on retailers who place newspaper inserts or mail catalogs when that material is printed out of state. If the retailer did not pay a state sales tax in the state where the material was printed, then the Revenue Cabinet will charge the retailer the six percent use tax on those inserts and catalogs. Revenue Cabinet attorney Mike Kalinyak, who handled the case before the Supreme Court, said the decision will not mean any liability or responsibility for newspapers. “Newspapers will not have to pay the use tax or any portion of it,” said Kalinyak. “The retailer is responsible for that. And newspapers won’t have to file any reports or collect any portion of the tax. We’re not interested in what newspapers charge for inserts. Our concern will be with the retailer, who is the owner of the inserts and catalogs.” Kalinyak met with KPA Executive Director David T. Thompson on May 29 to discuss the ruling. “We’re trying to create an equal playing field,” said Kalinyak. “Retailers are accustomed to paying either a sales tax on the printing or the use tax in other states. If the retailer had its inserts printed in Kentucky, the retailer would be responsible for paying the six percent state sales tax. Frankly, what this does is mean no longer will a retailer find an advantage to having inserts printed out of state. Before this decision, it might have been an advantage to print the inserts out of state because in printing the inserts in Kentucky, the retailer had to pay the six percent state sales tax. But by printing out of state and then having the inserts or catalogs shipped into Kentucky, the retailer wasn’t paying the six percent as a use tax.” The use tax will be applied on any newspaper inserts coming into Kentucky, or catalogs mailed into Kentucky if the retailer did not pay a printing sales tax in the other state. “With this ruling, if a retailer uses a mailing service or an out-of-state newspaper to send inserts into Kentucky, then at that point they’ll be subject to paying the use tax regardless of how the insert is distributed to Kentucky consumers.” Asked if there would be any advantage for a retailer to use a mailing service to get around the use tax, Kalinyak replied, “ADVO was specifically mentioned in our case and the same rule applies. If ADVO sends the insert into Kentucky, then the retailer will be responsible for the use tax. This gives us the even playing field because inserts sent by a mailing service will not be treated any differently from newspaper inserts or from the catalogs going through the postal service into Kentucky.” The Kentucky Press Association had filed an amicus brief in the Lazarus case, a move that was opposed by the Revenue Cabinet. “I know KPA and its members felt this would financially impact newspapers but we don’t believe that’s the case. I learned a lot about the newspaper advertising business during this case and the decision might mean newspapers will use more ‘we-prints’ or even ROP advertising,” said Kalinyak. (We-prints would be subject to the state’s six percent sales tax on printing and charged by the printing plant to the retailer. ROP -- run-of-paper advertising that’s more commonly referred to as “display” advertising -- is not subject to any tax in Kentucky.) He said that the cabinet will audit the books of retailers and if it finds printing expenses it will examine where those inserts were distributed. “This isn’t about newspapers at all. Newspapers have no tax liability or responsibility under this ruling as far as the cabinet is concerned.” Kalinyak invited newspapers to contact him directly at the Kentucky Revenue Cabinet, at (502) 564-3112 with any questions or clarifications about the Supreme Court’s ruling or how the use tax will be applied to retailers. KPA has written a detailed report on the meeting with the Revenue Cabinet. The report will be mailed to all publishers.
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