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Sales Tax As Penalty?

author photo of Annette Nellen

In California, it is not uncommon for tax proposals to appear on voter ballots through the initiative process. In fact, voters in Califronia have even voted on whether income should be apportioned using three factors or a single sales factor (single sales factor won - Prop 39 of 11/6/12). An "active measure" posted the the California Secretary of State's Office that caught my attention calls for a 1000% sales tax on "political advertisements" (15-0106). More specifically, it says it is imposed on the "privilege of influencing public elections and political issues." While the proposal provides that exemptions are only as federally required, there is an exemption specified for the first $1 million of spending in a calendar year. In measuring this threshold and what the tax applies to, both cash and bartering transactions are considered. The proceeds of the tax are earmarked for public education.

So, why a 1000% tax? It certainly sounds like the purpose is to limit such advertisements. If the purpose were soley to get more funds for education, then the normal sales tax could apply, but the funds earmarked for public education (not a good idea). What is the normal sales tax for political ads? Per California Sales Tax Reg 1541(b)(1), "The production of printed matter for a consumer is a sale of tangible personal property whether the materials incorporated into the printed matter are furnished by the consumer or the printer." Thus, they are subject to sales tax. But the services of an advertising agency in designing ads is generally a tax-exempt service. But issues can come up if the end product is transferred in tangible rather than digital form or there is bundling (Reg. 1540(b)(1)).

It is not clear if the proposition intends to expand the current sales tax to include the development of political advertisements, or just change the applicable tax, such as for printed ads, from the nromal (roughly 9%) to 1000%.

The California Legislative Analyst's Office analysis (10/28/15) notes in its short analysis of the proposal that there are "many legal uncertainties" as the proposal would limit forms of political communicatoin and that the fiscal effect is "uncertain."

Beyond just determining if the intent is to broaden the base of the sales tax for political ads or just tax printed ads at 1000%, there is a constitutional issue as to whether this proposal impedes free speech under the First Amendment of the U.S. Constitution? There are a few cases on this. For example, one that dealt with a situation involving a newspaper (freedom of the press), is Minneaplis Star v. Minnesota Comm'r, 460 U.S. 575 (1983), where newspapers had to pay a use tax on ink and paper where other businesses were exempt. Per the Court's syllabus, "Minnesota's ink and paper tax violates the First Amendment not only because it singles out the press, but also because it targets a small group of newspapers. The effect of the $100,000 exemption is that only a handful of publishers in the State pay any tax at all, and even fewer pay any significant amount of tax. To recognize a power in the State not only to single out the press, but also to tailor the tax so that it singles out a few members of the press, presents such a potential for abuse that no interest suggested by Minnesota can justify the scheme."

It seems likely that a similar result would be found where one type of printed message is singled out for a punative tax that, in effect, limits the form of speech.

We'll see what happens to the proposal.

What do you think?

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

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