Capitol Alert

After 25 years of taxation, California newspapers on verge of tax break

California Gov. Pete Wilson waves to supporters in Maine during his presidential campaign in 1996. Wilson and lawmakers approved extending a state sales tax to newspapers in 1991. A new interpretation of the tax is expected to save the industry a lot of money.
California Gov. Pete Wilson waves to supporters in Maine during his presidential campaign in 1996. Wilson and lawmakers approved extending a state sales tax to newspapers in 1991. A new interpretation of the tax is expected to save the industry a lot of money. Associated Press file

As the state slid into recession in the early 1990s, California lawmakers voted to extend the sales tax to cover newspapers and other goods, brushing aside industry complaints that the proposal was unfair and infringed upon free speech rights.

Multiple bills to repeal the tax failed. But now, a quarter-century later, the state is poised to more than halve the sales tax hit on newspapers, in belated recognition of massive shifts in the industry’s business model.

The overhaul means that at least 53 percent of the subscription price for print-digital subscriptions will be assumed to reflect digital content, and thus nontaxable. The revised rule follows months of negotiations between the state Board of Equalization and newspaper publishers.

Industry officials said the change is long overdue.

“The value is not just on pages of paper. It’s really so much beyond that,” said Nikki Moore, legal counsel for the California Newspaper Publishers Association. “This whole regulation recognizes that.”

$17.5 billion Sales and use tax revenue in 1991-92

$17.2 billion Personal income tax revenue in 1991-92

The new interpretation will “promote fairness and benefit taxpayers,” according to a Board of Equalization staff report last month, which cited “the increasing focus on digital content in the newspaper industry.”

Subscribers, though, shouldn’t expect to see lower bills after the change takes effect Oct. 1. Newspapers are likely to keep the 53 cents on the dollar in reduced taxes rather than pass it on to customers in the form of slightly lower subscription prices, Moore said.

“In this climate, newspapers need every dollar they can get. It helps ensure that print and digital products can stick around,” she said.

It’s unclear what newspapers could gain – and the state could lose – in revenue.

Last month’s staff report said the new interpretation “will result in no direct or indirect cost” to the government. Gov. Jerry Brown’s Department of Finance had no comment on the rule rewrite.

Free newspapers and many weekly papers already are exempt from the sales tax. And a handful of papers have individually pursued tax cuts for digital content, although such cases are rare because of paperwork and the expense involved. Vending machine and over-the-counter newspaper sales, moreover, will still be subject to the full rate.

In April 2015, a board analysis estimated that California businesses classified as newspaper publishers would have $874 million in taxable sales in the budget year ending June 30 of this year. That would translate into about $50 million in revenue from the state portion of the sales tax.

$25 billionSales and use tax revenue in 2015-16

$79.96 billion Personal income tax revenue in 2015-16

The rule rewrite underscores how California’s tax structure remains largely unchanged from what it was decades ago, despite major shifts in the state economy. Compared to 1991, taxable sales today represent a much smaller share of the state’s tax base.

Controller Betty Yee, a member of the tax board since 2004, noted that crafting the new rule took months. What’s needed, she said, is an overall restructuring of the state’s tax system. Her office recently released a report on the subject.

The newspaper taxation rule, Yee said, is “emblematic of the kinds of things we need to revisit.”

“I don’t think the BOE can rule-make its way out of this,” she said.

The newspaper rule rewrite is the latest twist for a tax that has been contentious from the start.

Newspapers used to be exempt from the sales tax. But as the state faced a $14.5 billion shortfall in 1991, Gov. Pete Wilson and lawmakers looked for ways to close the gap. Among them: expanding the tax to cover newspapers, as well as magazines, candy and some other items. The tax took effect in July 1991.

A 1992 ballot measure, Proposition 163, repealed the sales tax on candy, bottled water and snack foods. And lawmakers later restored the tax-exempt status exemption for hundreds of free newspapers.

Yet multiple bills to restore the tax exemption for all newspapers failed to advance, with cities, counties and the teachers unions among the listed opponents.

“No one familiar with California’s sales tax believes it is a model of rational policy, but the state’s sales tax policy as applied to the newspaper industry is indefensible,” Tom Newton, the longtime executive director of the publishers association, wrote in 1998. “The supreme irony is that the state’s tax policy appears to place a higher value on exempt junk mail than on taxed newspapers.”

New subscription packages have evolved since then, with many now featuring a blend of print and digital products, such as home delivery some days and access to electronic editions and website content.

Sacramento-based McClatchy, which owns The Sacramento Bee and four other daily California papers, is among the companies with newspapers that pay the state sales tax. Daniel Schaub, the company’s corporate director of audience development, said the rule would create “a level playing field” between newspapers and nontaxable news sources.

“Our five papers (in California) have done a nice job of growing their digital footprint,” he said.