The six-cent killer

It was a simple change in tax law: eliminating the sales-tax exemption for free newspapers in North Carolina. The N.C. Department of Revenue says the change was made in the interest of fairness. Legislators who passed it say they were unaware of its presence within a much larger tax bill presented to them at the end of the 1999 regular session. Yet the move threatens free-circulation newspapers across North Carolina, from alternative newsweeklies like Mountain Xpress to shopping guides like Town Tooter.

A coalition of publishers is organizing to reinstate the exemption, or otherwise level the playing field for all newspapers — since the law, by and large, exempts paid-circulation papers from paying or charging sales tax. But exactly how the free papers hope to do that, and whether they will succeed, remains very much in question.

Until last October, when the change took effect, North Carolina law (G.S. 105-164.13) exempted free-circulation newspapers from paying sales tax on the cost of printing their papers — an annual outlay that, in some cases, amounts to tens of thousands of dollars. The sales tax in North Carolina is six cents on the dollar — 4 percent for the state and 2 percent for the county.

The exemption was linked to the type of advertising a paper carried. It did not apply, for example, to automotive or apartment guides, whose advertising (often their only content) was specific to their subject. Free papers such as Mountain Xpress, on the other hand, sell advertising to a wide array of businesses to support the costs associated with producing the paper’s editorial content, which is not limited to one specific subject. The exemption was passed in the ’80s, after free papers complained that the exemption on printing costs enjoyed by paid newspapers (because their product was intended for sale to the public) gave them an unfair competitive advantage.

Media caught unawares

According to Andy Sabol, assistant director of the N.C. Department of Revenue’s Sales Tax Division, his department had been fielding questions over the years from papers trying to qualify for the “general nature” requirement. Consulting with the attorney general’s office, revenue officials learned of a 1987 U.S. Supreme Court decision (Arkansas Writer’s Project vs. Ragland) in which a tax exemption granted only to certain newspapers, based on content, was declared unconstitutional.

“We brought this to the attention of the [Senate] Finance Committee and presented them with two options for remedying the situation,” Sabol says. “We said they could amend the provision on general advertising and make the exemption applicable to all publications, or they could repeal the exemption altogether. They chose to do the latter.”

The way the tax change came about has angered the N.C. Press Association, which says that none of the affected parties, including the association itself, were consulted beforehand. “[The Department of] Revenue proposed the change entirely on its own,” says Hugh Stevens, lobbyist for the Press Association. “I don’t think they appreciated who would be affected by this and to what extent.”

Legislators contacted by Mountain Xpress and The Independent, in Durham, say that they, too, were unaware of the import of the provision, which constituted two paragraphs in the middle of a 60-page bill. “I couldn’t find anybody who knew anything about this,” says Rep. Martin Nesbitt (D-Buncombe), who is now researching ways to remedy the exemption. “It was presented to us as part of a larger tax-cleanup bill.”

Newspaper publishers became aware of the change only after the fact — in some cases, not till their printer started charging them sales tax. “We were not informed of the change at all,” says Bill Bowman, publisher of Up and Coming, a lifestyle publication in Fayetteville. “I found out about it from talking with another newspaper owner at a convention last October, the month the law went into effect. I had no chance to budget for it.”

Wreaking financial havoc

The impact of the new law on the state’s 53 free newspapers will be substantial. Recently, the Southeastern Advertising Publishers Association sent out a questionnaire polling free-newspaper publishers about the effects on their businesses. Based on the responses, SAPA estimates that the average shopping guide with a circulation of 35,000 can expect to pay about $20,000 a year in sales tax — a potentially lethal blow to a small paper struggling to make ends meet.

Sioux Watson, publisher of The Independent, says her paper will owe an additional $30,000 per year.

“It will be devastating to my business,” notes Bowman. “I hardly even made a profit last year, and now I’m looking at an annual sales-tax bill of $70,000.”

“We just put a rate increase into place to cover our circulation growth, and the revenue was immediately gobbled up to pay the sales tax,” says Mountain Xpress publisher Jeff Fobes. “It totally trashes my business plan. It’s also irritating to see my competition [the Asheville Citizen-Times] down the road get a 6-percent advantage in ad rates.”

Besides not being taxed on paper, ink and printing costs, paid newspapers are exempt from collecting sales tax on the papers they sell door-to-door or through vending machines — which accounts for the bulk of most dailies’ circulation. “That puts free newspapers at a competitive disadvantage,” asserts Fobes.

Protecting community voices

Fobes asked Nesbitt, his local representative, to intervene on behalf of free-circulation newspapers. Nesbitt is sympathetic to the cause, believing that alternative newspapers on both sides of the political fence add to societal awareness of important issues. But he warns that it’s unlikely that the old exemption will be reinstated. “The old policy was that a newspaper that is published strictly for commercial purposes can be taxed, while one that is devoted to free speech should not be,” he explains. “I don’t believe that meets the fairness clause of the Constitution.”

Nesbitt sees two options for resolving the situation. One is to exempt all newspapers from the sales tax on printing — an option the Finance Committee considered, but rejected. The other option might be for papers that are now free to start charging a token amount, which would put them in the same category as the dailies. “We’d need to get a ruling from Revenue to find out whether that would work,” notes Nesbitt. “If it does, it would certainly be the easier option, from my standpoint.”

Watson says the The Independent considered charging a token amount for the paper on a voluntary basis, but dismissed it as undesirable. “It would discourage people from picking up the paper,” she says.

Rep. Paul Luebke (D-Durham) feels the best solution is to charge all newspapers a sales tax. “Philosophically, I believe all these loopholes should be closed,” says Luebke. “The big papers have gotten this exemption by claiming they are sold door-to-door, but that’s a figment of the past. Most newspapers are now paid for in advance, by subscription.”

Fobes says he would go along with putting all newspapers on a level playing field, although the sales tax would still constitute a serious burden for his paper. Philosophically, Watson agrees with Luebke’s approach, but she doesn’t think the daily papers would let such a bill pass. “And the reality is that we and other alternative weeklies would suffer, in terms of content,” she says. “We wanted to add another writer and put more money in our free-lance budget, but with this sales tax, those options are off the table.”

This is more than just a business issue, however: It concerns which voices are heard in a community. In areas like the Triangle and Asheville, free-distribution weeklies represent an important — sometimes the only — alternative voices to the local daily paper. “It’s not that we’re necessarily more liberal than the Asheville-Citizen Times, but we aim to reach a more involved audience,” says Fobes. “Our central mission is to promote an active citizenry, not to make a profit.”

Meanwhile, the N.C. Press Association has been considering whether and how to address the situation, but has not yet come up with a strategy. Given the urgent need to allocate funds to help the victims of Hurricane Floyd, the association does not think the current short session is a good time to ask the legislature for any changes that will cost the state money. And most of the association’s members are paid newspapers, which are not overly concerned about the new law. But the association does include free-circulation papers among its members and does have an interest in their survival.

“We are concerned about the possibility of small papers going out of business,” says Terri Saylor, executive director of the N.C. Press Association. “And we have some daily papers who also own or publish free-circulation papers, and they could be negatively affected, too.”

Indeed, if free-circulation papers go out of business, printers will feel the pain, as well as publishers. And a number of daily papers also print independently owned freebies. Bob Wornoff is president of Benmot Publishing, which owns the Mount Olive Tribune, but also prints a number of shopping guides and weeklies for other publishers. “Free papers are a big part of our business,” Wornoff says. “If they go out of business, we would be drastically affected. We have 50 employees in the rural communities of Benson and Mount Olive. We’re talking about a loss of blue-collar jobs.”

The Department of Revenue has estimated that removing the exemption on free-circulation newspapers will net the state about $2.5 million a year in general revenue. But they haven’t analyzed what the state would lose in jobs and income, if a number of such papers went out of business. “Whatever small monetary benefit will accrue to the state, the harm will be enormous,” declares Hugh Stevens. “We’re not just talking about a loss of jobs, we’re talking about a loss of community voices.”

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