Prior to last October, when the new policy went into effect, North Carolina law (G.S. 105-164.13) granted free-circulation newspapers a sales-tax exemption on paper, ink and other "tangible personal property" used in the production process. The sales tax in North Carolina is six cents on the dollar--4 percent state and 2 percent county. The exemption applied to newspapers that contain advertising of a "general nature," but not to niche publications that contain advertising of a specific nature. Paid newspapers do not pay a tax on paper and ink, as those are considered components of a finished product that is taxed upon sale.
The Independent is an example of a newspaper with general advertising. The advertising supports the editorial content, which is the paper's primary focus. A car trader or apartment guide contains advertising of a specific nature. In those papers, the ads are the chief, and often only, content.
According to Andy Sabol, assistant director of the N.C. Department of Revenue's Sales Tax Division, the department had been fielding questions over the years from papers trying to qualify for the "general nature" requirement. Revenue officials consulted with staff of the attorney general's office and learned of a 1987 U.S. Supreme Court decision (Arkansas Writer's Project vs. Ragland) in which a tax exemption granted to certain newspapers and not others based upon 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. "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 The Independent claim 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 of remedying the exemption. "It was presented to us as part of a larger tax-cleanup bill."
Newspaper publishers only became aware of the change after the fact--literally when their tax bill to the printer came due. "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."
The impact of the new law on the state's 53 free newspapers will be substantial. Recently, the Southeastern Advertising Publishers Association (SAPA) sent out a questionnaire polling free-newspaper publishers about the effects on their businesses. Based upon the responses, SAPA estimates that the average shopping guide with a circulation of 35,000 can expect to pay approximately $20,000 in sales tax per year. Sioux Watson, publisher of The Independent, says it will owe an additional $30,000 per year. That's an enormous financial blow to small papers that often struggle to make ends meet.
"It will be devastating to my business," Bowman says. "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 the growth of our paper, and it was immediately gobbled up to pay the sales tax," says Jeff Fobes, publisher of Mountain Express, an alternative weekly in Asheville. "It totally trashes my business plan. It's also irritating to see my competition [the Asheville Citizen-Times, a daily] down the road get a 6 percent advantage in ad rates."
In addition to paid newspapers not being taxed on paper and ink, North Carolina law exempts from taxation all papers that are delivered door-to-door or sold through vending machines--the bulk of most dailies' circulation. "That puts free newspapers at a competitive disadvantage," Fobes says.
Fobes has petitioned Martin 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 it is 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 says. "I don't believe that meets the fairness clause of the Constitution."
Nesbitt sees two options to resolve the situation. One is to exempt all newspapers from the sales tax--an option originally considered by the Finance Committee and rejected. The other option might be for currently free papers to charge a token amount on a voluntary basis, putting them in the same category as the daily papers. "We'd need to get a ruling from Revenue to find out whether that would work," Nesbitt says. "If it does, it would certainly be the easier option from my standpoint."
Watson says that The Independent staff 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," Luebke says. "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 be a serious burden on his paper. Watson agrees with Luebke's approach on a philosophical basis, but 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 freelance budget, but with this sales tax, those options are off the table."
The threat posed by the elimination of the sales-tax exemption is more than just a business issue, it extends to which voices are heard in a community. In areas like the Triangle and Asheville, free-distribution weeklies represent an important, and sometimes the only, alternative to the daily paper. "It's not that we're necessarily more liberal than the Asheville Citizen-Times, but we aspire to a more educated audience," Fobes says. "Our central mission is to promote an active citizenry, not to make a profit."
Meanwhile, the N.C. Press Association has been planning whether and how to address the situation, but has not yet come up with a strategy. Given the $91.7 million shortfall in state tax revenues, the association does not think the current short session is a good time to ask the General Assembly for any changes that will cost the state money. Further, most of the association's members are paid newspapers, and are not overly concerned about the new law. However, the association does include free-circulation papers among its members and does have an interest in their staying alive.
"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. Benmot owns the Mount Olive Tribune, but also prints a number of shoppers 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 the removal of the exemption on free-circulation newspapers will net the state approximately $2.5 million a year in general revenue. They have not analyzed what the state stands to lose in jobs and income if a number of newspapers go out of business. "Whatever small monetary benefit will accrue to the state, the harm will be enormous," says Hugh Stevens. "We're not just talking about a loss of jobs, we're talking about a loss of community voices."