Verizon Yellow Pages v. Commissioner of Revenue (September 14, 2004)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


VERIZON YELLOW PAGES 	   v.      COMMISSIONER OF REVENUE


Docket No. C262642			      Promulgated:
							 September 24, 2004

	This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the appellee to abate use taxes assessed against the appellant under G.L. c. 62C, § 26 and G.L. c. 64I, § 2 for the monthly tax periods beginning July 1, 1994 and ending December 31, 1999.
Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by Commissioners Gorton, Egan, and Rose.
These findings of fact and report are made at the requests of the appellant and appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

Kathleen King Parker, Esq., Laurence D. Pierce, Esq., and Michael Duffy, Esq., for the appellant.

Frances M. Donovan, Esq., and Timothy Stille, Esq., for the appellee.


FINDINGS OF FACT AND REPORT
On the basis of the Statement of Agreed Facts and testimony and exhibits introduced at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
Verizon Yellow Pages Company ("VYP") seeks an abatement of use taxes on its purchases of printed telephone directories known as the Verizon Yellow and White Pages ("Directories"), which it purchased from out-of-state printers and distributed in Massachusetts during the monthly tax periods beginning July 1, 1994 and ending December 31, 1999 ("tax periods at issue").  VYP is in the business of compiling and distributing the Directories to Massachusetts residents and businesses.  
At the hearing on this matter, Ms. Susan Flanders, a general sales manager for VYP, described the content of the Directories.  She explained that the Yellow Pages contained advertising and that the White Pages contained an alphabetical listing of telephone numbers and addresses for both residences and businesses in a particular geographical area, along with some advertising dispersed throughout the directory.  The Directories were bound together and delivered to Massachusetts residents and businesses as a single volume.  VYP solicited Massachusetts businesses to purchase advertisements within the Directories.  Types of advertising available for purchase included "banner ads," "corner ads," "corner billboard ads," "half-page display ads," "front cover" and "back cover ads," and "bold listings," which provided bold typeface for the listing of the business in the White Pages.  VYP also offered "co-op advertising," which allowed multiple entities to share the cost of an advertisement.
Mr. Marlyn Johnson, a VYP employee, testified concerning the process for compiling and distributing the Directories.  He explained that the VYP's graphic designers planned the advertisements solicited from businesses, generated proofs for the advertisements, and then obtained approval from the advertising businesses.  Next, Volt Systems in Syosset, New York, assembled and formatted the advertisements.  The final format for the Directories was then sent to R.R. Donnelley in Lancaster, Pennsylvania, which printed the Directories.  
Ms. Flanders testified that about seventy-five percent of the Directories were distributed in an "initial distribution" which occurred once a year, and that the remainder of the Directories were distributed in "incidental distributions" which occurred whenever new telephone users entered the market or when a telephone user made a request for an additional copy of a Directory.  She testified that virtually all of the "initial distributions" were delivered by various carriers and that all of the "incidental distributions" were delivered by United States mail.  All distributions were made at the direction of VYP.
Throughout the tax periods at issue, VYP filed use tax returns and paid use taxes of five percent of the purchase price of those Directories distributed within Massachusetts during the tax periods at issue.  On June 30, 2000, VYP timely filed an application for abatement for use taxes paid on the Directories during the tax periods at issue.  The parties agreed that the amount of tax at issue is $4,582,100.  By notice of abatement determination dated December 27, 2001, the Commissioner of Revenue ("Commissioner") denied VYP's application for abatement.  VYP then seasonably filed its appeal with the Board.  On the basis of these facts, the Board found it had jurisdiction over this appeal.  
The Board found that the primary purpose of the Directories was to disseminate telephone numbers for Massachusetts residents and businesses in satisfaction of federal and state law.  The Directories were not advertisements but listings of telephone numbers which contained advertisements.  The Board also found that the Directories, which contained thousands of pages, were not similar to coupons or advertising leaflets.  Moreover, as testified to by Ms. Flanders, the Directories were intended to be distributed widely to all Massachusetts residents and businesses, not targeted to certain customers within the market.  Therefore, for the reasons stated more fully in the following Opinion, the Board found that the Directories did not meet the sales and use tax exemption for "direct and cooperative direct mail promotional advertising materials."  
The Board also found that VYP did not resell its Directories but used them in conducting its business in Massachusetts.  Therefore, for the reasons stated more fully in the following Opinion, the Board found that a use tax was due on VYP's distribution of the directories in Massachusetts.  Accordingly, the Board issued a decision for the appellee in this appeal.
Subsequent to the Board's decision, VYP filed a Motion to Reopen Record, because it believed that the Legislature's passage of an amendment to G.L. c. 64H, § 6(ff), the exemption at issue, was "germane to the issue of the meaning of the exemption before the change."  The Legislature's amendment, Chapter 262 of the Acts of 2004, amended § 6(ff) by restricting "direct and cooperative direct mail promotional advertising materials" to materials "no greater than 6 pages in length" and specifically excluding "telephone directories."  For the reasons stated more fully in the Opinion, the Board denied VYP's motion.

OPINION
G.L. c. 64H, § 2 imposes a sales tax of five percent upon a vendor's sales at retail in the Commonwealth of tangible personal property that are not otherwise exempt.  G.L. c. 64I, § 2 imposes a corresponding use tax "upon the storage, use or other consumption in the commonwealth of tangible personal property purchased from any vendor for storage, use or consumption within the commonwealth."  The sales and use taxes are "complementary components of a unitary taxing program."  Towle v. Commissioner of Revenue, 397 Mass. 599, 604 (1986).  Accordingly, exemptions from the use tax include any "sales exempt from the Massachusetts sales tax."  Id. at 605.  See G.L. c. 64I, § 7(b).
In J.C. Penney v. Commissioner of Revenue, 431 Mass. 684 (2000), the Supreme Judicial Court held that the use tax applied to the taxpayer's distribution of catalogs to its Massachusetts customers because, by directing the postal service and paying it a fee to deliver the catalogs to customers within Massachusetts, the taxpayer had exercised control over the catalogs sufficient to constitute a taxable use of the catalogs.  J.C. Penney, 431 Mass. at 691-92.  In accordance with that decision, the Board ruled that VYP was subject to the use tax on its distribution of the Directories in Massachusetts.  Furthermore, for the reasons explained below, the Board found that VYP was not exempt from the use tax on its distribution of the Directories.

The Directories did not qualify as "direct and cooperative direct mail promotional advertising materials" as defined in G.L. c. 64H, § 6(ff).

The appellant claimed exemption for the Directories under G.L. c. 64H, § 6(ff), which exempts the following:
Sales of printed material . . . including sales of direct and cooperative direct mail promotional advertising materials which are manufactured both inside and outside the commonwealth and which are distributed to residents of the commonwealth from locations both inside and outside the commonwealth.

This section provides a definition for the materials that it exempts:
For the purpose of this paragraph, "direct and cooperative direct mail promotional advertising materials" shall mean discount coupons, advertising leaflets and similar printed advertising including any accompanying envelopes and labels which are distributed with promotional advertising materials of one or more than one business in a single package to potential customers, at no charge to the potential customer, of the business paying for the delivery of such material.

(emphasis added).  The appellant claimed that the Directories qualified as "similar printed advertising" and therefore, should have been exempt from sales and use tax as "direct and cooperative direct mail promotional advertising materials" pursuant to § 6(ff).  As explained below, the Board ruled that the Directories were not: "advertising materials"; "discount coupons," "advertising leaflets," or "similar printed advertising"; or "direct mail" advertising materials targeted to certain Massachusetts telephone customers.  Accordingly, the Board found that the Directories did not qualify for the § 6(ff) exemption.


 The Directories were not advertising materials.

The Board recently addressed the issue of what constitutes "advertising" in Bloomingdale's, Inc. v. Commissioner of Revenue, 2003 ATB Adv. Sh. 163.  In that appeal, the Board addressed the taxability of printed booklets which "featured pictures of items showcased by Bloomingdale's, along with item numbers, brief descriptions of those items, and their respective retail prices."  Id. at 170.  The booklets were themed according to "particular holidays associated with shopping," including Mothers' Day or Presidents' Day, and "were designed to promote items that would be on sale during specific dates at Bloomingdale's."  Id.  The Board found that "the primary purpose" of the booklets "was to attract customers to [Bloomingdale's] retail stores."  Id. at 175.  Citing dictionary definitions that defined "advertise" as "to make known, proclaim publicly, esp. in order to promote sales || to draw attention to, make conspicuous," the Board ruled that the Bloomingdale's booklets were advertisements.  Id. at 174, quoting The New Lexicon Webster's Dictionary of the English Language 12 (encyclopedic ed. 1989).  
By contrast, the primary purpose of the Directories was not to showcase certain items for sale by VYP or its advertisers, but to provide a comprehensive listing of all published telephone numbers of Massachusetts residents and businesses.  Accordingly, the Directories were not themselves advertisements but materials which contained advertisements.  The difference is not merely one of semantics for purposes of the statutory exemption.
The Directories were a source of dissemination of telephone numbers by a local telephone provider in satisfaction of, and as controlled by, federal and state law.  The Telecommunications Act of 1996, 47 U.S.C.A. § 251 et. seq., which requires the promotion of competition in the telecommunications industry, imposes duties on telecommunications carriers to share several services, including their "network element."  See 47 U.S.C.A. § 153(29) (defines "network element" in provision of telecommunication services).  Telephone directories are an integral part of that "network element."  See Second Report & Order, 11 FCC Rcd 19392 at P 102, quoted in U.S. West Communs. Inc. v. Hix, 93 F.Supp. 2d 1115, 1131 (D.C. Colo. 2000) (the Federal Communications Commission considers directory publishing services as part of a telecommunications provider's network element).  
On the state level, the Department of Telecommunications and Energy has statutory jurisdiction and authority to regulate the telecommunications industry in Massachusetts.  G.L. c. 159, § 12.  See Western Union Telegraph Co. v. Foster, 224 Mass. 365 (1916), rev'd on other grounds, 247 U.S. 105 (1918) (telegraph companies "are subject to regulation under legislative authority on the ground that they are impressed with a public character.").  This duty necessarily includes the authority to regulate the dissemination of telephone numbers.  See In re: Quality of Services Standards for Required Telecommunications Services, 204 Mich. App. 607, 612 (1994) (agency charged with regulating state's telecommunications service had authority to require telecommunications provider to intercept all calls to a telephone number listed erroneously in printed directory).  While it cannot be disputed that the Directories contained advertisements, the Board found that the advertising component was incidental to their primary purpose, which was to provide a comprehensive listing of telephone numbers in satisfaction of the telecommunications provider's duties with respect to dissemination of information.   
Although the Yellow Pages portion of the Directories did not list every business, the Directories, bound together and widely distributed to Massachusetts residents and businesses as a single volume or delivered in the same packaging, together created a comprehensive listing of Massachusetts telephone numbers.  The appellant did not argue that the Yellow Pages, standing alone, should be considered "advertising materials" for purposes of § 6(ff), nor did it present evidence relating to printing costs for only the Yellow Pages portion of the directory.
VYP argued that each individual listing in the White Pages could somehow be considered an advertisement for the listed business.  However, the Board found that this argument was contrary to the nature of advertising.  According to the testimony of Susan Flanders, VYP did not charge individuals or businesses a fee to place their listing in the White Pages directory; in fact, Verizon charged a fee for a telephone number not to be listed in the Directories.  The Board found that requiring a consumer to pay only for the absence of a listing was antithetical to the common sense definition of advertising.  See Board of Assessors v. State Tax Comm'n, 357 Mass. 505, 507 (1970) ("The [relevant statutory term] is controlled by the common and approved meaning of those words in other contexts, absent a contrary legislative intent.").  
Moreover, telephone directories are beyond the scope of materials which the legislature intended to include in the § 6(ff) exemption.  In Commissioner of Revenue v. J.C. Penney Co., Inc., 431 Mass. 684 (2000), the Supreme Judicial Court held that the taxpayer was subject to use tax on the distribution of catalogs to customers and potential customers in the Commonwealth.  Subsequent to the Commissioner's assessment of use tax against J.C. Penney, but before the court's decision, the Legislature enacted an amendment to the § 6(ff) exemption, which specifically exempted "direct and cooperative direct mail promotional materials" from the sales and, consequently, the use tax.  See G.L. c. 64I, § 7(b) (exemptions from sales tax in G.L. c. 64H, § 6 also apply to imposition of use tax).  In Bloomingdale's, the Board found that the Legislature, aware of the Governor's veto of an earlier version of § 6(ff) that was carefully crafted to exempt only so-called "Val Pak" advertising, intended to broaden the exemption to include a wider range of advertising materials so as to avoid another veto.  Id. at 180-81.  However, while the legislative history of § 6(ff) reveals an intent to include a broader range of advertising materials than contemplated in the vetoed version of the provision, it is unreasonable to infer that the Legislature intended to exempt from tax any and all materials which simply contained some advertisements and which were so comprehensive and voluminous.  See Boston Safe Deposit & Trust Company v. Commissioner of Corporations and Taxation, Dodge v. Commissioner of Corporations and Taxation, 273 Mass. 187, 194 (1930) ("Exemption from taxation is an extraordinary grace of the sovereign power, is to be strictly construed, must be made to appear plainly, and is not to be lightly inferred.") (citations omitted).      
The Board found and ruled that the primary purpose of the Directories was not to advertise products and services but to provide a listing of telephone numbers in conjunction with the provision of regulated telephone service.  While the Directories contained advertisements, the Board found a distinction between materials which were themselves advertisements and those which merely contained advertisements.  Section 6 (ff) exempts only advertising materials, not materials which merely contain advertising.  Expanding the exemption to include any printed materials which contain advertising would far exceed the language and the intent of the exemption.  Accordingly, the Board found and ruled that the Directories did not qualify as "promotional advertising materials" under the § 6(ff) exemption.

The Directories were not discount coupons, advertising leaflets, or similar printed advertising. 
Even if the Directories could be considered advertising, the Board nonetheless ruled that the materials at issue did not meet the § 6(ff) exemption because they were not "discount coupons," "advertising leaflets," or "similar printed advertising" as required by the plain words of the statute.  
The appellant argued that many of the Directories distributed during the tax periods at issue contained a few "discount coupons" for products and services available at the advertising businesses.  However, the Board ruled that the comparatively small number of coupons contained within the voluminous Directories could not transform them into nontaxable coupons.  See Bloomingdale's, 2003 ATB Adv. Sh. at 177.  Accordingly, the Board ruled that the Directories were not "coupons."  
The appellant also argued that the Directories could be considered "leaflets" in satisfaction of the statute.  In Bloomingdale's, the Board looked to dictionary definitions and ruled that a "leaflet" need not consist of only a single sheet of paper, but that "several pieces of paper folded together to form a booklet," like the Bloomingdale's advertising materials, could fairly be described as a "leaflet."  Bloomingdale's, 2003 Adv. Sh. at 178.  However, the term "leaflet" cannot be extended to  include voluminous telephone directories containing thousands of pages.  The Board in the instant appeal ruled that classifying the Directories as "leaflets" would be a stretch beyond even the most generous dictionary definitions allowing leaflets to contain "several" pieces of paper.  While it may be difficult to quantify precisely the number of pages which could be considered to be "several," the Board ruled that thousands of pages were well beyond any reasonable concept of the term "several."  Accordingly, the Board ruled that the Directories could not fairly be described as "leaflets."
Subsequent to the Board's decision, VYP filed a Motion to Reopen Record, because it believed that the amendment to § 6(ff), restricting "direct mail" to "materials no greater than 6 pages in length" and specifically excluding "telephone directories" was "germane to the issue of the meaning of the exemption before the change."  The Board, however, found that the amendment was not relevant to the appeal, because a specific exclusion for "telephone directories" was not needed to exclude the Directories at issue.  As previously explained, the Directories at issue contained thousands of pages, a number so much larger than what a reasonable definition of an "advertising leaflet" could encompass.  Moreover, as also previously explained, the comprehensive nature of the Directories was contrary to the nature of advertising, which is to showcase certain items for sale.  Therefore, even though the amendment specifically excludes "telephone directories" and provides a specific page number, it would not have affected the outcome of the appeal, and the Board found and ruled that the Legislature's enactment of the amendment was not germane to the outcome of the appeal.
The materials at issue were voluminous telephone directories, not similar to "discount coupons" or "leaflets," and not within the realm of the legislative intent of the exemption.  Accordingly, the Board ruled that the Directories did not qualify as "similar printed advertising" and, therefore, were not exempt pursuant to § 6(ff).

c. The Directories were not "direct mail."  

While § 6(ff) contains no set definition of the phrase "direct mail," the Board has found that in order for materials to qualify as "direct mail," they must be targeted to certain customers within a market.  In Bloomingdale's, the advertising materials at issue were delivered to particular customers that Bloomingdale's had selected by use of "an extensive database of customers" of its retail stores.  Bloomingdale's, 2003 ATB Adv. Sh. at 166.  Accordingly, Bloomingdale's was able to "target that direct mail piece" to a particular customer.  Id.  
By contrast, the Directories were widely distributed to all Massachusetts residents and businesses.  The Board ruled that the blanket distribution of the Directories to Massachusetts residents and businesses was antithetical to the ordinary meaning of the term "direct mail."  See Bolster v. Commissioner of Corps. & Tax'n, 319 Mass. 81, 84-85 (1946) (basic statutory principle that words appearing in a statute should be given their ordinary meaning unless otherwise specifically indicated).  Accordingly, the Board found and ruled that the Directories did not qualify as "direct mail" for purposes of the § 6(ff) exemption.  

The Directories did not qualify under the sale for resale exemption.

The appellant further claimed that the Directories were exempt from the sales tax and, accordingly, the use tax, because they were purchased for resale.  The appellant cited Memorial Press v. Commissioner of Revenue, 16 Mass. App. Tax Bd. Rep. 152 (1994), which addressed the exemption at § 6(s) for "sales of machinery . . . used directly and exclusively in . . . the actual manufacture . . . of tangible personal property to be sold . . . ."  The taxpayer in that appeal, a printing company which created and distributed vacation guide books free of charge to tourists, claimed that its machinery used to create the guides fit within the § 6(s) exemption because, while the tourists did not pay for the guides, consideration was paid when businesses paid the printer to have their advertisements included in the guides.  Id. At 154.  The Board agreed and found that the taxpayer's machinery was exempt pursuant to § 6(s).  Id. at 155-56.
Memorial Press, however, is of no help to VYP but instead supports the Board's decision in this appeal.  The party analogous to Memorial Press in this appeal would be VYP's out-of-state printer, R.R. Donnelley, not VYP itself.  The "sale" in Memorial Press was between the printer as vendor and the advertisers as purchasers.  There was no "resale" of the guides to the members of the public to whom the advertising in the guides was directed.  Similarly, the "sale" in this appeal was between the out-of-state printer as vendor and VYP as purchaser.  Just as in Memorial Press, there was no "resale" of the printed material here when the Directories were distributed to the public.  Accordingly, the Board ruled that its ruling in the present appeal is consistent with Memorial Press.  See also J.C. Penney, 431 Mass. at 688-89 (ruling that by directing the distribution of catalogs to its customers, the taxpayer "did, in a very real sense, 'do something' with its catalogs in the Commonwealth" to justify the imposition of use tax).
On the basis of the foregoing, the Board ruled that the Directories were not "direct mail promotional advertising materials" for purposes of the § 6(ff) exemption.  The Board also ruled that the Directories were not purchased by the appellant for resale.  Therefore, the Board found and ruled that the Directories were not exempt from use taxes.  Accordingly, the Board issued a decision for the appellee in this appeal.

					APPELLATE TAX BOARD

                          By:______________________________
				     Frank J. Scharaffa, Member
A true copy,



Attest:_____________________
	  Clerk of the Board

   Yellow and White Pages directories distributed in the city of Boston were not bound together as a single volume, because these directories were quite voluminous.  However, even in the case of the separately-bound Yellow and White Pages, the volumes were delivered to recipients in a single bag.  Accordingly, for purposes of this appeal, the Board found no distinction between the integrated Yellow and White Pages and the separately-bound Yellow and White Pages, finding both types of directories to be "a single package" for purposes of the § 6(ff) exemption.  See Bloomingdale's, Inc. v. Commissioner of Revenue, 2003 ATB Adv. Sh. 163, 184 (materials contained within a polybag satisfied "in a single package" requirement of G.L. c. 64H, § 6(ff)).

ATB 2004-314