Free Papers Spared From Legal Bind : Taxation: The Board of Equalization declares such printed materials exempt from new state law after small publications complain that it would put them out of business.

Responding to fears that a new newspaper tax could force many small publications in California to fold, the State Board of Equalization found a legal escape hatch Tuesday that could spare most free-circulation newspapers from the additional financial burden.

Chairman Brad Sherman, acknowledging that the solution was not the ideal way to administer tax law, suggested that the board make free newspapers eligible for the same tax exemption that now applies to junk mail.

The idea immediately drew support from a majority of the five-member board even though the issue will not be voted on until Thursday morning. As the agency that administers state taxes, the board has the authority to determine who may receive tax exemptions.

The new sales tax on newspapers went into effect July 15 as part of Gov. Pete Wilson’s plan to resolve a $14.3-billion budget deficit. For newspapers that charge for their publications, it requires that the tax be added to the basic price of the item. But for free newspapers that have no “sales” to tax, the law applies the sales tax to their printing costs.

Under a separate state law designed to protect California’s printing industry from competition in Nevada and Arizona, printed sales materials such as catalogues, pamphlets and circulars are not required to pay state sales tax.

To qualify for this exemption, Sherman said, the newspapers would have to be free, devote at least 51% of their content to advertising and be printed by another company.

“It is an inelegant solution to an ugly problem,” he said.

Sherman said there was already some precedent for expanding the exemption for printed sales material since the board had recently agreed that some telephone directories fit the classification.

“If we can call a phone book a circular, would it be any great stretch to call the Daily Bruin (distributed to UCLA students) a circular?” he asked.

Board member William Bennett agreed. “I’m willing to do it, are you?” he asked his colleagues.

Afterward, board member Matt Fong said he would support the idea as long as “it is not going to have an adverse impact on the state.”

Sherman assured him that the tax revenue expected to be collected from free newspapers had not been included in the calculations used when the state budget was passed.

“It immediately put many of the small, community newspapers in a precarious financial situation,” Leslie S. Klinger, a lawyer for the Los Angeles Weekly, said of the new tax.

His arguments were bolstered by representatives from college newspapers who predicted that their publications could not survive if they had to pay the tax.

“What this would have done is required us to pay an additional $30,000 a year without being able to recover it from the end user--the reader--of the publication,” said Richard K. Reed, general manager of the Daily Californian, a newspaper distributed free to students at UC Berkeley.

Reed said his newspaper, which serves as a laboratory for prospective journalists, is supported entirely by advertising revenue. Since most of the advertisers are small-business owners who themselves are trying to cope with new state taxes, he said, the newspaper could not increase advertising rates to recoup the taxes.

The only opposition to the proposed exemption came from Board member Ernest Dronenburg who said he thought it would be a “long reach” to classify free newspapers as printed sales material.