02/020

Response Letter

10/11/02

 

REQUEST LETTER

 

 

NAME

ADDRESS

PHONE

FAX

 

Request for "Private Letter Ruling"

 

Under Utah law (Utah Code Ann: §59-12-104 (14)) a provision is made for the sales and use tax exemption on machinery and equipment used in the manufacturing process in a manufacturing facility if the machinery and equipment has an economic life of three or more years and is used to manufacture an item sold as tangible personal property. We are currently leasing a COMPANY Docucolor 12- Color copier (production life in excess of 3 years) which sole purpose is in producing of such tangible personal property for our customers which are mainly commercial printers and users of commercial printing.

 

The clear distinction between the type of use that this machine is required to handle and applications found in a copy shop is that it is used to replace the work done on offset printing presses and to do direct digital printing of Business cards, Letterhead, Brochures, Calendars, Signs, etc.

 

When offset printing is too slow or expensive our printer is a better solution for our customers and resellers. Although the equipment in questions is capable of doing photocopying work, it is rarely if ever used in that capacity. As such, this equipment is acting as a substitute for offset printing equipment.

 

Since distinct and separate economic activities are performed at this single physical location, this activity should be treated as separate establishment (Administrative Rule R865-19-85S) Even though the SIC code assigned to our company is 5999, the activity that this machine is responsible to handle is found under SIC code 2751.

 

Similar to Appeal No. 89-1793 the equipment in questions is not used as a photocopying service and should be exempt under the manufacturing exemption.

 

Also in questions is the cost per copy (click charge) from COMPANY. The charge currently includes:

1.                  The service and repair of equipment as needed.

2.                  The consumable supplies like fuser oil and toner, which become parts of the end product.

 

They currently do not separate or distinguish the different components of that charge and we have been making payments of sales tax on the entire amount. What part of their charge is taxable? Is there a way to avoid the double taxation that comes from paying sales tax on the component parts of the click charge that would normally be non-taxable?

 

We respectfully request a private letter ruling to address the tax concerns referenced herein.

 

Truly,

NAME

 

RESPONSE LETTER

 

October 11, 2002

 

NAME

ADDRESS

 

RE: Private Letter Ruling – Exemption from Sales Tax for Manufacturing Equipment

 

Dear NAME,

 

You have requested a ruling concerning the lease of a COMPANY color copier by your business. Specifically, you ask if the lease of the color copier qualifies for the manufacturing equipment and machinery exemption (“manufacturing exemption”) from sales tax. A second issue concerns the taxation of certain costs charged to you by COMPANY for each copy made on the machine.

 

Manufacturing Equipment Exemption. Utah Code Ann. §59-12-104(14) exempts from taxation certain purchases and leases of machinery and equipment used in a manufacturing facility. If your business does not qualify as a “manufacturing facility” for purposes of the exemption, the other requirements need not be discussed. Whether your business is considered a manufacturing facility (defined in Utah Code Ann. §59-12-102(15) as an establishment described in SIC codes 2000 to 3999) depends upon the precise nature of your business.

 

Your business creates graphic designs and transfers these designs onto clothing, paper, plastics, metal, and other materials that a client might require. Approximately 50% of your business involves the embroidery of your designs onto clothing, primarily shirts. The other 50% involves transferring your designs onto other items, such as banners, signs, posters, fliers, catalogs, business cards, etc. About one-half of the latter category (25% of your total business) is performed with a COMPANY Docucolor 12 Color Copier (“Color Copier”), the equipment about which you have inquired. Although you do not have any traditional printing presses at your business, you assert that the Color Copier is a substitute for a traditional offset printing press and, as such, should be classified as being used in a printing industry, which could qualify it for the manufacturing exemption.

 

To support your assertion, you refer to Utah State Tax Commission Appeal No. 89-1793, in which the Commission determined that a high volume photocopier that could perform functions similar to a traditional printing press qualified for the exemption. In that appeal, however, a business with three locations only received the exemption for photocopiers that were placed in those locations where traditional printing processes were predominant. In the location without traditional printing presses, that location was determined not to be a manufacturing facility and did not receive the exemption. The Commission also reached a similar conclusion in Utah State Tax Commission Appeal No. 90-0056. In that case, the Commission found that the SIC classification for those locations with photocopying machines, but without printing presses, was 7332 and, as a result, was not considered a manufacturing facility.

 

From the information available, your business does not employ any traditional printing presses at its facility. At least half of the work at the facility (embroidering of designs on shirts) could be considered a SIC classification of 7389. The Commission has previously found that the SIC classification for a business using photocopiers, but not printing presses, was 7332 (now listed in the SIC Manual as 7334). Much of the work you described in a recent telephone conversation also appears to fall within other SIC classifications in Major Group 73 (SIC Codes 7311 – 7389). However, for a printing business to be classified in Major Group 27 (SIC Codes 2711 – 2796), that printing should be one of the more common processes, such as letterpress, lithography, gravure, or screen. To print from a digital file with a Color Copier is not the type of printing described in Major Group 27. As there is no indication that any portion of your business is an establishment described under SIC Codes 2000 – 3999, it is not considered a manufacturing facility and the lease of the Color Copier cannot qualify for the manufacturing exemption.

 

We also note that the portion of Utah Administrative Rule R865-19S-85 you cite concerning an activity being treated as a separate establishment has changed. Nevertheless, as none of the activities at your business appear to be described in SIC Codes 2000 – 3999, we need not determine if any activity qualifies as a separate establishment.

 

Maintenance and Repair Charges. Your second question concerns the cost per copy charges from Xerox. We have recently addressed this issue in another ruling for a business that services photocopiers and charges a “per print” charge. We stated that a “per print” charge under a maintenance agreement is considered a charge for the repair of tangible personal property and, accordingly, is taxable under Utah Code Ann. §59-12-103(1). This is true whether the maintenance agreement is based on a base service charge or includes a per print or copy charge. In any case, such a charge is repair and maintenance of tangible personal property and, thus, taxable. If charges for toner or ink, which may be tax-exempt under the resale for component parts exemption, are imbedded in a maintenance or repair charge, the entire charge is taxable. The charge for the nontaxable item must be stated separately; otherwise, it too is taxable.

 

Should you have further questions, please contact us.

 

For the Commission,

 

 

 

Marc B. Johnson

Commissioner

 

MBJ/KC

02-020