April 1, 2008
SALES TAX EXEMPTIONS FOR EQUIPMENT USED IN COMMERCIAL PRINTING AND PUBLISHING
By: Judith Lohman, Chief Analyst
You asked for an explanation of the sales tax exemptions for equipment used in commercial printing and publishing. You also asked why the same equipment used by a mailing business is not exempt.
Whether any particular machinery or equipment qualifies for the sales tax exemptions for machinery and other items primarily used by commercial printers or publishers depends on a combination of the statutory language and how the Department of Revenue Services (DRS) interprets that language.
In the case of the sales tax exemptions for commercial printing equipment, the statutory language makes the exemption depend on who uses the equipment, how it is used, and how much it is used for the exempt purpose. If the machinery or equipment is the same and is performing the same function but the user is neither a commercial printer nor a publisher, as determined by DRS, then the machinery is not exempt. If the equipment is not used primarily in the production of printed material, it is likewise not exempt.
If the General Assembly wishes to extend the printing and publisher exemptions to machinery used by mailing businesses, it must amend the statutory language of the exemptions.
SALES TAX EXEMPTIONS FOR COMMERCIAL PRINTERS AND PUBLISHERS
There are two sales tax exemptions that apply to materials and equipment used by commercial printers and publishers.
One exempts sales of machinery, equipment, tools, materials, and supplies from the sales tax if these items meet the following criteria: (1) they are used predominately to produce printed material and (2) they are used by a commercial printer or publisher. The law defines “production of printed material” as including all processes needed to convert manuscript copy into printed material and explicitly includes (1) layout, (2) color separation, and (3) typesetting (CGS § 12-412 (71)).
The other is an exemption for machinery, equipment, tools, materials, and supplies used predominately to produce (1) type setting, (2) color separation, (3) finished copy with type proofs, and (4) artwork or similar content mounted for photomechanical reproduction. The statutory exemption extends to other similar products to be sold for use in the production of printed materials (§ 12-412 (72)).
HOW DRS ADMINISTERS THE EXEMPTIONS
According to DRS' most recent policy statement on the sales tax exemptions for commercial printers and publishers (PS 2001 (7), copy attached), whether a particular machine or item is exempt under the statute depends on several factors.
The statutory exemptions require that the equipment be used by a commercial printer or publisher. DRS determines a company's primary business according to how it classifies itself under the North American Industry Classification System (NAICS) and its predecessor, the Standard Industrial Classification Manual. Only those whose primary business falls in the classifications for commercial printers and publishers are eligible for the exemption.
Primarily and Predominately
By law, the printer or publisher must be “primarily” engaged in those businesses and the exempt equipment and items must be used “predominately” in the production of printed material. DRS defines “primarily” to mean chiefly, that is, that commercial printing or publishing is a business' chief business among all its activities. It determines the primary business based on the part of its activities from which the business derives more than 50% of its income. Likewise, in determining the “predominant” use of the machinery or material, DRS requires the machinery or material to be used more than 50% of the time for the qualifying function.
Production of Printed Material
The statute defines the production process for purposes of the exemption. The DRS policy statement states that the process includes the pre-production phases specified in the statute (layout, color separation, and typesetting), continues through the press or printing stage, and ends when bindery activities (drilling, punching, cutting and trimming, binding, coating, laminating, and packaging individual copies or sets) are complete. Machinery and materials predominantly used in those activities are exempt.
The policy statement expressly excludes various shipping activities from the production process. These include such activities as sorting, handling, casing, loading, addressing, or delivering printed materials to customers. Machinery and materials predominately used in those activities are not exempt.