Sales Tax State Activity Update - May 2005

Arizona Examines Out-of-State Printing

A recent opinion of the Court of Appeals State of Arizona Division One affirmed the Tax Court's decision that out-of-state printing services are not subject to use tax and the printers providing those services are not retailers for the purpose of collecting the Arizona privilege tax.

A taxpayer in the business of publishing telephone directories (White and Yellow pages) contracted with out-of-state printers and mills for printing services and paper to publish the directories.

Typically, the paper mills sent the paper directly to the printers who were permitted to accept and pay for paper orders on the taxpayer's behalf. The printer invoiced the publisher for the cost of the paper. Once the printer received the paper, the directory content was printed on the paper, assembled, and shipped to the taxpayer. The printer invoiced the taxpayer for the printing services and incidental tangible personal property such as glue and ink and separately stated the amount for reimbursement of the cost of the paper.

Arizona use tax is not imposed on out-of-state printing services. The decision in this case supports the conclusion that printing services are not subject to use tax by applying both the "dominant purpose" and "common understanding" tests.

The "dominant purpose" (i.e. true object) test seeks to establish either the nontaxable service or taxable tangible personal property as the predominant purpose of the transaction. The taxability of the transaction follows that of the dominant purpose. In Arizona, a court case establishes that when there is a fixed and ascertainable relationship between the value of the article and the value of the service rendered in connection therewith so that both may be separately stated, then the vendor is engaged in both selling at retail and furnishing services and is subject to the tax as to one and tax exempt as to the other. Where the property and the services are distinct and each is a consequential element capable of ready separation, it cannot be said one is an inconsequential element within the exemption provided by the statute. Since the paper and printing services are contracted for separately, from separate vendors and separate with billings, the court determines the transactions in question are consistent with the Arizona's established "dominant purpose" standard. Therefore, the sale of out-of-state printing services will be treated as services.

The "common understanding" test determines whether a transaction qualifies as the sale of tangible personal property or the sale of a service by the parties' common understanding of the particular trade, business, or occupation. In this case, it is clear the printer is in the business of providing a service and the paper mill is in the business of selling taxable tangible personal property. The value of the service and tangible personal property are readily ascertained by their separation on the invoices and separate contracts for paper. When applying both tests, the court reached the same conclusion that out-of-state printing services are the true object of the transaction and will be treated as such. The use tax is not imposed on out-of-state printing services. Therefore, the court affirms the decision of the Tax Court.

The full release can be viewed here.

(Sales and Use Tax Information Release ST 1989-03, Ohio Department of Taxation, Updated 12/2004)

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