Were a lithographer's retouching, assembly, proof, and color-separation charges taxable when the finished separations went directly to the customer's printer?

Plain-English summary

An out-of-state retailer hired a California lithographer to create color separations for newspaper inserts and direct-mail advertising. The lithographer sent hard-copy and blueline proofs out of state for approval; the retailer returned them. The lithographer then sent the finished color separations to a California printer.

The requester argued that the true object was the lithographer's service. Tax counsel disagreed. The retailer specifically wanted satisfactory color separations for printing, so the lithographer was selling tangible personal property rather than merely performing a service.

That made all listed production charges A through H taxable: retouching, outlining, image input and pickup, system assembly time, film and hard-copy proofs, blueline proofs, and a four-color change. Labor and skill used to produce the property could not be deducted from taxable gross receipts.

The separately stated shipment item received narrower treatment. Assuming the lithographer sent the separations directly to the purchaser's printer by mail or common carrier, the portion equal to actual postage or carrier cost was excluded. Any markup over actual shipping cost remained taxable.

The special-printing-aid resale provision did not change the result because the lithographer sold the color separations to the consumer rather than to a printer purchasing them for resale.

What this means for you

Lithographers and prepress vendors

Calling individual line items "process services" did not make them nontaxable when the customer sought usable physical color separations.

Retailers buying advertising production

Direct delivery to your printer can still be treated as delivery of the property to your agent. The fact that proofs are returned does not turn the overall transaction into a service.

Accountants and tax professionals

Include the full production charge in taxable gross receipts when the true object is tangible output. Review shipping separately and limit any exclusion to the qualifying actual-cost portion.

Common questions

Q: Were retouching and system-assembly charges taxable?

A: Yes. They were part of the taxable sale of color separations.

Q: Did returning the proofs make the transaction a service?

A: No. The customer still obtained the finished color separations through its printer.

Q: Was the shipping charge taxable?

A: Actual qualifying postage or common-carrier cost could be excluded if separately stated. Any excess over actual cost was taxable.

Q: Could the lithographer treat the color separations as special printing aids sold for resale?

A: No. The opinion said that provision was irrelevant because the lithographer sold the property to the consumer.

Citations and references

• California Revenue and Taxation Code §§ 6012, 6051, and 6596
• California Civil Code § 1656.1
• California Sales and Use Tax Regulations 1501, 1541(e), 1541.5, 1590(a)(1), and 1628(a)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0011.795
• Original supporting opinion: 515.0011.795 PDF

Original ruling text

515.0011.795

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 324-2655
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

November 25, 1996

E. L. SORENSEN, JR.
Executive Director

REDACTED TEXT
Re: Unidentified Taxpayer
Dear REDACTED TEXT,
This is in response to your letter of October 4, 1996, in which you ask for information regarding application of sales tax to "special printing aids" used to produce printed sales messages and newspaper inserts. You provided the following facts: An out-of-state retailer who has stores in California and other states hires a California lithographer to produce color separations. The lithographer sends hard copy proofs to the retailer out of state for approval. The retailer may make changes or not, but returns all the proofs after approval. After receipt of the approved proof, the lithographer sends the color separation to a California printer. The printer uses the color separation to print either direct mail advertising material which qualifies as printed sales messages under Regulation 1541.5, or inserts which are placed into newspapers as defined in Regulation 1590(a) (1). The inserts are shipped by the printer both to newspapers within and out of California. The "printed sales messages" are sent free of charge by a California mailing house to individuals both inside and outside the state of California. You believe the inserts meet the definition of being an ingredient or component part of the newspapers. You also believe that the true object of the contract between the retailer and lithographer is the service provided by the lithographer. You provided us with a listing of charges which are issued by the lithographer to the retailer as follows: “Quantity A) B) C) D) E) F) G) H) I)

1
1
22
12
6
4
4
1
1

Description

Amount

Retouching – 10 minutes
Simple Outline
Image Inputs - $45.00 Ea.
Pick Up Images - $35.00 Ea.
System Assembly Time - $200.00 per Hr.
Film with Hardcopy Proof - $425.00 Ea.
Blueline Proofs - $5.00 Ea.
Common 4/Color Change – UT, OR, AZ, CA
Ship Final Film to Printer

$80.00
25.00
990.00
420.00
1,200.00
1,700.00
20.00
450.00
75.00

515.0011.795

2

November 25, 1996

“Charges identified above are as follows:
1.

A through E are lithographic process services

2.
Charge F is a combination charge for the film and hardcopy proof. The hardcopy proof being supplied here to the retailer is for color inspection and is sent back to the lithographer. The retailer never receives the film. 3. Charge G is a charge for a blueline proof only which is being supplied to inspect print quality and is returned to the lithographer. 4.

Charge H is self-explanatory.”

Sales tax is imposed on a retailer's sales of tangible personal property at retail in California unless there is a statutory exemption. (Rev. & Tax. Code § 6051.) The retailer's gross receipts are used to determine the amount of the sales tax. "Gross receipts" is the total sales price charged by the retailer for the sale of tangible personal property in California. (Rev. & Tax. Code § 6012.) Sales tax does not apply to charges for services which themselves do not constitute sales of tangible personal property and which are not part of the sale of tangible personal property. The basic distinction in determining whether a particular transaction involves a sale of tangible personal property or the transfer of tangible personal property which is incidental to the performance of the service is one of the true object of the contract; that is, is the real object sought by the buyer the service per se, or the property produced by the service? If the true object of the contract is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred. When a transaction is regarded as a sale of tangible personal property, tax applies to the gross receipts from the furnishing of that tangible personal property without any deduction on account of the work, labor, skill, thought, time spent, or other expense producing the property. (Sales & Use Tax. Reg. 1501.) We do not agree with your conclusion that the true object of the retailer's contract with the lithographer is the provision of a service since the retailer specifically desires tangible personal property, that is, satisfactory color separations to use for printing newspaper inserts and printed sales messages. Hence, the lithographer makes a taxable sale of the color separations to the retailer. The lithographer may collect sales tax reimbursement from the retailer if the contract so provides. (Civ. Code § 1656.1.) The lithographer is not providing a mere service, but rather is selling tangible personal property. Its entire charges for that tangible personal property are subject to tax unless specifically excluded by statute. (Rev. & Tax. Code § 6012.) Thus, the charges listed as A through H on the lithographer's invoice are subject to tax. We assume that the lithographer sends the color separations to the printer by United States mail or other common carrier. Generally, tax does not apply to separately stated charges for such transportation from the retailer's place of business or other point from which the shipment is made directly to the purchaser or in this case the purchaser's agent. Only that portion of the separately stated charge which represents the retailer's actual cost of shipment may be excluded from the measure of tax; the portion that exceeds the actual cost of shipping is subject

515.0011.795

3

November 25, 1996

to tax. (Sales and Use Tax Reg. 1628(a).) Thus, that portion of Item I which is the amount paid by the lithographer for postage is not subject to tax since it is a separately stated transportation charge that meets the requirements above stated. That portion of the transportation charge that exceeds the cost of mailing, if any, is subject to tax. In light of our conclusion that the lithographer's sale is subject to tax, you inquire as to the definition of special printing aid in subdivision (e) of Regulation 1541. That provision explains when a printer may purchase special printing aids for resale. Since the lithographer here is making a sale of property to the consumer, this provision is not relevant. This opinion does not come within the purview of Revenue and Taxation Code 6596 (copy enclosed) since you have not identified your client. If you have any further questions in regard to the matters contained herein, please do not hesitate to write again providing us with facts specific to each transaction. Yours very truly,

AIP:cl
REDACTED TEXT
Enclosures (2)
cc: REDACTED TEXT District Administrator

Anthony I. Picciano
Tax Counsel