Was an outsourced in-house print shop a nontaxable service, and could the customer buy its printed materials for resale without tax?

Plain-English summary

The print-shop equipment that remained under the printer's direction and control was not being leased to the taxpayer, but the overall management charge was still taxable as a sale of printed materials. Calling the arrangement a service did not change its substance: the printer produced copies and other tangible printed products for a monthly charge tied partly to a minimum number of impressions.

The taxpayer could give the printer a valid resale certificate because nearly all of the printed materials were resold to customers. When the taxpayer instead consumed materials purchased tax-free, it had to accrue use tax on its purchase price for those materials.

Separately charged walk-up copiers used and controlled by the taxpayer remained taxable equipment leases. Their inclusion in the same agreement did not convert the rest of the arrangement into an equipment lease. Nor did the taxpayer's separate, taxed lease of distribution equipment from another company.

What this means for you

Control of equipment and the nature of the finished product are separate questions. A vendor-operated machine may avoid treatment as a lease, yet the transaction can still be taxable because the customer receives tangible personal property.

Businesses buying printed materials for resale should document the resale purchase with a valid certificate and track any copies later taken from inventory for their own use. The ruling says use tax is based on the taxpayer's purchase price, not the printer's production cost.

Common questions

Q: Was the printer's controlled equipment treated as leased to the taxpayer? No. The printer supplied the operators and supplies and retained direction and control over the equipment.

Q: Did that make the monthly management charge a tax-exempt service? No. The Department treated the charge as payment for printed materials, which were the essence of the transaction.

Q: Could the taxpayer give the printer a resale certificate? Yes, for materials purchased for resale. If the resale-versus-consumption split was unknown at purchase, it could certificate the whole purchase and later accrue use tax on the portion consumed.

Q: Did planned delivery or resale outside Florida eliminate tax at the printer-to-taxpayer stage? No. The Department said out-of-state disposition was irrelevant to that purchase; absent a resale certificate, Florida delivery remained taxable.

Q: Were the separately priced walk-up copiers taxable? Yes. They were under the taxpayer's control and their separate lease charge was taxable, but they did not change the classification of the rest of the agreement.

Citations and references

• Fla. Stat. §§ 212.02(14)(a), 212.02(19), and 212.05 — retail sales, tangible personal property, and sales and use tax
• Fla. Admin. Code r. 12A-1.027 — taxable printing of tangible personal property
• Fla. Admin. Code r. 12A-1.038 — resale certificates
• Fla. Admin. Code r. 12A-1.041(1) — photocopies as tangible personal property
• Fla. Admin. Code r. 12A-1.064(2)(a) — Florida delivery followed by purchaser transport out of state
• Fla. Admin. Code r. 12A-1.071(10) — equipment supplied with an operator
• Department of Revenue v. Seaboard Coastline Railroad Co., 480 So. 2d 1349 (Fla. 1st DCA 1985) — substance rather than form
• Motorola v. Green, 130 So. 2d 65 (Fla. 1960) — vendor protection for a resale certificate accepted in good faith
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-068

Original ruling text

SUMMARY

"Taxpayer," which sells printed materials to its customers,
has entered into a "Management Agreement" with "Printer."
Printer operates a "print shop" on Taxpayer's premises. At
all times, Printer maintains control and direction over its
printing and distribution equipment. Pursuant to Rule 12A1.071(10)(d), F.A.C., printer should not be charging
Taxpayer sales tax for the lease of its equipment that
remains under Printer's direction and control at all times.
However, the consideration paid by Taxpayer to Printer
under the Management Agreement is still taxable, as the
Department deems the transaction to be a sale of printed
materials or copies. If the printed materials purchased by
Taxpayer are for resale, Taxpayer may extend a resale
certificate to Printer in lieu of tax.

Furthermore, neither the fact that Management Agreement
includes the lease of walk-up copiers by Printer to
Taxpayer for which a separate charge is made, nor the fact
that Taxpayer leases distribution equipment from a third
party for Printer to use, makes the entire management
services agreement a taxable lease of copying equipment.

Oct 20, 1997

Re: Technical Assistance Advisement 97A-068
Sales and Use Tax In House Print Shop Operated by Third
Party
Rules 12A-1.071(10); 12A-1.038; 12A-1.027; 12A-1.041(1),
F.A.C.
XXX ("Taxpayer")

Dear

Your letter of March 25, 1997, requested a Technical Assistance
Advisement concerning the above referenced matter. This
response constitutes a Technical Assistance Advisement (TAA)

under Chapter 12-11, Florida Administrative Code, and is issued
to you under the authority of s. 213.22, Florida Statutes.

STATED FACTS

XXX (hereinafter "Taxpayer") is a Florida company that engages
in the business of providing research materials, access to
databases containing research and information publications, and
other support services to insurance companies throughout the
United States. Taxpayer also sells printed information to its
customers.

Taxpayer and XXX (hereinafter, "Printer") have entered into a
Facilities Management Agreement (hereinafter "Management
Agreement"), whereby Taxpayer subcontracts its printing services
to Printer. The Management Agreement provides the following:

1. Printer shall install and manage a facility at Taxpayer's
   premises from which Printer will provide to Taxpayer
   printing and distribution services.
2. The copiers, software, paper (up to 4.5 million sheets) and
   toner are owned and supplied by Printer. Additional paper
   is purchased separately by Taxpayer.
3. Printer shall furnish employees to produce the printed
   materials; if needed, additional staffing is provided by
   Printer for an additional cost to Taxpayer. Printer pays
   its own employees. At all times, Printer maintains control
   and direction over its own employees, the printing and
   distribution equipment, as well as the related supplies.
4. Taxpayer requests printing of specific items. Taxpayer
   completes a "Print/Distribution Request" detailing the
   specifications of the printing order. At no time does
   Taxpayer have physical control over the printing operation.
5. Printer bills Taxpayer on a monthly basis for machine
   usage, labor, and additional supplies, as needed.

Also included in the Management Agreement is the pricing
structure for the facilities management operation. On the
fourth page of Exhibit A, there is a monthly minimum price for
each of the first five years. For example, the monthly minimum
price for the first year is $180,819. Included in this price

are 8,500,000 impressions (copies).

Taxpayer conducts business in every state. In most instances,
the printed materials purchased from Printer are sold to final
consumers outside of Florida. Occasionally, Taxpayer does not
sell the printed materials, and Taxpayer agrees that it should
accrue use tax on the cost of those materials that it consumes.

In addition to printing services, the Management Agreement also
provides for "walk-up" copiers to be used by Taxpayer personnel
for routine copying. Printer performs all maintenance on these
copy machines. The support documents to the invoices from
Printer to Taxpayer separately state and itemize the price for
the lease of these machines as "XXX." Taxpayer does not dispute
the taxability of this particular transaction.

Pursuant to the Management Agreement, the print facility that is
maintained by Printer also functions as a distribution center
for Taxpayer. Once Printer produces the printed product,
Printer will maintain custody of the printed materials until it
delivers the products to the final destination on behalf of
Taxpayer. The distribution equipment is leased by Taxpayer from
a third party other than Printer. Taxpayer pays sales tax on
its lease of the distribution equipment. Taxpayer does not
dispute the taxability of this particular transaction.

REQUESTED ADVISEMENT

1. "Whether the consideration paid by [Taxpayer] to [Printer]
   for the printing services, pursuant to the Management Agreement,
   is exempt as a service under Rule 12A-1.071(10), F.A.C.?"

2. "Whether [Taxpayer] may extend a resale certificate to
   [Printer], and purchase the printed materials tax exempt,
   pursuant to Rule 12A-1.038, F.A.C., since these materials are
   for resale and/or delivery outside the State?"

3. "Whether including the lease of walk-up copiers, for which a
   separate charge is determined (upon which [Taxpayer] pays sales
   tax), in the Management Agreement taints the Management
   Agreement transaction?"

4. "Whether the fact that [Taxpayer] leases distribution
equipment from a third party (and pays sales tax on that
equipment), for [Printer's] use to perform services pursuant to
the Management Agreement, taints the exempt status of the
Management Agreement transaction?"

APPLICABLE LAW

The following statutory and administrative law is relevant to
addressing the issue under advisement:

Section 212.05, F.S., establishes a tax on the sale of tangible
personal property in the state of Florida:

212.05 Sales, storage, use tax.--It is hereby declared to
be the legislative intent that every person is exercising a
taxable privilege who engages in the business of selling
tangible personal property at retail in this state....

Section 212.02(14)(a), F.S., defines "retail sale":

(14)(a) "Retail sale" or a "sale at retail" means a sale to
a consumer or to any person for any purpose other than for
resale in the form of tangible personal property or
services taxable under this part, and includes all such
transactions that may be made in lieu of retail sales or
sales at retail.

Rule 12A-1.071(10), F.A.C., provides:

(10)(a) A transaction involving the use of equipment with
an operator supplied by the owner of the equipment is a
lease if control or direction over the use of the equipment
passes to the customer.

(b) When the operator of the equipment is on the payroll of
the lessee, the contract constitutes a rental of tangible
personal property and is subject to the tax.

(c) A transaction is not a lease if it is for the

performance of a specific job in a manner to be determined
by the owner or his operator.

(d) When the owner of equipment furnishes the operator and
all operating supplies, and contracts for their use to
perform certain work under his direction and according to
his customer's specifications, and the customer does not
take possession or have any direction or control over the
physical operation, the contract constitutes a service
transaction and not the rental of tangible personal
property, and no tax is due on the transaction.

Rule 12A-1.027, F.A.C., provides, in part:

(1) Sales to ultimate consumers for printing of tangible
personal property are taxable.

(3) "Printing of tangible personal property" shall include
imprinting and all processes or operations connected with
the preparation of paper and paper-like substances, the
reproduction thereon of characters or designs, and the
alteration or modification of such substances by finishing
and binding. This includes mimeographing, multigraphing,
etc.

(4) Upon such final sales, charges for materials and
production or fabrication of typography, authors,
alteration, art work, photoengravings, electros, mats,
stereotypes, hand or machine composition, lithographic
plates or negatives, electrotypes, etc., and binding and
finishing services shall be included in the selling price
and the tax shall be computed upon such selling price
whether or not the various charges are separately
stated....

Rule 12A-1.041(1), F.A.C., provides, in part:

(1) ... [P]hotostat producers are engaged in the sale of
tangible personal property. When such persons develop or
print... photostats..., they are making sales of completed
articles of tangible personal property and must collect the

tax on the total selling price without deduction for the
cost of the property sold, labor, service, or any other
expense whatsoever.

Rule 12A-1.038, F.A.C., provides, in part:

(1) It is the specific legislative intent that each and
every sale, admission, use, storage, consumption, or rental
is taxable under Chapter 212, F.S., unless such sale,
admission, use, storage, consumption, or rental is
specifically exempt. The exempt status of the transaction
must be established by the dealer. Unless the dealer shall
have taken from the purchaser a certificate signed by the
dealer or the dealer's authorized representative to the
effect that the property or service was purchased for
resale and bearing the date, the name and address of the
purchaser, the effective date of the certificate, and the
number of the dealer's certificate of registration... the
sale shall be deemed to be a taxable sale at retail....

Rule 12A-1.064(2)(a), F.A.C., provides, in part:

(2)(a) If goods are sold within this state and possession
is taken by the purchaser within this state, the sales tax
applies, irrespective of the fact that the goods are to be
transported outside of Florida by the purchaser immediately
upon delivery, unless otherwise exempt....

DETERMINATION

A. Response to Requested Ruling One

Based on analysis of the information supplied, the Department
agrees that, pursuant to Rule 12A-1.071(10)(d), F.A.C., any
charge for the copying equipment used by Printer in the printing
and distribution facility is not subject to tax as the rental or
lease of tangible personal property, since Printer furnishes the
operator and supplies, and maintains direction and control over
its equipment at all times. Printer should not be charging
Taxpayer sales tax for the lease of its equipment that remains
under Printer's control. However, further discussion is

warranted.

The Department does not concede that all consideration paid by
Taxpayer to Printer under the Management Agreement is exempt as
a service under Rule 12A-1.071(10)(d), F.A.C. Copies and other
printed material are considered tangible personal property, as
defined in Section 212.02(19), F.S. Printers are therefore
engaged in the fabrication and sale of tangible personal
property. The sale of printed material is subject to sales and
use tax. See Rule 12A-1.027, F.A.C. The sale of photocopies is
also subject to tax. See Rule 12A-1.041(1), F.A.C. The intent
of the Management Agreement is that Printer shall produce
printed material for Taxpayer. This is unlike an exempt service
transaction where no separate charge is made for the sale of
inconsequential tangible personal property. The printed
material sold by Printer to Taxpayer is not only consequential,
it is the essence of the transaction.

Rule 12A-1.071(1), F.A.C., deals with sales tax on rentals,
leases, and licenses to use tangible personal property. Rule
12A-1.071(10)(d) only provides an exception to the tax on
rentals, leases, and licenses to use tangible personal property,
implemented in Rule 12A-1.071(1), F.A.C. It was not intended to
exempt otherwise taxable sales of tangible personal property.

The classic example of a transaction to which Rule 12A1.071(10)(d) applies is the rental of a crane and an operator.
If a business rents a crane and an operator, and never has any
control over the operation of the equipment, the transaction is
for "crane services" and is not the lease of the crane itself.
Such a transaction is not subject to tax. However, the hiring
of a company to produce items of tangible personal property on a
customer's premises, which items are sold to that customer, is
not a service to that customer.

Based on analysis of the Management Agreement, it is clear that
the minimum monthly charge from Printer to Taxpayer for the
printing "services" includes a minimum number of "impressions."
You agree that these "impressions" are printed materials or
copies. Therefore, the monthly charge by Printer to Taxpayer is
for printed materials (tangible personal property), and not for

a service.

If Printer produced and sold the same printed materials from its
own print facility across the street from Taxpayer, the entire
charge would be taxable. Built into such a charge for those
printed materials would be the cost of the employees, the cost
of the materials, and the cost of operating the machines, as
well as profit. The location of the print shop should not cause
a drastic difference in the taxability of the printed materials.

It is possible that a small amount of the monthly charge by
Printer is for distribution services or for the convenience of
locating the print equipment on Taxpayer's premises. However,
after review of the Management Agreement, invoices from Printer
to Taxpayer, and other information supplied, as well as
discussions with you, the Department is unable to make a
determination as to how much of the charge from Printer each
month, if any, represents the charge for nontaxable services.
Therefore, based on the information supplied, the entire charge
made by Printer is taxable as the sale of printed materials.
Even if Printer were to label the majority of the charge as a
"service" in the Management Agreement, the transaction would be
taxable, because the substance of an agreement or transaction
and not the form dictates its tax consequences. See Dept. of
Revenue v. Seaboard Coastline RR. Co., 480 So. 2d 1349, 1353
(Fla. 1st DCA 1985).

This extensive discussion is necessary because of the wording of
your first request. If the Department simply conceded to your
request that all consideration paid by Taxpayer to Printer for
the printing services is exempt under 12A-1.071(10), F.A.C.,
then Taxpayer could avoid sales tax on the purchase of all
printed materials, even purchases of those for its own use.

Therefore, the taxability of the above described transaction
hinges upon whether the printed materials are purchased for
resale. The above discussion becomes moot if it is determined
that Taxpayer purchases the printed materials from Printer for
resale. As will be discussed in section B, if Taxpayer provides
resale certificates to Printer, Printer should not be charging
sales tax to Taxpayer on any of its invoices other than for the

self-service copy machines (Boca Copiers) of which Taxpayer has
use.

B. Response to Requested Ruling Two

Pursuant to Rule 12A-1.038, F.A.C., if a purchaser, who is
registered as a dealer in Florida, extends a resale certificate
at the time of sale to a vendor, the dealer may purchase
tangible personal property from that vendor exempt from sales
tax. If it is known at the time of purchase that the property
is not going to be resold, but is to be consumed by the
purchaser, the purchaser should not extend a resale certificate,
but should remit sales tax to the vendor. However, if it is not
known the extent to which the property will be resold, as
opposed to that which will be consumed, the purchaser may extend
a resale certificate for the entire purchase, and remit use tax
on that portion of the property that is consumed. Until these
materials are in fact consumed, however, they should be
reflected in the purchaser's books and records as inventory for
sale.

After thorough analysis of the information you provided on
September 2, 1997, it appears that Taxpayer resells the printed
materials it purchases from Printer. Based on your assertion
that nearly all of the purchases from Printer will be resold to
Taxpayer's customers, Printer should accept a resale certificate
from Taxpayer in lieu of tax when billing Taxpayer for printing,
including the monthly minimum charge. Whenever Taxpayer
consumes the printed materials it purchases tax exempt, Taxpayer
must accrue use tax on the purchase price of those materials,
not on the cost to Printer of producing the copies. If Printer
accepts a valid resale certificate in good faith from Taxpayer,
it is held harmless against the failure of Taxpayer to properly
accrue use tax on the consumption of the printed materials. See
Motorola v. Green, 130 So.2d 65 (Fla. 1960).

Whether or not the printed materials are sold within or outside
of Florida is irrelevant to this determination. A printer which
sells printed materials to a business which is shipping them out
of state must collect sales tax (unless a resale certificate is
provided in lieu of tax.) See Rule 12A-1.064(2)(a), F.A.C.

Whether the printed materials are sold out-of-state will only
affect whether Taxpayer is required to collect Florida sales tax
from its customers.

C. Response to Requested Ruling Three

The Department agrees that inclusion in the Management Agreement
of the lease of walk-up copiers (XXX) by Printer to Taxpayer,
for which a separate charge is made, does not make the entire
management services agreement a taxable lease of copying
equipment. In other words, the fact that certain copiers, for
which a separate charge is made, are under the control of
Taxpayer, does not taint the portion of the Management Agreement
transaction for which Printer maintains control over its
equipment. Needless to say, Printer must collect tax on the
separately stated charge for the walk up copiers, as a lease of
tangible personal property.

It must be noted that the Department does not view the
Management Agreement as an exempt service transaction. As
discussed in section A, the Department views the transaction as
the sale of printed materials, which, as discussed in section B,
is only exempt if a resale certificate is issued.

D. Response to Requested Ruling Four

The Department agrees that the fact that Taxpayer leases
distribution equipment from a third party for Printer to use
does not make the management services agreement a taxable lease
of copying equipment. Again, it must be reiterated that the
Department does not view the Management Agreement as an exempt
service transaction. As discussed in section A, the Department
views the transaction as the sale of printed materials, which,
as discussed in section B, is only exempt if a resale
certificate is issued.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized

above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Ralph G. Pepe
Senior Tax Specialist
Technical Assistance & Dispute
Resolution

Control #: 28466