Is ISDN internet equipment and connectivity used to transfer prepress printing files exempt from Texas sales tax as manufacturing equipment?

Subject

Integrated Services Digital Network/Data — Used In Printing Process — Equipment (Computers, Routers) And Services (Internet Provider, Telephone Lines) Used

Plain-English summary

A trade association member was installing an Integrated Services Digital Network (ISDN) telecommunications internet access line for the primary purpose of high-speed file transfer of prepress imaging files. The taxpayer argued this data was an integral part of the printing process -- analogous to artwork used to produce film, or in some cases digital data that actually drives digital presses -- and that the equipment used to transfer the data should therefore be treated as part of the manufacturing chain.

The Comptroller drew a line based on what the equipment actually does:

• Computers or equipment that directly drive the digital presses qualify for the manufacturing exemption.
• Equipment used only to retrieve or transfer the data to or from the customer -- including the ISDN line and routers -- does not qualify, even though that data ultimately feeds the printing process.
• The connectivity services themselves (the internet provider's charges and the telephone company's charges) also do not qualify for exemption.

The letter notes this opinion is based on the facts presented, and different facts could produce a different result.

What this means for you

Printers and prepress/imaging businesses

If you're transferring prepress files over an ISDN line or similar telecommunications connection, don't assume the "manufacturing" nature of the underlying data extends exemption to the transmission equipment or services. Under this ruling, only equipment that directly drives the presses is exempt -- the routers, ISDN lines, and computers used solely to move the data to or from a customer are taxable, as are the internet and phone service charges themselves.

Trade associations and members evaluating shared telecom purchases

The taxpayer here was asking on behalf of a member installing this connectivity. If your association or company is deciding how to structure or purchase similar internet/ISDN connectivity for prepress or similar data transfer, budget for full taxability of the hardware and services unless the equipment is doing the actual press-driving work.

Accountants and tax professionals

When classifying equipment in a printing or prepress operation for the manufacturing exemption, look at the specific function of each piece of equipment rather than its role in the overall workflow. Equipment that transmits or retrieves data is treated differently than equipment that directly operates the manufacturing/printing machinery, even when the data being moved is itself integral to production.

Common questions

Q: Is the ISDN line used to transfer prepress files exempt from Texas sales tax?
A: No. The ruling states that equipment such as the ISDN line and routers used to retrieve or transfer the data does not qualify for exemption.

Q: Are computers that directly drive digital printing presses exempt?
A: Yes. The ruling states computers or equipment that directly drive the digital presses qualify for exemption.

Q: Are the internet provider and telephone company charges for the connectivity exempt?
A: No. The ruling states these connectivity services would not qualify for exemption.

Q: Does it matter that the data is described as integral to the printing process?
A: Not for the transmission equipment or services. Even though the taxpayer characterized the data as analogous to artwork used to produce film, the exemption turned on whether the equipment directly drives the presses, not on the importance of the data itself.

Q: Could this outcome change under different facts?
A: Yes -- the letter states the opinion is based on the facts presented, and other facts, though similar, may provide a different result.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9610140L

Original ruling text

October 16, 1996

Dear ****:

This is in response to your request for a ruling regarding the taxability of an
Integrated Services Digital Network (ISDN) telecommunications Internet access
line being installed by one of your members for the primary purpose of high
speed file transfer of prepress imaging files. This data is an integral part
of the printing process, and you feel that the equipment being used to transfer
the data is an integral part of the manufacturing chain. The data is analogous
to artwork that is used to produce film for the manufacturing process, or in
some cases the digital data is actually used to drive digital presses.

Your questions are restated below followed by my response:

1. Is the hardware (routers, computers, etc.) necessary for this connectivity
   exempt?

Response: Computers or equipment that directly drive the digital presses
qualify for exemption. Equipment (i.e., the ISDN line, routers, etc.) used to
retrieve or transfer the data directly or indirectly from the customer does not
qualify.

2. Are the connectivity services (Internet provider, TELEPHONE CO.'s charges,
   etc.) exempt?

Response: These services would not qualify for exemption.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,
Gilbert Zamora
Tax Policy Division