How did Utah tax full-service photocopying contracts, vendor equipment and supplies, alternative equipment leases, and separately stated labor and material charges?

Plain-English summary

Utah Private Letter Ruling 93-029 addressed proposed contracts under which a vendor would operate a customer's on-site copy center.

The vendor would supply dedicated machines, staff, repairs, paper, toner, chemicals, and other inputs. The customer would pay per impression, with extra per-copy charges for binding, folding, laminating, and stapling.

The Commission said the total charge was taxable and explained how the vendor should tax equipment and supplies under several alternative contract structures.

Original full-service contract

The total amount the purchaser paid the vendor was taxable as a retail sale of copies, printing services, and services connected with selling tangible personal property.

That included binding, folding, and similar services.

The response cited Utah Code section 59-12-103 and Rule R865-19-80S.

Vendor equipment

Photocopy machines and other equipment the vendor used to make the finished products were not purchased for resale.

The vendor used or consumed that equipment, so the vendor's equipment purchases were taxable.

Paper, toner, chemicals, and supplies

Only items becoming an ingredient or component part of the finished goods sold to the purchaser could be bought tax-free for resale.

The Commission said paper and toner generally met that ingredient requirement.

Developer, chemicals, and other supplies did not qualify when the process did not leave them as an ingredient of the copies or printed material.

Alternative equipment lease and supply sales

If the machines and equipment were leased to the purchaser:

• The entire periodic lease payment was generally taxable.
• The taxable payment included its built-in interest factor.
• The vendor could buy leased equipment tax-free for resale.
• A qualifying conditional-sales lease under Rule R865-19-32S could generally produce less tax.

If toner, developer, and other supplies were sold to the purchaser, the vendor could buy them tax-free for resale and had to collect tax on their full sales price.

Reimbursements for employee salaries and benefits were taxable charges connected with the sale or lease of tangible personal property.

The Commission said this alternative generally produced the same result—the total customer charge was taxable—except that it also generally taxed the interest built into the equipment lease payment.

Cents-per-impression balance

When equipment was leased and the remaining expenses were charged on a cents-per-impression basis, both the periodic equipment lease charge and the impression-based balance were taxable.

Supplies that did not become ingredients of the customer's finished products were consumed by the vendor and taxable to it.

Separately stated allocations

Separately stating the equipment lease, labor, and paper, supplies, and chemicals did not change the result.

The total charge to the purchaser remained taxable.

Holding

Under the proposed arrangements:

• The bundled charge for copies, printing, binding, folding, and connected services was taxable.
• Vendor-used production machines and equipment were taxable to the vendor.
• Ingredients of finished copies could be bought tax-free for resale.
• Paper and toner generally qualified as ingredients.
• Supplies that did not remain in the finished product were taxable to the vendor.
• Equipment lease payments were generally taxable in full, including built-in interest.
• The vendor could buy equipment held for taxable lease tax-free for resale.
• Salary and benefit reimbursements connected with property sales or leases were taxable.
• A qualifying conditional-sales lease could generally reduce tax.
• Separately stating equipment, labor, and supplies did not exempt any part of the total customer charge.

What this means for you

Managed-print and copy-service vendors

Classify each input by whether you consume it or it physically becomes part of the product sold. That distinction controls the resale exemption.

Equipment lessors

Review whether the arrangement is a true lease or could qualify as a conditional-sales lease, and identify all amounts included in the periodic payment.

Corporate purchasers

A contract's internal allocation does not necessarily reduce the taxable base when all charges remain connected with taxable property.

Common questions

Q: Was the entire full-service photocopying charge taxable?

A: Yes.

Q: Could the vendor buy its copy machines tax-free for resale?

A: Not when the vendor used them to produce copies. It could do so when the machines were instead held for taxable lease to the purchaser.

Q: Which supplies qualified for resale treatment?

A: Only those physically becoming ingredients or component parts of the finished goods. Paper and toner generally qualified.

Q: Were employee salary reimbursements exempt?

A: No. They were treated as taxable charges connected with the sale or lease of tangible personal property.

Q: Did separately stating labor make it exempt?

A: No. The total charge remained taxable.

Key source language

• Bundled charge: “The total amount paid by the purchaser to the vendor would be subject to the sales tax.”
• Equipment: “Photocopy machines and other equipment used by the vendor to create the items sold are not property purchased for resale.”
• Ingredients: “Only those items that become an ingredient or component part of the finished goods sold to the purchaser may be purchased tax-free.”
• Lease: “the entire periodic lease payment would generally be subject to the tax (including the built-in interest factor).”
• Separate statement: “the total charge to the purchaser is taxable.”

Citations and references

• Utah Code Ann. § 59-12-103
• Utah Code Ann. § 59-12-104(27)
• Utah Admin. Rule R865-19-80S
• Utah Admin. Rule R865-19-32S

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 93-029
• Date note: the request was dated December 13, 1993; the Commission response was dated April 8, 1994.
• Scope note: the response addressed a proposed full-service contract and several alternative lease, sale, per-impression, and separately allocated structures.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response April 8, 1994

Request

December 13, 1993

Mr. Joe B. Pacheco

Commissioner

Utah State Tax
Commission

160 East 300 South,
5th Floor

Salt Lake City, Utah
84134

Re: Request for
Advisory Opinion In the Nature of a Declaratory Judgment

Dear Joe:

I represent a
photocopy company that proposes to enter into contracts with large companies to provide all of the photocopying, printing, and document reproduction needs of such companies in exchange for certain fees. For ease of reference, I will refer to the photocopy company as the �vendor�, and the company for which the copies are made as the �purchaser�. The proposed agreement would operate as follows:

1. The vendor would provide all of the
   copy machines, folding machines, binders and other equipment necessary to fulfill the contract. All of such machines and equipment would be used only to provide copies and products for the one single purchaser. Copies would not be made for any other purchaser using such dedicated copy machines and equipment.

2. The equipment would be kept and used on
   the premises of the purchaser.

3. The vendor would also provide all of
   the maintenance, repairs, supplies, toner, developer, chemicals, and paper necessary to fulfill the agreement.

4. The vendor would provide, as its own
   employees, a manager, operators, messengers, and all employees necessary to fulfill the agreement. The employees would be on the premises of the purchaser, but vendor would be responsible to pay all employee costs, including payroll taxes, insurance, and benefits.

5. The purchaser would pay to the vendor a
   fee based upon the number of copies made. For instance, it might require the purchaser to pay a minimum monthly fee of $0.04 per copy or $32,000 for the first 800,000 impressions per month, with an additional charge of $0.025 per impression for all impressions in excess of 800,000 per month. There would be additional charges imposed for additional services such as binding, folding, laminating and stapling. Such additional charges would be on the basis of cents per copy.

6. The above fee would constitute payment
   in full for everything, including the copy machines, paper, toner, chemicals, supplies, repairs, maintenance, and employee costs and expenses.

7. The purchaser would be required to pay
   all state and local sales and use taxes which vendor is required to pay as a result of the arrangement.

Based upon the above
proposed contract there are several sales and use tax issues that arise. Therefore, before entering into this type of proposal the parties would like to know how sales and use taxes would be imposed upon the various aspects of this proposed agreement. Accordingly, based upon the above represented facts and proposals, I hereby request that the Tax Commission issue an advisory opinion, in the nature of a declaratory judgment, relating to the following sales and use tax issues:

1. Would the amount paid by the purchaser
   to the vendor for copies and other printing services be a retail sale of tangible personal property pursuant to �59-12-103, Utah Code Ann., as amended, and therefore subject to sales and use taxes?

2. When the vendor purchases the photocopy
   machines and other equipment used in the performance of such a contract, are such purchases exempt from sales and use taxes as property purchased for resale pursuant to �5912-104(27), Utah Code Ann., as amended?

3. When the vendor purchases the toner,
   developer, chemicals, paper and other supplies used to provide the copies to fulfill the contract, are such purchases exempt from sales and use taxes as property purchased for resale pursuant to �59-12-104(27), Utah Code Ann., as amended?

4. In reference to question number 1
   above, if it is your opinion that the total amount paid by the purchaser to the vendor is subject to sales and use taxes, would the amount subject to tax be different under the following circumstances. The photocopy machines and equipment would be leased to the purchaser; the toner, developer, chemicals, paper and other supplies would be separately sold to the purchaser; and the balance would be for reimbursement of employee salaries and benefits; but the contract would be subject to a provision that the total costs would not exceed
   $$$$$ per copy or $$$$$ for the first XXXXX impressions per month, and an additional
   $$$$$ per impression for all impressions in excess of XXXXX per month? If your opinion is that the amount of sales and use taxes under such a structuring of the agreement would be different than if it is structured as originally proposed, what would be the specific differences, and which specific items would and would not be subject to sales and use taxes?

5. In reference to question number 2
   above, if it is your opinion that the purchase of the photocopy machines and other equipment would not be exempt from sales and use taxes as property purchased for resale, would the amount subject to tax be different if the photocopy machines and other equipment are leased to the purchaser under a scenario similar to that set forth in question 4 above?

6. In reference to question number 3
   above, would your response be different in any way if the contract between the vendor and the purchaser were structured in the manner set forth in question 4 above?

7. If the proposed contract is structured
   slightly differently than as set forth in question 4 above, so that the photocopy machines and equipment are leased to the purchaser, and the balance is calculated on a cents per impression basis for all remaining expenses, would your opinion for any of the above questions 1 through 6 be different, and if so, how would it be different?

8. In lieu of the any of the above, the
   contract may be restructured to allocate the sales price between the lease of the machines and equipment, the labor, and the paper, toner, chemicals, etc. For instance, the contract might provide for the price for the first XXXXX impressions per month to be priced at $$$$$ per copy, allocated as follows:

Lease of machines and
equipment $$$$$

Labor $$$$$

Paper, supplies and
chemicals $$$$$

TOTAL $$$$$

For all copies in
excess of XXXXX impressions per month the charge might be $0.025 per impression, to be allocated as follows:

Lease of machines and
equipment $$$$$

Labor $$$$$

Paper, supplies and
chemicals $$$$$

TOTAL $$$$$

In the event the
contract is restructured in this manner, how will sales and use tax be imposed on both the vendor and the purchaser on each portion of the contract?

Please know that I
appreciate your consideration of this matter, and I look forward to receiving your response in the near future. Best personal regards.

Sincerely yours,

XXXXX

N O T I C E

Notice is hereby given
that you have the right to appeal this decision to the Appeals Division of the Utah State Tax Commission. A Petition for Hearing must be filed with the Appeals Division of the Utah State Tax Commission within thirty (30) days from the date of mailing of the notice of the Commission action from which you are taking the appeal.

The address of the
Appeals Division is:

Appeals Division

Utah State Tax Commission

160 East Third South

Salt Lake City, UT 84134

The Petition must
contain the following:

1. The name of the Petitioner.

2. Particular tax involved and period of
   the alleged liability if appropriate and amount of tax in dispute.

3. If the petition results from a letter
   of notice from the Commission, the petition will include date of the letter or notice and originating department or officer.-

4. A statement of the relief or action
   sought.

5. If a particular statute is relied upon
   by the Petitioner, reference to that statute.

6. Statement of facts and a summary of
   arguments and authorities relied upon.

April 8, 1994

XXXXX

Re: Advisory Opinion - Sales or Use Tax
Application to Full-Service Contracts for Photo copying, Printing, and Document Reproduction

Dear XXXXX:

This letter is in response
to your recent request (copy attached) for the Tax Commission to issue a declaratory judgment as to application of sales or use tax to certain contractual arrangements for full service photocopying, printing, and document reproduction.

Although your inquiry
was framed as a request for a declaratory judgment, Tax Commission policy is to initially treat all such inquiries as requests for advisory opinions. As such, it was referred to the Tax Commission's Auditing Division for their analysis and recommendations.

The division's
recommendations are as follows:

1.
The total amount paid by the purchaser to the vendor would be subject to the sales tax as a retail sale of copies, printing services, and other services such as binding, folding, etc., in connection with the sale of tangible personal property under Utah Code Ann. 59-12-103 and Administrative Rule R865-19-80S (copy attached).

2.
Only those items that become an ingredient or component part of the finished goods sold to the purchaser may be purchased tax-free by the vendor. Photocopy machines and other equipment used by the vendor to create the items sold are not property purchased for resale under U.C.A. 59-12-104(27). Such machines and equipment are considered as for use or consumption by the vendor, and their acquisitions by the vendor are taxable transactions.

3. As indicated above, those items which
   physically become an ingredient of what is sold by the vendor to the purchaser are considered purchases for resale by the vendor and are consequently exempt from tax. Toner and paper generally fit the �ingredient� requirement for exemption. Certainly there are some processes by which developer, chemicals, and other supplies do not become an ingredient of the copies or printed material; and consequently, would not qualify for exemption.

4. If the machinery and equipment were
   leased to the purchaser, the entire periodic lease payment would generally be subject to the tax (including the built-in interest factor). See Rule R865-19-32S attached. If the toner, developer, etc., and other supplies were sold to the purchaser, the charge to the purchaser would be subject to the tax. The machinery, equipment and supplies, under these circumstances, could be purchased tax-free for resale by the vendor. Charges to the purchaser for reimbursement of employer salaries, benefits, etc., would be considered as taxable charges in connection with the sale or lease of the tangible personal property.

Overall, the effect of the described
variation would be the same (total charge to the purchaser, taxable) except that the circumstances in your question number 4 would also generally result in payment of tax on the interest factor built into the computation of the equipment lease payment.

5. As indicated above, if the photocopy
   machines and other equipment were leased to the purchaser, the vendor should purchase these items tax-free and then collect tax on the gross periodic lease payment. Alternatively, if certain conditions are met, the lease may qualify for treatment as a "conditional sales lease" under R865-19-32S. The conditional sale lease treatment will generally result in less tax. See the referenced rule for additional information.

6. If the toner, developer, paper and
   other supplies were sold to the purchaser, they would be purchased tax-free by the vendor, and the tax must be collected by the vendor on the full sales price to the purchaser.

7. If the machines and equipment were
   leased to the purchaser, the total periodic lease charge would be taxable as noted above. The balance charged on a �cents per impression� basis would also be subject to the tax. Purchases of any supplies consumed by the vendor (items that are not ingredients of the items sold to the purchaser) would be taxable to the vendor.

8. Even if the structure of the contract
   is such that the equipment lease, labor charge, and paper/supplies/chemicals are separately stated, the total charge to the purchaser is taxable.

For The Commission,

Alice Shearer

Commissioner