As reported in the August newsletter, most printers who file claims for refund with the State Board of Equalization will be entitled to retroactive refunds. Due to changes in Regulation 1541, purchases of printing aids used for printed matter that is ultimately subject to tax or sold to the U. S. Government can in most cases, be purchased without tax.

Since this Regulation change, the Sales and Use Tax Department has taken the position that "Ultimately subject to tax" doesn’t really mean what it says. For example, printing aids used for the printing of newspapers which will ultimately be subject to tax are not exempt under this new Regulation.

When asked to clarify their position in light of the apparent contradiction to the Regulation we received a letter from their legal staff’s tax counsel. In that letter, the argument was that the logical intent of the law change was not to let printers buy printing aids without tax unless title to the printing aid went with the printed matter sold to the consumer. For example, if I as a consumer purchased taxable employee manuals for my company, I would have purchased the manuals and the special printing aids used to print those manuals. Conversely when I buy a newspaper, I am not buying the printing aid used to print that newspaper. Therefore, the printer of that newspaper is not reselling those aids and must pay tax on the purchase.

Although this is a plausible and logical explanation and correctly distinguishes two separate situations, it still does not reconcile the all-encompassing wording in the Regulation with their position. Moreover, an equally logical argument could be made that the intent of this Regulation change was simply to stop taxing printing aids twice. If a printer buys a printing aid and pays tax and if the printed matter is also taxed somewhere down the line, the argument is the price of the printing aids is directly or indirectly included in the price of the printed matter. The real point, however, is the Regulation only requires that the sale of the printed matter be ultimately subject to tax.

If a newspaper company has newspapers printed (either by using an outside printer or prints them in house) and if the ultimate sale of those papers is taxable, the strict reading of the Regulation would exempt the purchases of those printing aids from tax. The Sales and Use Tax Department has effectively come up with their own additional set of criteria and tried to make this new tax law logical. Tax law and logic rarely go together and using logic works better in many aspects of life but usually is not a reliable authority to interpret the law. If this were the case I’m sure we could all rewrite the tax code to make it more logical. We may have a problem, however, when asked to defend our position based on that logic. Any printer selling printed matter which is subject to tax or for resale but will ultimately be subject to tax should file a protective claim for refund until this issue is decided in Appeals.

On a go forward note, the flip side is we are finding printers are now swinging 100% the other way and not paying tax on any printing aids. Remember, printing aids used for printed matter that is shipped out of state and/or exempt from tax (e.g. Printed sales messages, labels used on exempt food products, exempt publications, etc.) should be purchased tax paid, or if purchased for resale the cost must be reported on line 2 of the sales tax return. To determine this cost a proration of the printing aids purchased may be used based on a analysis of taxable sales, qualifying resales, and exempt sales. This analysis should be done each reporting period for which a return is filed.