How is a graphic arts business taxed on its sales of negatives and color proofs, and can it buy its film, paper, and chemicals tax-free?

Plain-English summary

A general graphic arts business objected that it was effectively paying Kansas sales tax twice - once when it bought film, paper, and chemicals, and again when it separately billed clients for the finished negatives and color proofs. It asked the Department to let the tax fall only on the final sale. The Department agreed on the result: tax the sale to the client, but buy the inputs tax-free.

The full sale to the client is taxable. When the project provides negatives and color proofs to the client, the business "should be billing, collecting, reporting and remitting sales tax on the total amount invoiced to its clients for the project, including the negatives, color proofs, materials, design or correction time, and any other items." That is because K.S.A. 1999 Supp. 79-3603(a) taxes the sale of tangible personal property, the negatives and color proofs are tangible personal property, and "the design and correction work and materials used would be part of that process." So tax is due on the full amount billed - even the separately stated design or correction time - because it is all part of producing the taxable end product.

Unless the client is a reseller. If the client will resell the negatives and color proofs as a retailer, the sale can be treated as a nontaxable sale for resale only if the business first obtains "a properly completed resale exemption certificate (showing that retailer's Kansas sales tax registration number) from that client."

The inputs can be purchased tax-free. This is what removes the double tax. The business's purchases of film and paper, "which become part of or an ingredient of the finished negatives and color proofs," are exempt under the "ingredient or component parts" exemption, K.S.A. 1999 Supp. 79-3606(m). Its purchases of the chemicals used to process the negatives and proofs "would appear to qualify for the 'consumed in production' sales tax exemption, K.S.A. 1999 Supp. 79-3606(n)." The business claims these exemptions by giving the appropriate exemption certificate to its supplier at the time of purchase.

Bottom line: the tax belongs on the final sale to the client (on the whole invoice, design time included), not on the shop's own inputs - film and paper come in tax-free as ingredients, and processing chemicals come in tax-free as consumed in production.

What this means for you

Graphic arts, prepress, and printing shops

Charge Kansas sales tax on the entire amount you invoice a client for a job that delivers tangible products like negatives and color proofs - including separately billed design or correction time and materials. You cannot peel the design charge out of the taxable base when it is part of producing the taxable product.

Stop paying tax on your inputs

Give your suppliers exemption certificates so you buy film and paper tax-free (ingredient or component parts) and processing chemicals tax-free (consumed in production). That is how you avoid being taxed both on your inputs and on your sale.

Reseller clients need a certificate

If a client is buying to resell the negatives or proofs as a retailer, get a completed resale exemption certificate with the client's Kansas sales tax registration number before treating the sale as exempt.

Common questions

Q: Is separately billed design or correction time taxable?
A: Yes, when it is part of a project that delivers taxable tangible personal property (negatives and color proofs). The Department said tax is due on the total amount invoiced, including the design or correction time.

Q: Can the shop buy its film, paper, and chemicals without tax?
A: Yes. Film and paper qualify as ingredient or component parts under K.S.A. 79-3606(m); processing chemicals qualify as consumed in production under K.S.A. 79-3606(n). Use exemption certificates at purchase.

Q: What if the client will resell the negatives or proofs?
A: The sale can be exempt as a sale for resale, but only if you first obtain a properly completed resale exemption certificate showing the client's Kansas sales tax registration number.

Citations and references

• K.S.A. 1999 Supp. 79-3603(a) - imposes Kansas sales tax on the sale of tangible personal property; the negatives and color proofs are tangible personal property, so tax is due on the full amount billed for the project, including materials and design or correction time.
• K.S.A. 1999 Supp. 79-3606(m) - the "ingredient or component parts" exemption; film and paper that become part of the finished negatives and color proofs may be purchased tax-free.
• K.S.A. 1999 Supp. 79-3606(n) - the "consumed in production" exemption; chemicals used to process the negatives and color proofs may be purchased tax-free. Both input exemptions are claimed with an exemption certificate given to the supplier at purchase.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2000-071

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

December 20, 2000

XXXXXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX

Re: Sales Tax Private Letter Ruling Request

Dear XXXXXX:

You requested a private letter ruling regarding the sales tax treatment of certain purchases and sales made by XXXXXXXXXX. Your letter states as follows:

“We are a general graphic arts business. We purchase film, color art replenisher, color art negative proofing, image setting fixer and proof paper to use in the production of negatives, color art proofs. We are presently purchasing these products with sales tax added. Once a job is complete and it includes negatives (film), proofs or color art, these items are charged individually as a separate line item to our clients. Tax is calculated again on these items, at a higher base, unless our client is a resale customer, is out of state, or some other qualified exception. We are thus paying sales tax at inception when the materials are purchased and again when they have been processed and sold.

“Since we are able to capture and separately bill for these production materials, it seems equitable that the sales tax need only be collected when sold to the final consumer. Please address this issue.”

In my further discussions with XXXXXXXXXX about the business, you stated that design or correction time on a project is shown and billed separately on the customer invoice at the applicable hourly rate, and sales tax is not billed or collected on that charge. The amounts separately billed for the negatives and color proofs include the cost of materials, chemicals used, labor and overhead costs in producing the negatives and color proofs, as well as a mark-up. Sales tax is billed for these items. You also stated that in general, approximately XX% of the billing for a typical project would be attributable to design or correction time and the rest would be attributable to the materials and labor in producing or processing the negatives and color proofs.

Given the facts you have provided, when the project is to provide negatives and color proofs to the client, XXXXXXXXX should be billing, collecting, reporting and remitting sales tax on the total amount invoiced to its clients for the project, including the negatives, color proofs, materials, design or correction time, and any other items. K.S.A. 1999 Supp. 79-3603(a) imposes sales tax on sales in Kansas of tangible personal property. The negatives and color proofs that you sell to your clients are such tangible personal property, and in the Department’s view, the design and correction work and materials used would be part of that process. Thus, sales tax would be due on the full amount billed to the client.

If XXXXXXXX’s client will be reselling as a retailer the negatives and color proofs that XXXXXXXX has sold to that client, then before the sale by XXXXXXXX to the client can be considered a sale for resale and not subject to sales tax, you will need to obtain a properly completed resale exemption certificate (showing that retailer’s Kansas sales tax registration number) from that client. A copy of such a resale exemption certificate is included in the Department’s booklet entitled Kansas Exemption Certificates, enclosed for your reference.

XXXXXXXXX should be eligible to claim that its purchases of the materials you described in your letter (film and paper), which become part of or an ingredient of the finished negatives and color proofs sold to the client, are exempt from sales tax under the “ingredient or component parts” sales tax exemption, K.S.A. 1999 Supp. 79-3606(m). Also, XXXXXXXXX’s purchases of the chemicals used to process the negatives and color proofs would appear to qualify for the “consumed in production” sales tax exemption, K.S.A. 1999 Supp. 79-3606(n). XXXXXXXXXX would need to complete the appropriate exemption certificate (see the enclosed booklet) and provide it to the supplier at the time of purchase to claim the exemption.

This private letter ruling is based solely on the facts provided in your request, and as described above. This private letter ruling will be revoked in the future by operation of law without further Department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Richard L. Cram

Encl.

Date Composed: 01/03/2001 Date Modified: 10/11/2001

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