This policy statement is a restatement of the Department's existing policy of the Sales and Use Tax treatment of the printing industry on the issues of (1) which methods of commercial printing constitute manufacturing and, (2) with respect to those methods considered to be manufacturing, which phases of their business operations qualify for manufacturing exemptions from the Sales and Use Tax. This policy statement does not affect section 12-426-20 of the Regulations of Connecticut State Agencies which deals with printer and related industries.
1. The methods of printing which constitute manufacturing
Offset lithography, letter press, embossing and debossing, die cutting, foil stamping, engraving, thermography, flexography, gravure, screen printing, ink jet printing and laser printing are considered to be manufacturing as that term is defined in section 12-426-11b(a)(10) of the Regulation of Connecticut State Agencies (see Stop 'N Save, Inc. v. Department of Revenue Services, 212 Conn. 454, 458 (1989)). Under this definition and the Stop 'N Save decision, the Department requires that the manufacturing production process must occur solely at an industrial plant in order for any taxpayer to gain the exemption from the Sales and Use Tax set forth in section 12-412(34) of the Connecticut General Statutes for machinery used directly in a manufacturing production process.
Facsimile photocopying does not meet the definitions of manufacturing set forth in our statutes, regulations, and court decisions (see Connecticut Water Company v. Barbato, 206 Conn. 337 (1988); American Frozen Foods, Inc. v. Dubno, Commissioner of Revenue Services, No. 301353 (Conn. Super. Ct. April 30, 1987)).
Pursuant to section 12-412(34), data processing equipment is not entitled to an exemption even when used in the manufacturing production process.
2. The scope of the manufacturing production process in printing operations
The Department has determined that the manufacturing production process begins with the use of the plate. The stages prior to plate, including plate-making, are considered to be preproduction and , therefore, outside the parameter of the manufacturing production process as it is defined in Regulation section 12-426-11b(11). Materials and supplies used in the preproduction stage do not meet the requirements for exemption as production materials under section 12-412(18) because they do not become a component part of tangible personal property to be sold and are not used directly in an industrial plant in the actual fabrication of a finished product to be sold. In addition, machinery used in preproduction does not qualify for exemption under section 12-412(34) because it is not used directly in the manufacturing production process. In this regard, Plastic Tooling Aids Laboratory, Inc. v. Commissioner, 213 Conn. 365, 371 (1990) sets forth the requirement that, when claiming an exemption for machinery used directly in a manufacturing production process, a taxpayer must prove a direct connection with a process that results in the substantial transformation of the form. composition or character of tangible personal property.
The manufacturing production process begins with the use of the plate which is the surface carrying an image to be inked and transferred to paper or other media. The plate is a "tool" which when positioned on the press produces a direct effect upon the product by making impressions of the printed image when the plate or, in the case of offset lithographic printing, the blanket meets the paper or other media. As such, the plate and/or blanket and the materials directly incorporated into them meet the requirements for exemption as a "tool" under Regulations section 12-426-11b(a)(13).
The process from the use of the plate forward is considered to be the manufacturing production process. The machinery used to print the finished product is used directly in the manufacturing production process at an industrial plant and, accordingly, meets the requirements for exemption in section 12-412(34) and Regulations section 12-426-11b(a)(7), (9), (10) and (11).
The Department considers the bindery work occurring after the actual printing operation to be part of the manufacturing production process and to meet the requirements for exemption listed above. Bindery work includes drilling and punching, cutting and trimming, scoring and perforating, folding, collating and gathering, binding, coating, laminating and packaging.
3. Preproduction purchases by printers
Printers must pay Sales and Use Tax on the purchase of all materials, supplies, equipment, tools and machinery used in the preproduction phases of their business operations. While this list is not all-inclusive, the preproduction phases would include all layout, design, typesetting, galleys, paste-up procedures, mounting boards used to make mechanicals, computer-aided designs, electronic page assembly, and color separation in making camera-ready copy, cameras, film, and other items used in preparation work, stripping procedures in making a flat (i.e., the assimilated composition of negatives and positives) prior to plate-making, and the plate-making process.
4. Post-production activities
Under Regulations section 12-426-11b(a)(11), the manufacturing process does not include any activities following the last production stage such as casing, loading or delivery to the consumer. The Department considers bundling, counting, sorting, and handling to be post-production activities occurring after the manufacturing production process and, as such, not entitled to an exemption from the Sales and Use Tax.
This policy statement is a restatement of the Department's existing policy of the Sales and Use Tax treatment of the printing industry. Recognizing that the Department's policy may not have been circulated throughout the entire industry, the Department expects all members of the printing industry to be in compliance with this policy statement by July 1, 1990.