The Appellate Tax Board (Board) recently decided Winthrop Printing, Inc. v. Commissioner in favor of the taxpayer.  ATB Docket Nos. 201770, 201771, 217153 (2000).  The Commissioner did not appeal this case.  This TIR discusses the Department of Revenue’s application of Winthrop Printing.

Winthrop Printing involved the application of the sales tax exemptions set forth in G.L. c. 64H, §§ 6(r) and (s) as to machinery and materials purchased and used by a company engaged in the manufacture and sale of printed books, pamphlets, and similar property.  In particular, the case pertained to the taxpayer’s purchase of machinery and materials used prior to the use of a printing press to print the books, etc., or “pre-press.” 

The Board concluded that the taxpayer’s purchase of certain pre-press machinery was exempt from sales tax because it met the requirement set forth in G.L. c. 64H, § 6(s) that the machinery operate to “guide or measure a direct and immediate physical change” to tangible personal property to be sold.  In addition, as determined by the Board, this function met the additional requirement that it be “an integral and essential part of tuning, verifying or aligning the component parts” of the property to be sold.  See G.L. c. 64H, § 6(s).  The Board concluded that the purchased machinery – a typesetter, film processors and a color scanner – met the § 6(s) requirements indirectly, through the production of printing plates, which were then used in connection with the taxpayer’s printing press to print the books and other property to be sold.

In contrast, Winthrop Printing concluded that certain materials used by the taxpayer in its pre-press operations were not exempt from sales tax under G.L. c. 64H, § 6(r) since these materials were not used in the “actual manufacture” of tangible personal property to be sold.  The Board concluded that the actual manufacture required under § 6(r) did not commence until the taxpayer began the use of its printing press, and that therefore materials used prior to this printing process, or pre-press, did not qualify under § 6(r). 

The Department will follow the analysis in Winthrop Printing as to all factual scenarios that substantially resemble the facts of that case.  As of July 1, 2000, pre-press machinery and materials, such as those evaluated by Winthrop Printing, are exempt under newly enacted G.L. c. 64H, § 6(ss).  See St. 2000, c. 159, §§ 131, 498.[1]  However, the Department will recognize the application of the § 6(s) exemption as to all pre-press machinery that substantially resembles that in Winthrop Printing, for all taxpayers with open taxable years, even when the machinery was purchased prior to July 1, 2000. 

As noted, Winthrop Printing distinguished between the types of manufacturing in which materials and machinery must be used to qualify for the §§ 6(r) and (s) sales tax exemptions.  The Department recognizes the distinction posited by the Board.  Applying the Board’s interpretation, materials are not exempt pursuant to § 6(r) unless they are used in the “actual manufacture” of tangible personal property to be sold.  While § 6(s) similarly references the “actual manufacture” standard, this standard, as noted by the Board, is defined in § 6(s) to mean specific types of activity that are not similarly incorporated into § 6(r).  As a consequence, the type of manufacturing that will sustain the § 6(r) exemption may be narrower than that which supports the § 6(s) exemption – as was the case in Winthrop Printing.

The Board’s distinction between the manufacture required under §§ 6(r) and 6(s) may no longer be relevant in the context of a printing operation, like that evaluated in Winthrop Printing, because of newly-enacted § 6(ss).  However, this distinction may be relevant in the context of manufacturing operations that do not involve printers and that therefore do not implicate the provisions of § 6(ss).

DISCUSSION

I.  Pre-Press Machinery

The pre-press machinery evaluated in Winthrop Printing was a typesetter, film processors and a color scanner.  Using this machinery, the taxpayer would manipulate data provided to it by its customer into a format suitable for printing by specifying exactly where any text, graphics, image or other component was to appear in the finished product and ensuring that proper colors and tones were used in the printed image.  The typesetter would be used to manipulate the customer’s data in order to determine the margins, location of text and images on the printed product, and even something as basic as the order of the pages in the finished product.  The scanner would be used to produce a color image in the printed material.  To accomplish this, the scanner would first separate the individual colors contained in the image provided to the taxpayer into four basic colors.  Then the taxpayer would use the scanner to adjust the tone and shade of the final printed image by adjusting the amount of each of the four basic colors.   Once the typesetting and color scanning processes were complete, the taxpayer would use a film processor to transfer and develop the film containing the image to be printed onto a piece of aluminum called a “plate.” 

Upon completion, the taxpayer would affix its printing plates to its printing press, which would operate to transfer the image to paper or other material.  In the case of a color image, four separate plates would print the same image on the same part of the final material.  In these latter cases, the result would be that the human eye would see a color image that was the result of the blending of the four basic colors, effected according to the taxpayer’s direction and control of the scanner and the film processor.

The sales tax exemption for machinery used in manufacturing set forth in G.L. c. 64H, § 6(s), provides that the machinery, including any replacement parts, must be “used directly and exclusively … in an industrial plant in the actual manufacture of tangible personal to be sold.”  The provision further states that machinery shall be deemed used directly and exclusively in the “actual manufacture” of tangible personal property to be sold when the machinery is used solely during a manufacturing, processing or conversion operation in one of five specified types of activities.  One of the specified activities is that “the machinery guides or measures a direct and immediate physical change upon [the property to be sold] where such function is an integral and essential part of tuning, verifying or aligning the component parts of such property.”  See G.L. c. 64H, § 6(s).

The Board concluded that the taxpayer’s typesetter, scanner and film processors met the “guide or measure” requirement set forth in § 6(s), as stated above.  Hence, the Board concluded that this machinery was deemed used “directly and exclusively in the actual manufacture of tangible personal property to be sold.” The Board found that the taxpayer used the machinery to guide and measure the printing process by determining the layout of the final printed product, including the placement of the various components of the final product and the color, tones and shade of that product.  Further, the Board concluded that § 6(s) applied even though the machinery effected physical change to the property to be sold through the production of printing plates, which were then used to print the property to be sold.

II.  Pre-press Materials

Winthrop Printing also evaluated supplies and materials that were used by the taxpayer during its pre-press operations, including film, bulbs, developers and fixers, gears and rollers, various types of tape, razor blades, glass cleaner, rubber bands, mylar, vinyl, laser print, pins, vacuum board, and other “general pre-press supplies”.  The Board noted that, to be exempt, these pre-press materials had to meet the statutory requirements set forth in G.L. c. 64H, § 6(r).  Section 6(r) provides a sales tax exemption for materials that  ‘become an ingredient or component part of tangible personal property to be sold’ or that are “consumed and used directly and exclusively in the actual manufacture of tangible personal property to be sold.” 

Because the materials at issue in Winthrop Printing did not become an ingredient or component part of tangible personal property to be sold, the question was whether they were consumed and used directly and exclusively in the actual manufacture of tangible personal property to be sold.  Although some of the taxpayer’s materials were used in connection with machinery that the Board found to be exempt under identical statutory language set forth in § 6(s), the Board concluded that the “actual manufacture” standard incorporated into § 6(r) is more narrow.  In particular, the Board concluded that the five activities that are presumed to satisfy the actual manufacture standard under § 6(s) have not been incorporated into § 6(r). Further, the Board found that the language of §§ 6(r) and (s) and the legislative intent behind the enactment of these sections requires the conclusion that the five activities that form the basis for the application of the § 6(s) exemption are not controlling for purposes of § 6(r).[2]

Winthrop Printing determined that the taxpayer’s pre-press materials did not qualify under the actual manufacture standard set forth in § 6(r) because these materials were not “shown to be used directly in the actual manufacture of [the taxpayer’s] final printed product to be sold to its customers.”  The Board concluded that, on the facts in question, materials used in pre-press operations, and not the actual press run, do not qualify under § 6(r).[3]


/s/Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.,
Acting Commissioner of Revenue


BFC:DMS:mtf

August 6, 2001

TIR 01-10



[1] General Law chapter 64H, section 6(ss) provides an exemption for “[s]ales of machinery and equipment, if its operation, function or purpose is an integral or essential part of a continuous production flow or process of manufacturing printed material to be sold and such machinery is used exclusively for that purpose; and sales of pre-press items which are used exclusively as part of a continuous production flow or process of manufacturing printed material to be sold.”

[2] The Board stated that:


Accordingly [we rule] that the explicit language of § 6(r) and § 6(s), together with the clear legislative intent evident from the 1971 amendment which limited the ‘deemed to be used in actual manufacture’ circumstances to the machinery exemption under § 6(s), compels the conclusion that materials, tools, and fuel must be consumed or used in the ‘actual manufacture’ of tangible personal property to be sold in order to be exempt under § 6(r) and that the circumstances constituting a deemed use in actual manufacture do not apply to materials, tools and fuel under § 6(r).

See Winthrop Printing, ATB at 2000-1019.

[3] As noted above, these same pre-press materials might be exempt from sales tax under newly enacted c. 64H, § 6(ss).  However, by statute, § 6(ss) was made effective as of July 1, 2000, and does not apply to pre-press materials, like those evaluated in Winthrop Printing, purchased prior to that date.  Further, by its express terms, § 6(ss) only applies to printing operations.  Therefore, the distinction between the application of §§ 6(r) and (s) that was recognized in Winthrop Printing remains relevant in all non-printing manufacturing cases.