Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Memorandum Opinions
The petitioner's customers were interested in securing the end product of petitioner's services, photocopies, for their use. The securing and field copying of the original record were activities. The performance of which was required in order to fulfill the contract for the production and delivery of the photocopies. These activities were properly considered to be services that were apart of the production and sale of the photocopies.
The charges were not for the transmission of information. While the customers may have desired the photocopies of the records to obtain information recorded thereon, it was not information which was an original composition of the petitioner. Petitioner's work did not result in the creation of any information. Petitioner's activity is indistinguishable from the work of a book printer.
BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA
In the Matter of the Petition of MICRO REPRODUCTION SERVICES, INC.
For Petitioner: Mr. Stanley Blaine Worthington President
For Staff: Mr. W. E. Burkett Tax Counsel
This opinion considers the merit of a protested final determination for sales and use taxes in the amount of $9,315, plus statutory interest determined against petitioner for the period January 1, 1966, to June 30, 1967.
Petitioner is a California corporation engaged in the business of reproducing and delivering photocopies of medical records. Its brochure describes its activity as a photocopy service.
Petitioner's customers are primarily attorneys and insurance companies who desire copies of original medical records for their own use or for use in court. Petitioner also reproduces and delivers photocopies of records for hospitals who are authorized to respond to a subpoena duces tecum by submitting micro reproductions of the records in lieu of producing the original records.
The production and delivery of the photocopy is carried out in the following manner:
1. Petitioner receives a written or telephone order from the customer generally identifying the records of which copies are desired.
2. Its representative contacts the custodian of the records and secures an appointment to micro reproduce the records. This sometimes involves additional work in locating the custodian of the records.
3. A field representative of petitioner then goes to the location of the records and micro reproduces those records considered necessary to fill the customer's order. This may involve an element of identification in selecting the particular portion of the records ordered by the customer.
4. The microfilm is then delivered to a central facility for processing and reproduction of full size photocopies.
5. The reproduced photocopies are then hand delivered or mailed to the customer.
Petitioner makes a basic charge for processing the order and arranging for the copying, an additional charge for field services and a separate unit charge for each reproduced copy delivered to the customer. Tax has been paid on the separately stated unit charge for each reproduced copy, but no taxes have been paid on the balance of the charges. It is these amounts that make up the protested measure of tax.
The question presented is whether the activity performed by petitioner, or any portion thereof, constitutes a sale of tangible personal property or is an exempt sale of services. Sales of services are not subject to tax even though the person rendering the services may incidentally use property in the performance thereof (sales and use taxes ruling 1, (Admin. Code 1901)). Conversely, charges for the production of tangible personal property are subject to tax without deduction for any cost or expense incurred in producing the property or "any services that are a part of the sale" (Rev. & Tax. Code § 6012).
Petitioner's principal contention is that its charges should be classified as sales of services because its work consists primarily of the professional service of locating, identifying, and selecting the records for the field exposure or "shooting" of the microfilm. However, it is not the predominance of services that determines the classification of the charge because the production of property often consists primarily of the performance of skilled services. This was pointed out in the following terms by the court in People v. Grazer (1956) 138 Cal.App.2d 274, which reviewed the application of the sales tax to charges for the production of X-rays and accompanying reports:
"To be sure, the raw materials consumed in producing that which he ordered may have cost the laboratory only a small part of the charge made. The expense of the producer of the pictures is almost entirely the cost of the skilled services of the radiologist and the technicians and the use of equipment which is generally quite costly. But the price charged for all taxable transfers is more often than not largely a charge for services rendered in connection with the tangible object transferred."
Rather, the test is whether the customer desired to acquire the services or the product of the services for his use. (People v. Grazer, supra; Albers v. State Board of Equalization (1965) 237 Cal.App.2d 494.)
In the Albers case, a draftsman's charge for preparing a drawing from detail provided by the customer was held to result in the production and sale of property because the customer desired the end product of the draftsman's services, the drawing, for his use, and not merely the services of the draftsman. In the words of the court:
"He (Albers) simply applied his ability to the details supplied by the customer for the purpose of putting such details down on paper and thereby producing a drawing for use by the customer. In other words, the customer was purchasing the detailed drawing for his use, he was not purchasing the design or specifications pictured in the drawing."
Hence, the acquisition of the finished article was considered to be the true object of the contract.
Similarly, petitioner's customers did not desire to acquire its services for any independent purpose. Rather, they were interested in securing the end product of the services, the photocopy, for their use. The securing and field copying of the original record were activities, the performance of which was required in order to fulfill the contract for the production and delivery of the photocopy. We, therefore, believe that these activities were properly considered to be services that were a part of the production and sale of the photocopy. The photocopy is undeniably tangible personal property. (Rev. & Tax. Code § 6016.)
It is also claimed that the charges were made for the transmission of information and not for property, While the customers may have, in many instances, desired the photocopies of the records to obtain information recorded thereon, it was not information which was an original composition by this taxpayer; such as is an architect's plan, a writer's manuscript, or a lawyer's brief. Petitioner's work did not result in the creation of any information. It merely reproduced material originally recorded or documented by the owner of the records. In this respect, its activity is indistinguishable from the work of a book printer or any other person reproducing and selling property from which information may be obtained. Such an activity is classified as a sale of tangible personal property by the provisions of Revenue and Taxation Code section 6006, which defines a sale to include:
"(f) A transfer for a consideration of the title or possession of tangible personal property which has been produced, fabricated, or printed to the special order of the customer, or of any publication."
We conclude that the claim that the taxes were erroneously determined is without merit.
Done at Sacramento, California, this 25th day of March 1969.
George R. Reilly, Chairman
Paul R. Leake, Member
Richard Nevins, Member
Attested by: H. F. Freeman, Executive Secretary