200608840H




STAR SUPERSEDED INFORMATION
Accession No.(s) - 200608840H
Supersede type - Complete
Document superseded on - 12-17-2010
Issue(s) that caused the document to be superseded: Legislative
intent regarding exclusion of "printed material" from use tax
[Tax Code Section 151.0101(a) as amended in 2003] should not
be limited to either material purchased or labor to imprint
material, but should instead be applied to "printed material"
that itself becomes a component of a final product.
Reason(s) - Court decision - Southwestern Bell Yellow Pages v.
Combs, 2009 Tex. App. LEXIS 582 (Tex. App. - Austin Jan. 30,
2009, pet. Denied); See STAR 200901636C




HEARING NO.  48,135

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: N/A
AUDIT PERIOD: OCTOBER 1, 2003 THROUGH DECEMBER 31, 2005

SALES AND USE TAX/RFD

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

ALVIN STOLL
Administrative Law Judge

JULIA KATHERINE SWISHER
Representing Tax Division

**************
Representing Claimant


COMPTROLLER’S DECISION

PRELIMINARY COMMENTS:

At Claimant’s request, this case is decided on the basis of the written 
submissions of the parties, and a Comptroller’s Decision is issued pursuant to 
Rule 1.13 regarding expedited hearings.

Official Notice has been taken of Comptroller records pertinent to Claimant and 
the issues in this case.  Unless otherwise indicated, Section references are to 
Title 2, Texas Tax Code Ann. (Vernon 2002) and Rule references are to Sections 
of Title 34, Texas Administrative Code.

CLAIMANT'S CONTENTION:

Use tax is not due on printing charges for telephone directories that were 
printed out of state and delivered in Texas.

FINDINGS OF FACT:

1. ************** (“Claimant”) sells advertising and publishes telephone 
directories.

2. Claimant filed a refund claim for use taxes accrued during the 
above-referenced refund period on printing charges for telephone directories 
printed by out-of-state vendors and delivered to local telephone users in 
Texas.  The refund claim was denied by the Comptroller’s Audit Processing 
Section by letter dated May 10, 2006.  Claimant’s timely request for hearing 
resulted in this proceeding.

CONCLUSIONS OF LAW AND DISCUSSION:

Claimant’s contention should be denied.

Claimant seeks a refund of Texas use taxes accrued on charges for printing 
telephone directories during the refund period from October 1, 2003 through 
December 31, 2005.  Claimant purchased paper in bulk and had it delivered to 
out-of-state printing companies.  The printers performed printing operations 
that resulted in finished yellow page telephone directories.  The telephone 
directories were then distributed to local telephone users in Texas from 
Claimant’s staging locations in Arkansas, Kansas, Missouri, Oklahoma, and 
Texas.  Claimant contends that the use tax was not due on the printing charges 
under an amendment to Section 151.011(a).  That section defines “use” for use 
tax purposes as the exercise of a right or power incidental to ownership over 
tangible personal property.  Effective October 1, 2003, Section 151.011(a) was 
amended to state that “use” includes the exercise of a right or ownership over 
tangible personal property “including tangible personal property other than 
printed material that has been processed, fabricated, or manufactured into 
other property or attached to or incorporated into other property transported 
into this state. . .”  Claimant interprets the clause “other than printed 
materials” to mean that printing charges are not taxable items as defined by 
the Tax Code, that charges for printing are excluded from the use tax by the 
amendment to Section 151.011(a), and that there was no taxable use of the 
printed materials in Texas.  The Tax Division disagrees with each of these 
contentions.  As discussed below, Claimant’s broad interpretation of the 2003 
amendment is contrary to the plain meaning of the amendment, contrary to the 
legislative intent as shown by the legislative history, and contrary to the 
Comptroller’s reasonable interpretation of the amendment.

Although this is a refund claim for use tax, for analysis purposes it is 
helpful to begin with the sales tax as it applies to catalogs and other printed 
materials.  The sales tax is imposed on sales of tangible personal property, 
defined as personal property that can be seen, weighed, felt, touched or is 
otherwise perceptible to the senses.  SECTION 151.009.  The tax is due on the 
sales price, defined as the total amount for which a taxable item is sold, 
without any deduction for the cost of materials, labor, or other expenses.  
Section 151.007(a).  The printing or imprinting of tangible personal property 
for consumers who provide the materials used in the printing is specifically 
mentioned as a taxable sale or purchase.  SECTION 151.005(4).  Printing is 
considered to be the sale of tangible personal property because the “essence of 
the transaction” is the printed material.  May Department Stores v. Strayhorn, 
Tex. App. Lexis 7681 (Tex. App. Austin – 2004).  The telephone directories are 
tangible personal property, and when sold in Texas, the sales tax is due on the 
sales price, including all charges for materials, labor, and other expenses.

The use tax is a complementary tax imposed on taxable items that are purchased 
outside the state for storage, use, or consumption in Texas.  SECTION 
151.101(a).  The directories were delivered to local telephone users in Texas.  
Some deliveries were made from Claimant’s staging locations in Texas, and 
others from out-of-state locations.  In either case, use tax would be due, 
because under Rule 3.346(b)(3)(A), as effective December 21, 1990, directing 
the delivery of tangible personal property to Texas recipients constitutes the 
exercise of a power or right incident to ownership of tangible personal 
property.  The rule was a valid exercise of the Comptroller’s rule making 
authority.   May Department Stores v. Strayhorn, supra.  

As is the case with the sales tax, the use tax is generally due on the total 
sales price of a taxable item.  SECTION 151.101(a).  But under the facts of 
this case, because the materials and the printing were separately purchased 
from out-of-state vendors, the use tax is due only on the printing charges; tax 
is not due on the bulk paper or other materials.  This is so because of the 
holding in Sharp v. Morton Buildings, 953. S.W.2d 300 (Tex. App. –Austin 1997, 
Pet. denied).  In that case, a taxpayer purchased raw materials, such as 
lumber, paint, and steel, from out-of-state sellers.  The taxpayer cut the 
lumber, corrugated the metal, and manufactured the raw materials into building 
components.  The Court of Appeals held that the taxpayer did not owe use tax on 
the raw materials because, as the raw materials were “converted into something 
else” out of state and never “existed” in Texas, there was no taxable use of 
the raw materials in Texas.  After Morton Buildings, the Comptroller applied 
the same rule to catalogs and other printed materials, with the result that use 
tax is assessed on the printing costs of printed materials that are printed out 
of state and used in Texas, but not on paper and other materials separately 
purchased from out-of-state vendors.

The amendment to Section 151.011(a) was in response to the holding in Morton 
Buildings.  In its original form, as it appeared in the Engrossed Version of 
House Bill 2425 in the 2003 Regular Session, the amendment read as follows:

(a) Except as provided by Subsection (c) of this section, "use" means the 
exercise of a right or power incidental to the ownership of tangible personal 
property over tangible personal property, including tangible personal property 
that has been processed, fabricated, or manufactured into other property or 
attached to or incorporated into other property transported into this state, 
and, except as provided by Section 151.056(b) of this code, includes the 
incorporation of tangible personal property into real estate or into 
improvements of real estate whether or not the real estate is subsequently 
sold.

The underlined amendment states that the use tax extends to tangible personal 
property transported into this state, even if that tangible personal property 
has been processed, fabricated, manufactured into other property, or has been 
attached or incorporated into other property.   There can be no doubt that it 
was intended to, and does in fact, reverse the result in Morton Buildings.

But once House Bill 2425 reached the House floor, it was modified by House 
Amendment No. 10, adopted on May 9, 2003.  After the floor amendment, Section 
151.011(a) read as follows (floor amendment in bold face):

(a) Except as provided by Subsection (c) of this section, "use" means the 
exercise of a right or power incidental to the ownership of tangible personal 
property over tangible personal property, including tangible personal property 
other than printed material that has been processed, fabricated, or 
manufactured into other property or attached to or incorporated into other 
property transported into this state, and, except as provided by Section 
151.056(b) of this code, includes the incorporation of tangible personal 
property into real estate or into improvements of real estate whether or not 
the real estate is subsequently sold. 

The sole purpose of House Amendment No. 10 was to exclude printed materials 
from the original amendment regarding tangible personal property that is 
manufactured or otherwise changed into other property before it enters Texas.  
As a result, printed materials are still subject to the rule in Morton 
Buildings, that raw materials manufactured or incorporated into other tangible 
personal property are not subject to use tax in Texas.  That principle was 
applied in this case.  Claimant’s purchases of paper and other raw materials 
were treated as nontaxable, while the printing charges were considered taxable 
as the purchase of tangible personal property.

In view of this history, the phrase “other than printed material” cannot have 
the sweeping scope assigned to it by Claimant.  It does not exclude printed 
materials from the definition of tangible personal property as stated in 
Sections 151.007 or 151.009, nor does it exempt printed materials entirely from 
the use tax imposed by Section 151.101.  As stated by the Comptroller in a 
letter to a member of the Texas House of Representatives, the amendment to 
Section 151.011(a) in House Bill 2425 “allows a retailer to purchase component 
parts of printed materials (paper and ink) outside of Texas; have brochures 
catalogs, or flyers printed outside the state; and not owe tax on the paper and 
ink when the printed materials are delivered to customers in Texas. . . . Texas 
use tax will still be due on charges for printing.”  STAR Document No. 
200403794L (March 5, 2004).  An administrative agency’s construction or 
interpretation of a statute that the agency is charged with enforcing is 
entitled to serious consideration, and will be upheld by reviewing courts, so 
long as that construction is reasonable and does not contradict the plain 
language of the statute.  Strayhorn v. Willow Creek Resources, Inc. 161 S.W. 32 
716 (Tex. App. – Austin 2005, no pet.).  The Comptroller’s construction of the 
statute is in accord with its plain meaning and intent as shown by the 
Legislative history and should be affirmed.

RECOMMENDATION:

On the basis of the foregoing Findings of Fact and Conclusions of Law, the 
refund claim should be denied.

Signed August 23, 2006.


ALVIN STOLL
Administrative Law Judge


HEARING NO. 48,135

ORDER OF THE COMPTROLLER

The above decision of the Administrative Law Judge is approved and adopted in 
all respects.  This decision becomes final twenty-three (23) days from the date 
of this Order.

If a rehearing is desired, a Motion for Rehearing must be filed with the 
Administrative Law Judge no later than twenty-three (23) days after the date of 
this Order, and must state the grounds upon which the motion is based.

RENDERED and ISSUED August 23, 2006.


CAROLE KEETON STRAYHORN
Texas Comptroller




ACCESSION NUMBER: 200608840H
SUPERSEDED: S
DOCUMENT TYPE: H
DATE: 08/23/2006
TAX TYPE: SALES