The Arizona Court of Appeals recently upheld a Tax Court decision that a taxpayer’s purchase of out-of-state printing services were not subject to use tax. The taxpayer publishes both the Yellow Pages and White Pages telephone directories. The taxpayer contracted with mills for paper which was then sent directly to printers. Printers paid for the paper and billed it to the taxpayer separately on invoices.
The Court of Appeals sided with the taxpayer utilizing two tests: the “dominant purpose” test and the “common understanding” test. According to the “dominant purpose” test, a service transaction is exempt if the main purpose of the transaction is the procurement of nontaxable services rather than tangible personal property. In Goodyear Aircraft Corp v. Arizona State Tax Commissioner, the court stated “when there is a fixed and ascertainable relationship between the value of the article and the value of the service rendered in connection therewith so that both may be separately stated, then the vendor is engaged in both selling at retail and furnishing services and is subject to the tax as to one and tax exempt as to the other. The Court of Appeals noted that the printing services were easily separated from the purchase of tangible personal property; therefore the services were not subject to use tax. Under the “common understanding” test, the parties involved in the transaction determine whether a transaction is a sale of a service or a sale of tangible personal property. Under this test, the parties’ common understanding of the transaction determines what the object of the sale is. The Court of Appeals also sided for the taxpayer using this test based on the court’s assumption that most people would agree that the printers provide a service to the taxpayer when printing the directories. (Qwest Dex, Inc. v. Arizona Department of Revenue, Arizona Court of Appeals, Div. 1, No. 1 CA-TX 03-0017, April 5, 2005)