Craftsman Press, Inc. v. Comptroller of the Treasury

Liss, J., delivered the opinion of the Court. This is an appeal by Craftsman Press, Inc. (Craftsman), appellant, from an order of the Circuit Court for Prince George’s County affirming the decision of the Maryland Tax Court which upheld an assessment for sales taxes made by the Comptroller of the Treasury of the State of Maryland, appellee herein, against the appellant for the period ranging from 1971 to 1973. Craftsman, a commercial printer in Bladensburg, Maryland, produces printing by means of "offset” or "photo-” lithography, a process whereby a photograph is taken of "camera-ready” images. Camera-ready compositing work ("repro’s”) is prepared on sheets of paper by compositors from drafts supplied by Craftsman’s customers.

The image from the photographic negative is transferred onto a metal plate, the plate is placed on a printing press, and printed work is then produced. At the hearing in the Tax Court, Craftsman’s president, Mr. Arnold R. Altshuler, testified for Craftsman and was qualified as an expert witness in lithography and printing. Most importantly, from a historical viewpoint, Mr. Altshuler testified that photo-lithography started to become the principal method of printing in the United States about 35 years ago, i.e., just about the time that Maryland’s Retail Sales Tax Act was adopted. Prior to lithography, Mr. Altshuler testified, compositors made no retail sales of tangible personal property to printers, but merely transferred physical metal to printers on a temporary basis, to be used in producing "letterpress” work.

After the metal image created by the compositor was used in the letterpress printing process, the metal was returned to the compositor and melted down for reuse by him. What the printer therefore obtained from the compositor was temporary custody of a composed typographic image to be reproduced by letterpress printing. ⁹⁸ Mr. Altshuler testified that in the lithographic process, instead of transferring heavy metal between compositor and printer, the compositor prepares a piece of paper bearing the image he has created, the piece of paper being known as a "repro.” The image used in lithographic printing is transferred to the printer through the medium of the sheet of paper constituting the "repro.” The present state of the printing and compositing arts, however, is such that transferring physical pieces of paper is not necessary: image transfer can take place directly from the compositor to the metal lithographic printing plate without intervening paper or a photographic step. Mr. Altshuler testified as an expert that in his opinion a typographer’s providing compositing to a printer is "basically a service. . .. What we are buying is his know-how in putting his style together.” It was uncontradicted that Craftsman and other printers are not billed by compositors for any tangible product; they are billed exclusively for the labor creating the image produced by the compositor.

The compositor’s bill is therefore measured by the amount of typesetting ("ems”) on a page, not the number of paper "repros.” The cost of the compositing therefore varies with the nature of the composition and the difficulty or amount of craftsmanship which goes into making a particular image. Mr. Altshuler testified that "it takes a whole line of skills .. . to make that image” and that the culmination of the compositor’s "skill and craftsmanship” results in the image which becomes the "repro.” Craftsman contended that it had never been billed for physical pieces of paper or ink that constitute a "repro,” but only for the work used to create the typographic images. The image produced is the essence of the typographer’s work. Once camera-ready copy is photographed, the copy or "repro” is destroyed.

The appellant argued that it is the typographic image itself which gives the "repro” its entire worth; after a picture is taken of the "repro,” it is not worth anything. The case originally arose from an assessment of Craftsman made by the Retail Sales Tax Division of the Comptroller of the Treasury of a deficiency in sales tax. ⁹⁹ Craftsman contested the assessment following the required administrative procedure which culminated in a formal hearing and a written opinion by the Hearing Officer dated April 30, 1979. That opinion determined that the purchase of "repros” by Craftsman was a transaction subject to sales tax and denied Craftsman’s application for revision of the assessment. The Hearing Officer upheld the assessment in the amount of $33,867.32 plus penalty and interest.

Craftsman appealed to the Maryland Tax Court which held a trial de novo. The Tax Court by Order and Memorandum dated February 21, 1980, affirmed the assessment. A further appeal was then filed in the Circuit Court for Prince George’s County which resulted in an order affirming the judgment of the Tax Court. It is from that order that this appeal was filed.

The following issues are raised by this appeal: 1. Were "repros” produced in the performance of compositing services subject to payment of sales tax as tangible personal property? 2. Was the Comptroller of the Treasury legally correct in his revision of the original Rule 30? 3. Should either penalty or interest or both imposed on the sales tax assessment be abated? 1. and 2.

The assessment against Craftsman was made under the authority of the Comptroller’s revised Rule 30, which was in effect from May 13,1971 through June 30,1973. The original Rule 30 was adopted by the Comptroller at the time of the enactment of the Retail Sales Tax Act in 1947. Rule 30 was drafted by a committee which in considering this industry and others was charged with the responsibility, as phrased by Mr. Richard Engelbert, former Chief of the Retail Sales Division, of placing regulatory meat on the Sales Tax Act skeleton. As a result of the committee’s labors, Comptroller’s Rule 30 was adopted.

It provided in pertinent part as follows: The sale of typography, art work, photo-engravings, ¹⁰⁰ electros, mats, stereotypes, hand or machine compositions, lithographic plates or negatives, electrotypes, etc. to a person engaged in printing of tangible personal property and to be used directly by such person shall be deemed essentially sales of services and not taxable. The supplier of the service is deemed the consumer of all material used in supplying such service, and must pay the tax to his vendor. Mr. Engelbert testified that he had served in the Retail Sales Tax Division of the Comptroller’s office since 1947 and that Rule 30 had been adopted even before the effective date of the Act. He stated that the purpose of Rule 30 was to interpret the provisions of the Retail Sales Tax Act under the Comptroller’s statutory authority to define terms and write rules and regulations.

The Comptroller during the entire period of the effectiveness of the original Rule 30 had followed the position that compositing was a nontaxable service for the reasons testified to by Mr. Engelbert when he said, [U]nder these rules any person who processes a plate which he will use in his own printing operation or which he will sell to another person to be used by him to print products for sale must pay the tax on everything which he buys, but when the processed plate is sold to a printer the supplier of the plate is not required to collect the tax. This means it doesn’t make any difference who buys the raw materials; tax is applied to the raw materials only and not to the processed plate, which we have considered as a sale of service to the printer rather than a sale of tangible personal property, the placing of image on the property. This would be true whether trade composition, art work, or any other form of the placing characters on paper or paper-like substances. These rules will differ from the Rule 63, for example, which applies to general manufacturers. ¹⁰¹ Mr. Engelbert further testified that in 1955 legislation was introduced in the Maryland Senate for the purpose of creating new printing-related exemptions from the sales tax statute but including also a number of items already defined as exempt under Rule 30.

That legislation failed and the Legislature left the original Rule 30 intact. Effective May 13, 1971, the Comptroller’s office revised Rule 30 completely reversing its original position. It adopted a revised Rule 30 which from May 13,1971 to June 30, 1973 provided in pertinent part as follows: Sales to persons engaged in printing of typography, art work, photo-engravings, electros, mats, stereotypes, hand or machine composition, lithographic plates or negatives, electrotypes, etc., together with machinery, tools, equipment and replacement parts which are not incorporated into the finished product or destroyed in the printing process are taxable to the printer. Despite the Comptroller’s revision of Rule 30 in 1971, it is clear that the Comptroller remained of the view that a printer’s purchase of typography involved a nontaxable transaction.

As evidence of this position the Comptroller requested the advice of the Attorney General on a proposed further revision of Rule 30 as follows: The sale to all persons engaged in the printing of tangible personal property of typography, composition, reproduction proofs, photographic negatives, photoengravings, lithographic plates, electrotypes, stereotypes, mats, and art work, including layouts and paste-ups, and similar items will be considered sales of services and not taxable if: (1) the item is produced or designed on a special order for a specific printing job; (2) its value consists primarily of the services used to prepare an image which is to be reproduced in the printing process; (3) it is of inconsequential value for any purpose other than for the reproduction of the image contained on the ¹⁰² items; (4) it will be discarded after it is used in printing the material for which it was designed or produced. The supplier of such items will be considered to be selling services and will not be entitled to any of the exemptions from sales tax contained in Section 324(f) and must pay the tax on all tangible personal property purchased by him for use in supplying such services. The Attorney General, in 51 Op. Atty.

Gen. Md. 641, declined to approve the wording of the proposed second revision pending the Comptroller’s providing additional information to support the further revision. In the light of this opinion a clarifying amendment codifying the original Comptroller’s Rule 30, as it was in effect from 1947 until 1971, was placed on the agenda of the joint Budget and Audit Committee of the Legislative Council of the Maryland Legislature. The Comptroller was requested to state his position on the