Machines Used in Printing and Reproduction

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Interpretation Letter MF-0009, February 2001

Thank you for your letter dated December 5, 2000 regarding the application of Ontario retail sales tax (RST) to two machines used in printing and reproduction.

Understanding of Facts

We understand that Company A is a manufacturer of nuclear fuel handling equipment for sale mainly to electric utilities worldwide. Most contracts require that several copies of the engineering drawings and instruction manuals in relation to the nuclear fuel handling equipment are supplied. You request confirmation that RST does not apply on the purchase or lease of a machine used to print original drawings and then reproduce the drawings, and a second machine that reproduces the master instruction manual but does not print the original instruction book.

First Machine - Engineering Systems Copier

Company A's engineering department designs nuclear fuel handling equipment. The design/engineering drawing is created on computer assisted design (CAD) equipment (combination of hardware and software) and sent electronically to a drawing printer/folder machine (Engineering Systems Copier) where an "original" or "master" drawing is printed and then stored for safekeeping. When required, the "original" or "master" hard-copy drawing is fed into the Engineering Systems Copier where it can be reproduced in bulk and folded to be sent to the manufacturing floor for production purposes, or copied in the quantity required to be sent to Company A's customer.

Second Machine - High Speed Copier

An original instruction manual is created from another computer and associated printer. The High Speed Copier takes the original instruction manual and reproduces the appropriate number of copies as contractually required by the customer. The machine may also be used to produce copies of some non-instructional manuals.

Both machines are contained in a secure area accessed by card entry only. These machines are used primarily (more than 50%) for the reproduction of drawings or the reproduction of the instruction manuals.

The CAD equipment that sends the "final" drawing electronically to the Engineering Systems Copier does not electronically send the drawings directly or indirectly to production machines on the shop floor. Hard copy reproductions are printed on the Engineering Systems Copier and sent to the shop floor for use in manufacturing the nuclear handling equipment.

Legislation and/or Administrative Policy

A manufacturer is defined in section 1 of Regulation 1013 to the Ontario Retail Sales Tax Act (the Act) as a "person who manufactures, fabricates, produces or assembles tangible personal property (TPP) for sale where the fair value of such TPP property sold to others exceeds $5,000, or where the fair value of such TPP manufactured for that person's own use exceeds $50,000 in the fiscal year...".

Under paragraph 7(1)40 of the Act, a business that is considered a manufacturer may purchase all production machinery, equipment and processing materials, used primarily and directly in manufacturing, exempt from RST. The equipment must be prescribed in subsection 14(1) of Regulation 1012 and must not be excluded by subsection 14(1.1) of Regulation 1012.

The prescribed equipment in subsection 14(1) of Regulation 1012 includes plans and drawings, related specifications and substitutes for them and reproductions of any of them used directly in the manufacture or production of TPP.

Paragraph 7(1)41 of the Act provides an exemption for TPP purchased for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into TPP for the purpose of sale.

Paragraph 7(1) of the Act provides an exemption to the purchaser of "books" as defined in by the Minister in section 1 of Regulation 1012.

On May 7, 1997, the Act was amended to include computer programs in the definition of tangible personal property (TPP). As a result, all computer programs are subject to RST unless there is a specific exemption. Included in the exemption are "custom computer programs", certain modifications to taxable computer programs and some related services.

A "custom computer program" is a computer program that is designed and developed solely to meet the specific requirements of, and that is intended for the exclusive use of, a particular person. Any sale of a custom computer program or any service provided in respect of custom computer program is exempt from RST.

Analysis & Conclusion

The following is our response to your questions:

The Engineering Systems Copier is considered a production machine used by a manufacturer and can be purchased or leased exempt from RST provided it is used primarily to reproduce copies of the original drawings and the threshold amounts set out in the definition of a manufacturer in section 1 of Regulation 1013 are met. (See number 7 on the next page for further information regarding the threshold amounts). If Company A has paid RST on the purchase or lease of the machine, it may apply for a refund of the tax. Refund claims must be received within four years of the date RST was paid.
Any paper, ink used in connection with the Engineering Systems Copier to reproduce reproductions of original drawings may be purchased exempt under the provision of paragraph 7(1) 41 of the Act.
Company A is not required to self-assess RST on the printed matter produced by the Engineering Systems Copier since i) the reproduced copies of the drawings sent to the shop floor are exempt under the provisions of section 14 of Regulation 1012 and ii) drawings are sold to Company A's customers along with the nuclear fuel handling equipment.
The High Speed Copier is considered a production machine used by a manufacturer and can be purchased or leased exempt from RST provided it is used primarily to reproduce instruction manuals for sale to Company A's customers with the nuclear fuel handling equipment. If Company A has paid RST on the purchase or lease of the machine, it may apply for a refund of the tax. Refund claims must be received within four years of the date RST was paid.
Any paper, ink used in connection with the High Speed Copier to produce instruction manuals may be purchased exempt under the provision of paragraph 7(1) 41 of the Act. The binders used to contain the pages of the instruction manuals sold to Company A's customers may also be purchased exempt from tax.
Under the definition of "manufacturer" in section 1 of Regulation1013, a manufacturer can be a person who manufactures TPP for sale to others where the fair value exceeds $5,000 in the fiscal year or a person who manufactures TPP for own use where the fair value exceeds $50,000 in the fiscal year.
If a person manufactures TPP where the fair value of such TPP sold to others exceeds $5,000 in the fiscal year, the person is not required to manufacture $50,000 of goods for own use in order that the same equipment used in both applications qualifies for exemption from RST at paragraph 7(1)40 of the Act. This is provided the equipment is used primarily (more than 50%) of the time in manufacturing TPP for sale to others. If the equipment is used primarily to produce goods for own use and the $50,000 threshold is not met, the equipment would be taxable regardless that it also used to produce TPP for sale to others and these sales exceed $5,000 in the fiscal year.
CAD equipment and associated maintenance contracts and printers used to create Company A's "original" drawings do not qualify for exemption as production machinery or equipment. Any purchase or lease or maintenance contracts for computer hardware or software (unless "custom" software) and the associated printers and paper used to produce rough drafts are subject to RST.
Cabinets used to file and store Company A's original drawings are subject to RST.
Equipment (both hardware and software {unless custom software}) and associated maintenance contracts as well as printers and paper, used to create drafts and eventually the pages of the "original instruction manual", are not production equipment and are taxable.
If the High Speed Copier is used to produce any taxable printed material for Company A's own use, Company A must self-assess and remit RST on the printed material.