Schengen short-term visa - Country of Longest stay vs Country of business reason

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Would I likely face any issues at the Italian consulate cause I am entering and leaving the Schengen area from Croatia? As Italy is not my port of first entry. I have read the documents stating that you apply at "the country of longest stay", but also lot of heresay on questioning by officers when it is not the country of first entry.

Entering and leaving through Croatia really shouldn't be an issue. As you experienced, the length of stay is more likely to be an issue but since you're staying longer in Italy, this would probably give them enough grounds to process your application (although your original interpretation was the right one and Croatia definitely should have done it in my opinion).

Should I apply for "tourism" or "business" short-term visa in the Italian application? Technically, its business in another country but tourism in Italy.

It shouldn't matter too much but since the trip is still a business trip, that's what I would check. Online forms often enforce rather arbitrary distinctions but the original paper form would also let you check several purposes or pick “other” and write something like “business and tourism”. Of course, it won't help much against an ill-informed third-party visa processor or a stubborn consulate employee but those are simply not hard-and-fast categories of visa.

As discussed in the comments, the key requirement here is to be truthful about and provide documentation regarding the purpose of your trip. So I would recommend mentioning the conference and submitting the relevant documentation no matter what.

Also, any other steps I can take to give more clarity to my application so it has a better chance when I go to the Italian Consulate appointment?

One thing you could do is write a letter to lay out in more details what your plans are, beyond what can be communicated through a form and attach that to the application (again if there is a field for that somewhere).

Do point out that Croatia declined to process the application as the main concern ought to be whether you're trying to sneak into Croatia without giving them a chance to review your application. Since you have properly applied to the Croatian consulate and they decided that Croatia wasn't the main destination, there really should be nothing stopping Italy from processing it now.

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