Is an independent contractor's service of turning a record company's flat promotional poster into a 3-D in-store display taxable in New York?

Plain-English summary

Brandi Merolla runs Merolla Displays, Inc., an independent contractor for record companies. When a record label wants to promote an artist, it sends her a flat, two-dimensional advertising poster (marked "For promotional use only, not for sale"). She builds an enlarged, three-dimensional version of it — sometimes with supplies the label provides — delivers it herself to record stores, and sets it up in retail space the label has rented. When the promotion ends, she tears down the old display and puts up the next one.

The Department held this is a taxable fabricating service: Merolla is transforming tangible personal property her customer (the record company) furnishes her — the flat poster — into a different physical form. New York taxes exactly that kind of "producing, fabricating, processing" service when performed on property the customer supplies and doesn't intend to resell, and since the 3-D displays are never resold, the fabricating exclusion for "resale" doesn't apply. The real question was whether these displays could instead qualify for New York's promotional-materials exemption, which can cover fabricating work performed on promotional items. It couldn't, for a simple mechanical reason: that exemption requires the promotional item to be mailed or shipped by common carrier, USPS, or similar delivery service to a customer or prospective customer — and Merolla's 3-D posters are neither mailed nor shipped to anyone; she personally delivers and installs them in-store, where they're meant to catch the eye of shoppers browsing the store, not to solicit any particular addressee the way a mailed flyer would. So her fabricating work stays fully taxable wherever it's delivered and used inside New York State — but under New York's ordinary destination-tax rule, any display she delivers and sets up outside New York escapes New York sales tax entirely, regardless of where the record company that hired her is headquartered.

What this means for you

Display, fixture, and merchandising companies working for out-of-state or national brands

If you're taking a customer-furnished item and physically altering or rebuilding it (not just installing an already-finished product), that's a taxable fabricating service under New York law, taxed based on where you deliver the finished item — not where your customer is based.

Businesses hoping to rely on the promotional-materials exemption for in-store displays

Don't assume "promotional" items automatically qualify. The exemption is written around mailed/shipped promotional pieces sent to a specific customer or prospect; an in-store display that you personally deliver and set up, aimed at whoever happens to walk by, doesn't meet that test no matter how "promotional" its purpose is.

Independent contractors delivering finished work across state lines

Track delivery location carefully — the same fabricating service can be fully taxable for an in-state delivery and completely untaxed for an identical job delivered out of state, regardless of your customer's location.

Common questions

Q: Is turning a flat poster into a 3-D display a taxable service in New York?
A: Yes, when the finished display is delivered to and used at a location in New York — it's a taxable "fabricating" service performed on property the customer furnished.

Q: Does the promotional-materials exemption cover in-store display work like this?
A: No, not here — that exemption requires the promotional item to be mailed or shipped to a customer or prospective customer. A display personally delivered and installed in a store, meant for browsing shoppers generally, doesn't meet that requirement.

Q: What if the contractor delivers and installs the display outside New York?
A: Then it's not subject to New York sales tax at all, regardless of where the record company that hired the contractor is located — New York sales tax follows the point of delivery/use.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(12) (definition of promotional material)
• Tax Law § 1105(c)(2) (producing, fabricating, processing services)
• Tax Law § 1115(d) (exemption for property delivered outside New York for use outside the state)
• Tax Law § 1115(n)(4), (5) (promotional materials exemption)
• Tax Law § 1131(4) (use tax on services performed on tangible personal property)
• 20 NYCRR 525.2(a)(3) (sales tax as a destination tax)
• 20 NYCRR 526.7(e)(1) (place of delivery/possession-transfer controls taxability)
• 20 NYCRR 527.4 (fabricating services; resale exclusion)

Prior advisory opinions relied on:

• Henry Goldwasser, TSB-A-99(55)S; AAA Western and Central New York, Inc., TSB-A-98(74)S (promotional-materials exemption requires mailing/shipping to the solicited recipient)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a04_12s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(12)S
Sales Tax
May 20, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S030221A

On February 21, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Brandi Merolla, President, Merolla Displays, Inc., 671 Skipperene Rd,
Narrowsburg, NY 12764. Petitioner, Brandi Merolla, provided additional information pertaining
to the Petition on October 23, 2003.
The issue raised by Petitioner is whether the services she provides to record companies are
subject to sales or compensating use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is an independent contractor who offers the following service to record companies.
When a record company has an artist it wants to promote, it will send Petitioner a two-dimensional
poster of that artist. The flat two-dimensional poster has been designed and produced by the record
company for display in retail record stores for advertising purposes. Using the two-dimensional
poster, Petitioner creates (using other necessary supplies which are sometimes furnished by the
record company) an enlarged three-dimensional version of the poster. The three-dimensional poster
provides a more attention getting look when incorporated into a display. Petitioner delivers the
three-dimensional version of the poster to the record stores in her own vehicle and arranges the
display in a designated location. The designated location is a space in the record store which has
been rented to the record company. Petitioner states that on occasion the record company has also
provided other property (e.g., curtains) for use in the display to further draw the record store
customer’s attention to the display area. Occasionally, if the three-dimensional posters are large,
the record company may arrange for one of its employees, a merchandiser who is responsible for
placing the record company’s products for sale in the store, to be available to assist Petitioner with
the three-dimensional posters. Once the promotion for a recording artist is over, Petitioner is
responsible for removing and destroying the old three-dimensional poster, and placing and arranging
a new promotional display.
Petitioner provided samples of the two-dimensional posters as part of its Petition. Along the
bottom of every poster are the words “For promotional use only. Not for sale.”
Applicable law and regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by subdivisions (a),
(b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
following terms shall mean:

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(12) Promotional materials. Any advertising literature, other related tangible
personal property (whether or not personalized by the recipient’s name or other information
uniquely related to such person) and envelopes used exclusively to deliver the same. Such
other related tangible personal property includes, but is not limited to, free gifts,
complimentary maps or other items given to travel club members, applications, order forms
and return envelopes with respect to such advertising literature, annual reports, prospectuses,
promotional displays and Cheshire labels but does not include invoices, statements and the
like. Promotional materials shall also include paper or ink furnished to a printer for use in
providing the services of producing, printing or imprinting promotional materials or in
producing, printing or imprinting promotional materials, where such paper and ink become
a physical component part of the promotional materials and such printer sells such services
or such promotional materials to the person who furnished the paper and ink to such printer.
Section 1105(c)of the Tax Law imposes sales tax, in part, upon:
The receipts from every sale, except for resale, of the following services:
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(2) Producing, fabricating, processing, printing or imprinting tangible personal
property, performed for a person who directly or indirectly furnishes the tangible personal
property, not purchased by him for resale, upon which services are performed.
Section 1115(d) of the Tax Law provides:
Services otherwise taxable under paragraph (1), (2), (3), (7) or (8) of subdivision (c)
of section eleven hundred five shall be exempt from tax under this article if the tangible
property upon which the services were performed is delivered to the purchaser outside this
state for use outside this state.
Section 1115(n) of the Tax Law provides, in part:
(1) Except as otherwise provided in this subdivision, promotional materials mailed,
shipped or otherwise distributed from a point within the state, by or on behalf of vendors or
other persons to their customers or prospective customers located outside this state for use
outside this state shall be exempt from the tax on retail sales imposed under subdivision (a)
of section eleven hundred five and the compensating use tax imposed under section eleven
hundred ten of this article.
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(4) Notwithstanding any contrary provisions of paragraph one of this subdivision,
promotional materials which are printed materials and promotional materials upon which
services described in paragraph two of subdivision (c) of section eleven hundred five have
been directly performed shall be exempt from tax under this article where the purchaser of
such promotional materials mails or ships such promotional materials, or causes such
promotional materials to be mailed or shipped, to its customers or prospective customers,
without charge to such customers or prospective customers, by means of a common carrier,
United States postal service or like delivery service.
(5) Services otherwise taxable under paragraph two of subdivision (c) of section
eleven hundred five performed on promotional materials exempt under paragraph four of this
subdivision shall be exempt from tax under this article.
Section 1131(4) of the Tax Law provides, in part:
“Property and services the use of which is subject to tax” shall include . . . all
services rendered to a person within the state, whether or not such services are performed
within the state, upon tangible personal property the use of which is subject to tax under
section eleven hundred ten of this article or will become subject to tax when such property
is received by or comes into possession or control of such person within the state. . . .
Section 525.2(a)(3) of the Sales and Use Tax Regulations provides:
Except as specifically provided otherwise, the sales tax is a "destination tax." The
point of delivery or point at which possession is transferred by the vendor to the purchaser,
or the purchaser’s designee, controls both the tax incidence and the tax rate.
Section 526.7(e)(1) of the Sales and Use Tax Regulations provides:
Except as otherwise provided in paragraph (3) of this subdivision, a sale is taxable
at the place where the tangible personal property or service is delivered, or the point at which
possession is transferred by the vendor to the purchaser or his designee.
Section 527.4 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. (1) Section 1105(c)(2) of the Tax Law imposes a tax on the receipts
from services of producing, fabricating, processing, printing or imprinting tangible personal
property, performed for a person who directly or indirectly furnishes the property.
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(c) Fabricating. Fabricating is the alteration or modification of tangible personal
property to the specifications of the purchaser of the service, without changing the identity
of the property. . . .
Example 1:

An individual purchases sheet metal from a supplier and takes the
sheet metal to a metal shop to be cut, perforated, and bent to the
individual’s specifications, for the individual’s own use. The metal
shop’s charge for these services is taxable.
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(f) Resale. (1) When the services enumerated in this section are rendered on property
held for resale, the services are not taxable.
Opinion
Unless specifically exempted or excluded, New York State and local sales taxes are imposed
on the receipts from every sale, other than sales for resale, of specifically enumerated services as
provided in section 1105(c) of the Tax Law. See section 525.2(b) of the Sales and Use Tax
Regulations. Petitioner performs services for its customers, the record companies, by transforming
two-dimensional advertising posters into three-dimensional versions of the same posters and
arranging the posters in designated spaces in record stores. Petitioner’s customers furnish Petitioner
with the posters and some of the supplies necessary for Petitioner to perform this service. When a
customer furnishes tangible personal property upon which alterations/modifications are made, the
sale of the services of producing, fabricating or processing are being provided to that customer.
These services are subject to sales tax under section 1105(c)(2) of the Tax Law when delivered or
used in New York State unless purchased for resale or performed on property intended for resale.
See section 527.4(c) of the Sales and Use Tax Regulations. Accordingly, Petitioner’s service of
transforming two-dimensional posters into three-dimensional posters constitutes a taxable service
where delivery or use of the posters occurs within New York State. Since the three-dimensional
posters are not resold by the record companies, Petitioner’s receipts for posters delivered in
New York State are subject to sales tax. See sections 526.7(e) and 527.4(f)of the Sales and Use Tax
Regulations.
Therefore, Petitioner’s sales of producing, fabricating, or processing services are subject to
sales or compensating use tax if delivery or use of the three-dimensional posters occurs in New York
State. When Petitioner provides such services and delivers the posters to a location outside of
New York State, the receipts are not subject to New York State or local sales tax regardless of the
customer’s business location. See section 1115(d) of the Tax Law, and sections 525.2(a)(3) and
526.7(e) of the Sales and Use Tax Regulations.
The three-dimensional posters constitute promotional materials as defined in section
1101(b)(12) of the Tax Law. The purchase of promotional materials upon which section 1105(c)(2)

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services have been directly performed, that are mailed or shipped, or caused to be mailed or shipped,
via common carrier, United States postal service or like delivery service by a purchaser without
charge to the purchaser’s customers or prospective customers in New York State is exempt from
sales and compensating use tax. See section 1115(n)(4) and (5) of the Tax Law.
In Petitioner’s case, the three-dimensional posters are not shipped or delivered by common
carrier, United States mail or similar delivery services as required for purposes of the exemption
under section 1115(n)(4) of the Tax Law. The three-dimensional posters are placed by Petitioner
in retail outlets for viewing by the retail record stores’ customers and prospective customers when
they enter the store. The posters do not promote or solicit purchases by the retail record store to
which they are delivered and in which they are displayed. In addition, these posters are intended
to solicit purchases by the record stores’ customers who ultimately consume the record companies’
products. Thus, the posters also fail to qualify for the exemption under section 1115(n)(4), because
they are not shipped or mailed to the customers or prospective customers whom the posters are
designed to solicit. See Henry Goldwasser, Adv Op Comm T&F, November 30, 1999,
TSB-A-99(55)S; AAA Western and Central New York, Inc., Adv Op Comm T&F, November 5,
1998, TSB-A-98(74)S. Accordingly, the services Petitioner provides are not exempt under section
1115(n)(5) of the Tax Law since the three-dimensional posters are not exempt under section
1115(n)(4). Therefore, Petitioner’s charges to her customers for these services are subject to sales
tax when the three-dimensional posters are delivered and used in locations in New York State.

DATED: May 20, 2004

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.