Are an office-equipment company's 'convenience copier' agreements with customers taxed as an equipment rental, or exempt as a maintenance service?

Plain-English summary

Pitney Bowes Management Services (PBMS), an affiliate of Pitney Bowes Credit Corp., offers customers custom office-equipment packages that can include "convenience copiers" — photocopy machines installed at the customer's premises and fully maintained by PBMS. PBMS charges a monthly base fee covering a set number of copies, plus a per-copy charge for any overage; it handles all maintenance, repair, toner, developer, and parts, and may or may not supply the paper depending on the deal. The customer has exclusive use of the machine and full control over how it's operated, usually for a three-year term, with an early-termination charge if the customer cancels before then.

The Department focused on who controls the equipment, not on how much service comes bundled with it. Because PBMS transfers possession of the copier to the customer without transferring title, and the customer has exclusive use and the right to direct how it's used, the arrangement is legally a rental or lease of tangible personal property — not the provision of a nontaxable service — regardless of how much maintenance and supply support PBMS layers on top. That classification pulls every related charge into the tax base: the flat monthly rental fee, the per-copy overage charge (treated like a car-rental company's mileage-overage charge), and even the early-termination/cancellation fee, all taxable under the same rental-of-equipment theory. On the purchasing side, PBMS itself gets favorable treatment: since its copiers are bought exclusively to rent out to customers, it can buy them tax-free as a purchase for resale, and the same goes for the maintenance supplies, repair parts, and (where applicable) paper it actually hands over to customers as part of servicing the rental.

What this means for you

Office-equipment and copier leasing companies

Bundling in maintenance, supplies, and repairs doesn't convert an equipment deal into an untaxed service — if your customer gets exclusive possession and control of the machine without taking title, the whole package is taxed as a rental, including any usage-based overage charges and early-termination fees.

Businesses renting copiers, printers, or similar equipment with usage-based billing

Expect sales tax on the entire relationship: the base rental fee, per-unit overage charges above your included allotment, and any cancellation fee if you end the agreement early — all follow the same taxable-rental treatment as the base equipment charge.

Equipment providers buying machines and supplies for rental customers

You can purchase the equipment itself, plus any maintenance supplies, parts, or paper that actually get transferred to your customers as part of servicing the rental, tax-free as purchases for resale — just don't extend that resale treatment to tools or supplies you consume yourself rather than transfer to the customer.

Common questions

Q: Is a "maintained" equipment package (with the provider handling all service and supplies) taxed as a rental or as a nontaxable service?
A: As a rental — what matters is whether the customer gets exclusive possession and control of the equipment without taking title, not how much maintenance support is bundled in.

Q: Is a per-copy overage charge above the included monthly allotment taxable?
A: Yes — it's treated as an addition to the taxable rental charge, similar to a mileage-overage fee on a vehicle rental.

Q: Is an early-termination or cancellation fee on an equipment lease taxable?
A: Yes — a cancellation fee charged when a customer ends an equipment lease early is included in the total taxable receipts from that lease.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(4) (retail sale; resale exclusion)
• Tax Law § 1101(b)(5) (sale, selling, or purchase; includes rentals and leases)
• Tax Law § 1105(a) (retail sales of tangible personal property)
• Tax Law § 1105(c)(3) (installing/maintaining/repairing tangible personal property)
• 20 NYCRR 526.6(c) (resale exclusion)
• 20 NYCRR 526.7(c), (e)(4), Example 11 (rental/lease definitions; per-copy overage charge taxable, analogous to vehicle mileage overage)
• 20 NYCRR 541.9(c)(1)(c) (equipment lease cancellation fee included in taxable receipts)

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_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(1)S
Sales Tax
January 28, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S030320A

On March 20, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Pitney Bowes Credit Corp., 27 Waterview Drive, Shelton, Connecticut,
06484. Petitioner, Pitney Bowes Credit Corp., provided additional information pertaining to the
Petition on April 1, 2003.
The issues raised by Petitioner are:

1. Whether the agreements described below between Pitney Bowes Management Services
   (PBMS) and its customers are lease/rental agreements or whether PBMS is providing a
   service.
2. Whether PBMS is obligated to collect sales tax on certain parts of these agreements.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   PBMS is an affiliated company of Petitioner and possesses a valid New York State
   Certificate of Authority to collect sales tax. PBMS offers its customers custom packages consisting
   of the provision of various pieces of office equipment and/or services. The details of the agreements
   between PBMS and its customers vary but the essence of the transaction is the same in each
   instance. PBMS charges its customers separately for various pieces of office equipment and
   services and customers may select which pieces of equipment or services are to be provided in the
   agreement. One of the pieces of equipment that may be provided in the agreements is a
   “convenience copier.” “Convenience copiers” are photocopy machines provided for in the
   agreements, which are located on the customer’s premises and fully maintained by PBMS.
   PBMS installs the photocopy machines at the customer's place of business. PBMS charges
   its customers a base amount per photocopy machine, usually on a monthly basis, which allows the
   customer to make a certain number of copies per month. An additional charge per copy is assessed
   when the customer exceeds the number of copies allotted in the agreement. During the term of the
   agreement the customer may negotiate for a different (i.e., higher volume, color, etc.) photocopy
   machine.
   As part of the agreement, it is PBMS’s responsibility to maintain and, if necessary, to repair
   the photocopy machines and provide maintenance supplies such as toner and developer, and parts.
   The customer has exclusive use of the photocopy machines and has the right to direct the manner
   of their use. The customer’s staff operates the photocopy machines choosing different control
   functions, and has the photocopy machines available for its use at any time during the agreed upon

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period (usually three years). PBMS may or may not provide photocopy paper depending on the
terms of the particular agreement.
Under these agreements, the customer has the right to terminate the agreement by providing
written notice a fixed number of days prior to the desired termination date and paying, if applicable
to the particular agreement, an early termination charge.
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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(4) Retail sale. (i) A sale of tangible personal property to any person for any purpose,
other than (A) for resale as such or as a physical component part of tangible personal
property, or (B) for use by that person in performing the services subject to tax under
paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven hundred five
where the property so sold becomes a physical component part of the property upon which
the services are performed or where the property so sold is later actually transferred to the
purchaser of the service in conjunction with the performance of the service subject to tax.
...
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(5) Sale, selling or purchase. Any transfer of title or possession or both, exchange or
barter, rental, lease or license to use or consume (including, with respect to computer
software, merely the right to reproduce), conditional or otherwise, in any manner or by any
means whatsoever for a consideration, or any agreement therefor, including the rendering
of any service, taxable under this article, for a consideration or any agreement therefor.
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax On and after June first, nineteen hundred seventy-one, there
is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.

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(c) The receipts from every sale, except for resale, of the following services:
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(3) Installing tangible personal property . . . or maintaining, servicing
or repairing tangible personal property . . . not held for sale in the regular
course of business, whether or not the services are performed directly or by
means of coin operated equipment or by any other means, and whether or not
any tangible personal property is transferred in conjunction therewith . . . .
Section 526.6 of the Sales and Use Tax Regulations provides, in part:
Retail sale. (a) The term retail sale or sale at retail means the sale of tangible
personal property to any person for any purpose, except as specifically excluded.
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(c) Resale exclusion. (1) Where a person, in the course of his business operations,
purchases tangible personal property or services which he intends to sell, either in the form
in which purchased, or as a component part of other property or services, the property or
services which he has purchased will be considered as purchased for resale, and therefore
not subject to tax until he has transferred the property to his customer.
(2) A sale for resale will be recognized only if the vendor receives a properly
completed resale certificate. . . .
(3) Receipts from the sale of property purchased under a resale certificate are not
subject to tax at the time of purchase by the person who will resell the property. The receipts
are subject to tax at the time of the retail sale.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
Sale, selling or purchase.
(a) Definition. (1) The words sale, selling or purchase mean any transaction in which
there is a transfer of title or possession, or both, of tangible personal property for a
consideration.
(2) Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal property.

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January 28, 2004

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(c) Rentals, leases, licenses to use. (1) The terms rental, lease and license to use refer
to all transactions in which there is a transfer for a consideration of possession of tangible
personal property without a transfer of title to the property. Whether a transaction is a "sale"
or a "rental, lease or license to use" shall be determined in accordance with the provisions
of the agreement. . . .
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(e) Transfer of possession. (1) 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.
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(4) Transfer of possession with respect to a rental, lease or license to use, means that
one of the following attributes of property ownership has been transferred:
(i) custody or possession of the tangible personal property, actual or
constructive;
(ii) the right to custody or possession of the tangible personal property;
(iii) the right to use, or control or direct the use of, tangible personal property.
Example 11: A company enters into an agreement with another company to lease
a copying machine for two years, at a flat rental fee, payable in 24 installments, plus
a fee per copy made. This transaction is taxable, as a sale, and the tax is applicable
to the receipts from the flat rental fee and the per-copy fee.
Section 541.9(c) of the Sales and Use Tax Regulations provides, in part:
Rentals and leases of equipment and motor vehicles to contractors. (1) Rentals and
leases of equipment to contractors.
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(i)(c) If a contractor cancels a lease on equipment and the lessor charges a
cancellation fee, such fee is included as a part of the total receipts upon which the tax is
based.

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January 28, 2004
Opinion
PBMS enters into agreements with its customers to, among other things, provide
photocopying machines on the customers’ premises. The specific terms of the agreements vary from
customer to customer, but the essence of the transaction is the same in each instance. PBMS agrees
to provide and maintain “convenience copiers” (photocopy machines) on its customers’ premises
for its customers’ exclusive use for a fixed period of time for a fixed periodic payment with the
exception that, where the customer exceeds an agreed upon number of copies during the payment
period, an additional charge is assessed per excess copy. The agreement may be renegotiated to, for
example, upgrade to a color photocopy machine or a higher capacity photocopy machine. The
agreement may require PBMS to provide the photocopy paper or the customer to provide its own
paper. During the term of the agreement, the customer may terminate the agreement by providing
written notice as provided in the agreement. Where the customer elects to terminate the agreement
prior to the agreed upon term, PBMS may assess an early termination charge to the customer.
PBMS transfers possession of the photocopy machines to its customers without transferring
title. PBMS’s customers have exclusive use of the photocopy machines and have the right to direct
the manner of their use. Accordingly, the agreement between PBMS and its customer for use of the
photocopy machines constitutes a rental or lease of tangible personal property rather than the
provision of a service. See section 1101(b)(5) of the Tax Law and section 526.7(c) of the Sales and
Use Tax Regulations. Separately stated charges by PBMS for such rentals are subject to the sales
tax under section 1105(a) of the Tax Law.
Petitioner charges an additional amount per copy when the customer exceeds the number of
copies allotted in the rental agreement. Such charges may be considered as an addition to the rental
charge, similar to charges by lessors of vehicles for mileage above that agreed to in the rental
agreement. See section 526.7(e)(4), Example 11 of the Sales and Use Tax Regulations. Such
charges are taxable pursuant to section 1105(a) of the Tax Law.
Where the agreement between PBMS and its customer requires PBMS to provide paper for
the rented photocopy machines, PBMS is required to collect sales tax on any additional amounts
charged to its customer for photocopy paper. PBMS may purchase paper which is actually
transferred to its customers, either as part of the rental of the photocopy machine or for an additional
charge to the customer, exempt from tax as a purchase for resale.
Section 541.9(c)(1)(c) of the Sales and Use Tax Regulations provides that “If a contractor
cancels a lease on equipment and the lessor charges a cancellation fee, such fee is included as a part
of the total receipts upon which the tax is based.” It follows that the same rule would apply to a
cancellation fee in connection with the termination of a lease of photocopy machines or other office
equipment. Therefore, PBMS is required to collect sales tax on the termination fee charged to its
customer on the early termination of its lease of photocopy machines.

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The purchase of photocopy machines by PBMS, which it intends exclusively for rental to
its customers, is exempt from sales tax as a purchase for resale. Purchases by PBMS of related
maintenance supplies and repair parts which PBMS uses to maintain or repair the photocopy
machines as part of the rental agreement, and which are actually transferred to its customers as part
of such maintenance or repairs, are also exempt as purchases for resale. See section 1101(b)(4) of
the Tax Law and section 526.6(c) of the Sales and Use Tax Regulations.

DATED: January 28, 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.