Are personalized postage stamps and a separate 'stitch file' charge for embroidery subject to NY sales tax?

Plain-English summary

The petitioner sells two things: personalized U.S. postage stamps (it manufactures real stamps imprinted with a customer-chosen image, sold in sheets above face value, under a USPS license) and customized embroidered products (t-shirts, mugs, etc.). To embroider a customer's design, it needs a "stitch file" -- a machine-readable data file that tells its stitching machines how to replicate the design. The company creates and owns the stitch file (the customer keeps the image copyright but never receives the file), and charges separately for creating the file and for the embroidered product. It asked about the taxability of (1) the personalized stamps and (2) the stitch-file charge.

The Office of Counsel concluded:

• Personalized stamps for mailing -- not taxable. Postage stamps are tangible personal property only when purchased for a purpose other than mailing (20 NYCRR 526.8(a)); a stamp bought to use as postage is the purchase of an intangible (the right to postal delivery). Because the company's customers buy these stamps to actually mail things (e.g., party invitations), the full price is exempt. (If the company had reason to believe the stamps won't be used as postage -- e.g., collectibles -- they'd be taxable.)
• Stitch file billed alone -- not taxable. When a customer pays only the stitch-file charge and buys no product, the charge buys no tangible personal property and is for an unenumerated service, so it's not taxable.
• Stitch file billed with a product -- taxable as part of the receipt. When the stitch-file charge accompanies the sale of an embroidered product, it's an expense the company incurs to make that product (the customer never gets the file). A vendor can't deduct expenses from its taxable receipt, even if separately stated (Tax Law 1101(b)(3); 20 NYCRR 526.5(e); Artex Systems; Zagoren). So the stitch-file charge is part of the receipt for the product and is taxable to the same extent the product is. For clothing, that matters for the under-$55 exemption (April 2011-March 2012): the stitch-file charge counts toward the price, so if clothing plus the stitch-file charge exceeds $55, neither the clothing nor the stitch-file charge is exempt.

What this means for you

Sellers of postage stamps / "postage-as-product"

Personalized or specialty stamps sold to be mailed are not taxable -- they're really the intangible right to postal delivery. They become taxable only if you have reason to believe they won't be used as postage (e.g., sold as collectibles or décor).

Embroidery, printing, and customization shops

A setup/digitizing/stitch-file charge that produces something the customer never receives is an expense of making the product. You can't carve it out of the taxable price by separately stating it: if it accompanies a taxable product sale, it's taxable; only when billed purely on its own (no product) is it a nontaxable service. And it counts toward the $55 clothing threshold -- watch that a digitizing fee doesn't push an otherwise-exempt garment over the line.

Common questions

Q: Are personalized postage stamps taxable?
A: Not if your customers buy them to mail with. A stamp used as postage is an intangible. They're taxable only if you have reason to believe they won't be used as postage.

Q: Can I separately state a digitizing/stitch-file fee to keep it untaxed?
A: No. If it accompanies a taxable product sale, it's an expense included in the taxable receipt. It's only nontaxable when billed alone with no product.

Q: Does the stitch-file fee affect the $55 clothing exemption?
A: Yes. It counts toward the garment's price -- if the total tops $55, the exemption doesn't apply.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1101(b)(3) (receipt; no deduction for expenses)
• 20 NYCRR section 526.8(a) (postage stamps; tangible personal property)
• 20 NYCRR section 526.5(e) (no deduction for vendor expenses)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a11_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-11(15)S
Sales Tax
May 6, 2011

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO S100618A

Petitioner name and address redacted asks whether its receipts from its sales of personalized U.S.
Postage Stamps are subject to the New York State and local sales tax. Petitioner also asks about the
taxability of its charge for creating a stitch file used to convert a customer-designed image into machine
readable instructions allowing the replication of the design onto clothing, which Petitioner then sells. We
conclude that Petitioner’s charge for the sales of customized postage stamps is not subject to sales tax.
With regard to the charge for the creation of the stitch file, if that charge is made in conjunction with the
sale of clothing, the charge is part of the receipt from the sale of the clothing and is taxable to the extent
that those receipts are taxable. Where the charge for the stitch file is made on a stand-alone basis (i.e., not
in conjunction with the sale of clothing or other tangible personal property), the charge is for a nonenumerated service, and thus not taxable.
Facts
Pursuant to a license obtained from the United States Postal Service, Petitioner sells personalized
United States postage stamps. Customers place an order with Petitioner to purchase stamps that contain
an image or picture selected by the customer imprinted on the face of the stamp. In creating the stamps,
Petitioner does not imprint an image on an existing stamp, but rather manufactures the stamp in toto.
Petitioner’s website provides stock images for many types of cards, including holiday and
birthday cards, and monogrammed wedding invitations. The stock images may also be customized (e.g.,
insertion of date for wedding, anniversary or other event invitation; addition of names of engaged
couples, etc.). In addition, stamps may be purchased imprinted with business designs, college and
university designs, sports team designs, cartoon and comic characters, personal photographs, and other
images selected or supplied by the customer.
Petitioner believes the stamps are typically used as postage by the customer for mailings such as
birthday party invitations or other social announcements. The stamps may be used for any type of
mailing for which regular postage stamps are used, and Petitioner believes most of the stamps are indeed
used for postage.
Stamps are sold in sheets of 20 stamps per sheet at prices “marked up” beyond the face value of
the postage reflected thereon.
Petitioner is also engaged in the business of selling customized products containing designs or
images that are selected, and in many cases designed, by customers (“embroidered products”). These
products include t-shirts, shoes, mugs, pet clothing, bumper stickers, ties, business cards, and posters.
Customers may also place on-line orders for products that contain customized embroidered designs
created by the customer. To create an embroidered product, Petitioner needs a stitch file, which is a data
file that contains machine readable instructions for Petitioner’s stitching machines to replicate the logo.

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TSB-A-11(15)S
Sales Tax
May 6, 2011

Customers may provide Petitioner with a stitch file for its use in producing an embroidered product for
purchase by the customer. In such instances, the only charge by Petitioner to the customer is for the cost
of the item(s) as embroidered.
Alternatively, if a customer doesn’t own a stitch file for the design, Petitioner will provide one.
Specifically, the customer uploads the design to Petitioner’s website. Petitioner, through a third-party,
develops a stitch file for the design, and loads it on to the customer’s individual image library on
Petitioner’s website. Under the terms of use of Petitioner’s website, the customer grants Petitioner the
right to create the stitch file for purposes of printing the design on Petitioner’s products. Petitioner owns
the stitch file, but the customer owns the copyright to the image.
Where a customer has ordered a product embroidered with the customer’s own design, and
Petitioner has created the stitch file, the customer pays two charges, one for the cost of creating the stitch
file and another for the embroidered product. A customer incurs no additional stitch file charge on
subsequent product orders that are embroidered with the same design.
Petitioner offers a customer the option of posting his or her design on Petitioner’s website for use
by others. If another customer chooses to use the design on an embroidered product purchased from
Petitioner, the customer who owns the design receives a commission. Petitioner will remove the design
from its website at the request of the customer who owns the copyright to the design. If a customer
submits a design to Petitioner for use by other customers without buying any product from Petitioner, the
customer pays only a stitch file charge.
Analysis
The Tax Law imposes sales tax on all sales of tangible personal property and certain enumerated
services unless purchased for resale or otherwise exempt (see Tax Law § 1105[a], [c]).
Personalized Postage Stamps
The Sales Tax Regulations provide that "[p]ostage stamps, when purchased for purposes other
than mailing" are considered tangible personal property and are thus taxable (20 NYCRR section
526.8[a]). That regulation means postage stamps are only to be treated as tangible personal property
when they are purchased for some purpose other than mailing, the idea being that a stamp purchased for
use as postage is the purchase of the right to receive postal delivery services, i.e., an intangible. The facts
here indicate that Petitioner believes that its customers are buying the stamps for mailing purposes, such
as a personalized stamp on a birthday party invitation. Accordingly, under the sales tax regulations, the
full price of the personalized stamps sold by Petitioner is exempt as attributable to an intangible. If the
Petitioner has reason to believe that the stamps will not be used as postage for mailing purposes, the
personalized stamps are taxable.
Embroidered Products
Petitioner asks what its taxable receipts are in regard to its sales of embroidered products.
Petitioner’s retail sale of non-clothing embroidered products are taxable, unless an exemption applies (see
Tax Law § 1105[a]). With regard to Petitioner’s sale of embroidered clothing, pursuant to Chapter 57 of
the Laws of 2010, for the period April 1, 2011, through March 31, 2012, clothing and footwear sold for
less than $55 per item or pair are exempt from the State’s 4% sales tax and the state-imposed 3/8% sales

TSB-A-11(15)S
Sales Tax
May 6, 2011

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tax in the Metropolitan Commuter Transportation District (MCTD) (see Changes to the Sales Tax
Exemption for Clothing and Footwear, TSB-M-10[16]S).1 Thus, Petitioner’s charge for embroidered
clothing may or may not be subject to sales tax, depending on the price at which the clothing is sold.
As for the charge for the production of the stitch file, that charge does not entitle the customer to
any tangible personal property. Thus, when a customer pays only that charge (i.e., the customer does not
buy any embroidered product), the charge appears to be for an unenumerated service and is not taxable.
Where the customer pays the charge for the creation of the stitch file in connection with the purchase of
an embroidered product, the question is whether the charge for the stitch file should be considered part of
the receipt from the sale of the embroidered product. “Receipt” for sales tax purposes is the sale price of
any property and the charge for any taxable service, “without any deduction for expenses . . . regardless of
whether such charges are separately stated” (Tax Law §1101[b][3]). A vendor may not deduct from its
receipts subject to tax charges to recoup expenses that the vendor incurs in making the taxable sale (see
Sales and Use Tax Regulations, 20 NYCRR §526.5[e]; Artex Systems, Inc. v. Urbach, 252 A.D.2d 750
[3d Dept 1998]; Matter of Zagoren Group Inc., Tax Appeals Tribunal, May 19, 1994). Given that
Petitioner requires the stitch file in order to produce the embroidered product, and the customer never
receives the stitch file, the charge for the stitch file, in conjunction with the sale of clothing, is an expense
item includible in Petitioner’s receipts from the sale of the clothing. To the extent that the price of the
clothing, together with the charge for the creation of the stitch file, exceeds $55, the clothing exemption
does not apply and the stitch file charge (as well as the charge for the clothing) is subject to tax.

DATED: May 6, 2011

NOTE:

1

/S/
DEBORAH LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set
forth therein and is binding on the Department only with respect to the person or entity to
whom it is issued and only if the person or entity fully and accurately describes all relevant
facts. An Advisory Opinion is based on the law, regulations, and Department policies in
effect as of the date the Opinion is issued or for the specific time period at issue in the
Opinion.

Under Chapter 57, localities have a number of options as to whether to provide a clothing exemption (see Changes
to the Sales Tax Exemption for Clothing and Footwear, TSB-M-10[16]S, supra). Also, on and after April 1, 2012,
the original less-than-$110-per-item clothing and footwear exemption will be restored. It will apply to the State’s
4% sales tax and also the 3/8% sales tax in those localities in the MCTD that provide the less-than-$110 exemption
(see Id.).