Is a contract packager's charge to fill, weigh and seal a food manufacturer's product subject to New York sales tax?
Plain-English summary
A New York food manufacturer outsources the packaging of its product to an unaffiliated New York company. The manufacturer supplies both the food and the bag, and pays a set amount per bag to have its product filled, weighed, and sealed. It then sells the packaged food to resellers. It asked whether it owes sales tax on the packager's charge.
The Office of Counsel said no:
- Tax Law § 1105(c) taxes the service of producing, fabricating, processing, or imprinting tangible personal property for the person who furnishes the property. Processing is any service on the owner's property that changes its nature, shape, or form (20 NYCRR 527.4(d)), and filling, weighing, and sealing bags of food is processing.
- But processing is not taxable when performed on property intended for resale (20 NYCRR 527.4(a)(2)). Because the manufacturer resells the packaged food, the packager's charge is exempt.
What this means for you
Contract packers, co-packers, and processors
When you fill/weigh/seal, bottle, label, or otherwise change the form of a customer's goods, that's taxable processing by default — unless the customer's goods are for resale, in which case it's exempt. Get the resale story documented.
Manufacturers and brand owners outsourcing production steps
A processing step you pay for on goods you'll resell isn't a taxable purchase. (Normally you'd give the processor a resale certificate (Form ST-120) to support the exemption.)
Where it would be taxable
Processing on goods the owner will use or consume (not resell) is taxable. The resale destination of the product is what drives the exemption here.
Common questions
Q: Filling and sealing bags is a service — why isn't it taxable?
A: It is taxable processing in general, but processing performed on property intended for resale is exempt, and here the manufacturer resells the packaged food.
Q: Does it matter that the manufacturer supplies both the food and the bags?
A: The key fact is that the finished product is resold. Processing the owner's resale-bound property is not taxable.
Q: What if the manufacturer kept the product instead of reselling it?
A: Then the resale exemption wouldn't apply and the processing charge would generally be taxable.
Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.
Citations and references
- Tax Law § 1105(c) (tax on enumerated services, including producing, fabricating, processing tangible personal property for the person who furnishes it)
- 20 NYCRR 527.4(d) (definition of processing)
- 20 NYCRR 527.4(a)(2) (processing service exempt when performed on property intended for resale)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales-ao-2020.htm
- Opinion: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales/20-74s.htm
Original ruling text
TSB-A-20(74)S
Sales Tax
December 1, 2020
The Department of Taxation and Finance received a Petition for Advisory Opinion from [ REDACTED ] (hereinafter “Petitioner”). Petitioner asks whether it should pay sales tax to another entity that charges Petitioner for packaging Petitioner’s food product.
We conclude that the packaging of Petitioner’s food product is not a service subject to New York State sales tax.
Facts
Petitioner is a manufacturing company in New York State. Petitioner outsources the packaging of the food product it manufactures to an unaffiliated entity in New York State. Petitioner provides both the food product and the bag to be used in packaging. Petitioner pays a set amount per bag to have its food product packaged, weighed, and sealed. At the end of each billing cycle, the entity provides Petitioner with an invoice reflecting the number of bags packaged multiplied by the agreed upon rate. The food product is then sold by Petitioner to various resellers.
Analysis
Tax Law § 1105(c) imposes sales tax on the receipts from every sale, except for resale, of certain enumerated services, including producing, fabricating, processing or imprinting tangible personal property for a person who directly furnishes the tangible personal property. Processing includes the performance of any service on tangible personal property for the owner which effects a change in the nature, shape or form of the property. 20 NYCRR 527.4(d). Filling, weighing and sealing bags of a food product constitutes the processing of tangible personal property. See id. However, such service is not subject to tax when it is performed on property intended for resale. See 20 NYCRR 527.4(a)(2). Accordingly, the entity’s charge to Petitioner for filling, weighing and sealing the bag is not subject to New York State sales tax where Petitioner will then resell the processed food product.
DATED: December 1, 2020
DEBORAH R LIEBMAN
Deputy Counsel
Note: 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. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.