Does a display maker owe sales or use tax on artwork it buys from suppliers, and does the resale exclusion or the production exemption apply?

Plain-English summary

Ledan, Inc. creates, designs and sells displays, mostly to manufacturers of consumer products. On occasion it orders artwork from art or design suppliers — usually located outside New York State or City, for customers also located outside New York. Ledan submits the artwork unaltered to its customer for approval or rejection, and the customer becomes the owner of the artwork on receipt. If the customer approves and orders a display, Ledan uses the artwork to produce the display; if not, Ledan simply bills the customer for the artwork. Ledan asked whether it incurs sales or use tax on the artwork it buys.

The Department laid out the analysis in layers:

• Sales tax or use tax, depending on where bought. Section 1105(a) taxes retail sales in New York; § 1110 imposes a compensating use tax on property purchased at retail and used in New York (to the extent not already subject to sales tax). Because Ledan usually buys the artwork out-of-state, use tax is the live issue — but the same dispositive question applies to both.
• First question — purchase for resale? Under § 1101(b)(4) and 20 NYCRR 526.6(c), property bought to sell (as such or as a component) is purchased for resale and not taxed until transferred to the customer, and resale is recognized only with a properly completed resale certificate. If Ledan buys the artwork for resale to its customer, the sale to Ledan isn't a retail sale and neither sales nor use tax is due. To qualify, unconditional title must pass to the customer immediately on delivery, before any use by Ledan (the opinion cites the Advisory Opinion to D. L. Terwilliger Co. Inc., TSB-H-81(51)S).
• Second question — if not resale, is it production equipment? Where the resale conditions aren't met but Ledan uses the artwork to produce a display for sale, the artwork is "equipment for use or consumption directly and predominantly in the production of tangible personal property for sale," exempt from State and local sales and use tax under § 1115(a)(12) — except for New York City's sales and use taxes.
• Ledan's own sales are retail sales. Ledan's sales of the artwork, and of completed displays produced from its customers' artwork, are retail sales, taxable if delivered to customers in New York (20 NYCRR 526.7(e)(2)). The same analysis, with the noted exceptions, applies under New York City's taxes.

What this means for you

How you use a purchased input decides its tax — and there can be two tax-free paths. For the same artwork, Ledan could owe nothing either because it's resold to the customer, or because it's consumed to produce a product for sale. Figure out which path fits before deciding whether tax is due.

The resale path has a strict timing rule. To treat a purchase as for resale, unconditional title has to pass to your customer immediately on delivery, before you use the item — and you need a properly completed resale certificate. Use the item first, and you can lose the resale treatment.

Watch the New York City carve-out. The § 1115(a)(12) production exemption frees the artwork from State and local sales and use tax when it's used to make a display for sale, but not from New York City's sales and use tax. City tax can still apply where the State-level exemption does not.

Your outbound sales are still taxable in New York. Selling the artwork or the finished displays is a retail sale — collect tax when delivery is to a customer in New York.

Common questions

Q: I buy artwork out-of-state — do I owe New York tax?
A: Possibly use tax under § 1110 if you use it in New York. But if you bought it for resale (title passing to your customer immediately, with a resale certificate), neither sales nor use tax is due.

Q: What if I use the artwork to make a display instead of reselling it?
A: Then it's equipment used directly and predominantly to produce tangible personal property for sale, exempt under § 1115(a)(12) from State and local sales and use tax — but not from New York City's sales and use tax.

Q: What exactly does 'purchase for resale' require here?
A: Unconditional title to the artwork must pass to your customer immediately upon delivery and before you use it, and you must have a properly completed resale certificate. The opinion points to the Advisory Opinion to D. L. Terwilliger Co. Inc., TSB-H-81(51)S, on the title-passing requirement.

Q: Do I charge tax when I sell the artwork or the finished display?
A: Yes, if delivered to a customer in New York. Ledan's sales of artwork and of completed displays are retail sales taxable on New York delivery.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4) — defines "retail sale"; excludes purchases for resale (as such or as a component)
• Tax Law § 1110 — compensating use tax on property purchased at retail and used in New York
• Tax Law § 1115(a)(12) — exemption for equipment used directly and predominantly to produce tangible personal property for sale (does not extend to New York City's sales and use taxes)
• 20 NYCRR 526.6(c) — purchases for resale are untaxed until transferred to the customer; resale recognized only with a properly completed resale certificate
• 20 NYCRR 526.7(e)(2) — delivery to a customer in New York makes the sale a taxable retail sale
• Advisory Opinion to D. L. Terwilliger Co. Inc., TSB-H-81(51)S — cited for the requirement that unconditional title pass to the customer immediately on delivery for resale treatment

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-81 (1) S
Sales Tax
July 21, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810129A

On January 29, 1981 a Petition for Advisory Opinion was received from Ledan, Inc., 167
Lexington Avenue, New York, New York 10017.
The issue raised is whether Petitioner incurs a tax liability under Article 28 of the Tax Law
when Petitioner orders artwork from an art or design supplier, under the circumstances described
below.
Petitioner is in the business of creating, designing and selling displays to its customers,
primarily manufacturers of products sold to the general public. On occasion Petitioner orders artwork
from art or design suppliers. In the great majority of these cases the supplier is located outside New
York State or New York City, and the customer for whom the artwork is ordered is also located
outside New York State or New York City. Petitioner submits such artwork, unaltered, to his
customer, for approval or rejection. If the customer approves the artwork and orders a display to be
produced by Petitioner the latter will use the artwork in the production of the display. If the customer
does not order a display to be produced by Petitioner, Petitioner will bill the customer for the
artwork. Petitioner states that in either case the customer becomes the owner of the artwork upon
receiving it from Petitioner for approval or rejection.
Section 1105(a) of the Tax Law imposes a tax on the receipts from retail sales of tangible
personal property. Section 1101(b)(4) of the Tax Law defines the term "'retail sale" to include any
sale of tangible personal property to any person "other than (A) for resale as such or as a physical
component part of tangible personal property "Section 1110 of the Tax Law imposes a
compensating use tax on the use within New York of "tangible personal property purchased at retail",
except to the extent that the same has been or will be subject to the sales tax imposed under Article
28 of the Tax Law.
It is the applicability of this use tax provision which is at issue herein where Petitioner
purchases the artwork in question outside of New York. Where such purchases are made within New
York it is the sales tax which is at issue. In both cases the dispositive question is whether the
purchase of the artwork by Petitioner is a purchase for resale, in which case neither tax would be due.
The Sales and Use Tax Regulations provide, in this regard, that:
"(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 retail
certificate . . . . "20 NYCRR 526.6(c).
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2-

TSB-A-81 (1) S
Sales Tax
July 21, 1981

Accordingly, where Petitioner purchases artwork for the purpose of resale to its customer the
sale to Petitioner would not constitute a retail sale and neither sales nor use tax would be due. To
establish the sale as a sale for resale it is necessary that unconditional title to the artwork pass to the
customer immediately upon delivery to the customer and prior to any use thereof by Petitioner. See
Advisory Opinion to D. L. Terwilliger Co. Inc., TSB-H-81(51)S.
Where the conditions establishing the applicability of the "sale for resale" exclusion are not
present, an exemption from the State and local sales and use taxes, other than New York City's use
tax, may nonetheless be applicable. Thus, where the artwork is used to produce a display for sale,
the purchase of the artwork would constitute a purchase of "equipment for use or consumption
directly and predominantly in the production of tangible personal property. . . for sale," and would
be exempt from State and local sales and use tax pursuant to section 1115(a)(12) of the Tax Law,
except for New York City's sales and use taxes.
Petitioner's sales of artwork, and of completed displays produced from its customers' artwork,
constitute retail sales and are subject to sales tax if delivered to customers in New York. 20 NYCRR
526.7(e)(2).
The foregoing considerations, with the exceptions noted, are similarly applicable under New
York City's sales and use taxes, imposed under Article 28 of the Tax Law.

DATED: July 2, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau