Are packaging materials taxable when a company uses them to box up aircraft components it has overhauled and ships them back to the customer?

Plain-English summary

AAR Technical Service Center overhauls aircraft components. When a unit is finished, it is bagged in plastic, placed in a carton, encased in a poured-foam protective mold with additional plastic, then sealed with gummed tape, labeled, and sent to the customer. It asked whether its purchases of these packaging materials are subject to sales tax.

The Department held it depends on whether the overhaul being packaged is a taxable service.

• Overhauling is a taxable repair service — with an exception. Under § 1105(c)(3), "maintaining, servicing or repairing tangible personal property not held for sale" is taxable — except services performed on commercial aircraft primarily engaged in intrastate, interstate or foreign commerce (and machinery/equipment installed on, or property for the use of, such aircraft), which are not taxable.
• Packaging for a taxable overhaul = purchased for resale (not taxable). Where the packaging is actually transferred to the customer in performing a taxable service, it is excluded from tax as purchased for resale (§ 1101(b)(4)(i); 20 NYCRR 528.20(a)(2), (b)(1) — whose list of packaging materials includes bags, cartons, gummed tape, labels, foam-type cushioning, and the like). So packaging used to return components of non-commercial aircraft is not taxable.
• Packaging for an exempt overhaul = taxable. Where the same materials package components of commercial aircraft primarily in intrastate, interstate or foreign commerce — whose overhaul is a non-taxable service — the materials are not purchased for resale and are taxable (20 NYCRR 526.6(c)(7): property used to perform a non-taxable service isn't purchased for resale).
• Tools to manage it. The company may consult TSB-M-80(4)S to determine which aircraft fall into which category, and may use a Direct Payment Permit (Form ST-123) so it can buy without tax up front and later pay tax directly to the State only on the packaging materials that turn out to be taxable.

What this means for you

Packaging follows the taxability of the service it supports. When you transfer packaging to a customer as part of a taxable repair, it's bought for resale (no tax). When it's part of a non-taxable (exempt) service, it's taxable to you — the same box, opposite result.

Commercial-aircraft repairs are the exempt category here. Overhauls of components for commercial aircraft primarily in intrastate, interstate, or foreign commerce aren't taxable services — so packaging for those jobs is taxable. Repairs of other components are taxable services, and their packaging is resale-exempt.

A Direct Payment Permit sorts out mixed use. If you can't tell at purchase which category the materials will serve, a Form ST-123 lets you defer and pay tax directly to the State only on the taxable portion. Use TSB-M-80(4)S to classify the aircraft.

Common questions

Q: Is the packaging I use in repairs taxable?
A: Only when the repair itself is a non-taxable service. Packaging transferred to the customer in a taxable repair is purchased for resale and isn't taxed.

Q: Why is packaging for commercial-aircraft components taxable but packaging for other components isn't?
A: Because overhauling commercial aircraft (primarily in intrastate/interstate/foreign commerce) is an exempt service. Property used to perform a non-taxable service isn't "for resale," so it's taxable (20 NYCRR 526.6(c)(7)).

Q: How do I handle materials that could go either way?
A: Use a Direct Payment Permit (Form ST-123) to buy without tax and remit tax later only on the taxable materials, and consult TSB-M-80(4)S to classify the aircraft.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — "retail sale" excludes property that becomes a component of, or is transferred with, a taxable service
• Tax Law § 1105(c)(3) — tax on maintaining/servicing/repairing tangible personal property, with the commercial-aircraft carve-out

Regulations:

• 20 NYCRR § 528.20(a)(2), (b)(1) — packaging materials transferred in performing a taxable service are purchased for resale; enumerated list of packaging materials
• 20 NYCRR § 526.6(c)(7) — property used to perform a non-taxable service is not purchased for resale

Department guidance / forms:

• TSB-M-80(4)S — how to determine whether particular aircraft are commercial aircraft primarily in intrastate/interstate/foreign commerce
• Form ST-123 — Direct Payment Permit

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(22)S
Sales Tax
June 18, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S811118B

On November 18, 1981, a Petition for Advisory Opinion was received from AAR Technical
Service Center, 747 Zeckendorf Blvd., Garden City, New York 11530.
The issue raised is whether the purchase of packaging materials used in the packaging of
overhauled aircraft components are subject to sales tax.
Petitioner is engaged in the overhauling of aircraft components. When work on a unit is
completed, it is placed into a plastic bag. The unit and plastic bag are then placed in a carton. Foam
is then poured into the carton, where it hardens to form a protective mold. Additional plastic is
placed in the carton and more foam is added to complete the mold. The carton is then sealed with
gummed tape, labeled and sent to the customer.
Section 1105(a) of the Tax Law imposes the State sales tax on the ". . . receipts from every
retail sale of tangible personal property . . . . " The term "retail sale" is defined, in relevant part, as
a sale 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) and (5) 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." Tax Law, §1101(b) (4) (i).
The Sales and Use Tax Regulations provide as follows, with regard to the foregoing:
"Cartons, containers, and other packaging materials actually transferred to a customer in
conjunction with performance of a service subject to tax under sections 1105(c)(1), (2), (3) and (5)
of the Tax Law are excluded from sales tax as purchased for resale. . . .
Example 3:

A watch repairman packs a watch in a box, with cushioning material to return
it to his customer. The box and packing material is not taxable. 20 NYCRR
528.20(a)(2).

"Tangible personal property purchased for use in performing a service not subject to tax is
not purchased for resale." 20 NYCRR 526.6(c)(7).

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

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

-2­
TSB-A-82(22)S
Sales Tax
June 18, 1982
"Packaging material includes, but is not limited to' bags, barrels, baskets, bindings, bottles,
boxes, cans, carboys, cartons, cellophane, coating and preservative materials, cores, crates, cylinders,
drums, excelsior, glue, gummed labels, gummed tape, kegs, lumber used for blocking, pails, pallets,
reels, sacks, spools, staples, strapping, string, tape, twine, wax paper and wrapping paper " 20
NYCRR 528.20(b) (1).
Petitioner performs the service of overhauling aircraft components. Such constitutes the
service of "maintaining, servicing or repairing tangible personal property not held for sale in the
regular course of business," the receipts from which are subject to tax under section 1105(c)(3) of
the Tax Law, except with respect to "such services rendered with respect to commercial aircraft
primarily engaged in intrastate, interstate or foreign commerce, machinery or equipment to be
installed on such aircraft and property used by or purchased for the use of such aircraft for
maintenance and repairs. . . ." Tax Law, §1105(c)(3).
Petitioner's repair service is subject to tax when performed with respect to component parts
of aircraft other than commercial aircraft primarily engaged in intrastate, interstate or foreign
commerce. Cartons, containers and other packaging materials (including plastic bags, foam, gummed
tape and labels) used by Petitioner as described above are purchased by Petitioner for resale and are
not subject to tax. 20 NYCRR 528.20(a)(2); 528.20(b)(1). However, where such materials are used
by Petitioner to package components of commercial aircraft primarily engaged in intrastate, interstate
or foreign commerce, the materials are not purchased for resale and they are subject to tax. In order
to determine which category particular aircraft fall into, Petitioner may consult Technical Services
Bulletin TSB-M-80(4)S.
Petitioner may use a Direct Payment Permit (Form ST-123) to avoid the necessity of paying
sales tax at the time of purchase, where it is uncertain at the time of purchase whether the materials
will be used in a manner which would render the transaction subject to tax. Use of a Direct Payment
Permit relieves the vendor of his obligation to collect tax and would permit Petitioner subsequently
to pay tax, directly to the State Tax Commission, only upon those packaging materials which are
subject to tax, as described above.

DATED: June 1, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau