Is a machine used to master compact discs exempt production equipment, and does it matter whether the discs are made for sale?

Plain-English summary

Script Systems, Inc. makes a compact disc-interactive "Authoring System" — a machine that records live or prerecorded video and audio and lets the user enter text, producing a "final" tape used to master a compact disc, to make films, training films, and audio recordings. It asked whether sales of the machine are taxable.

The Department held taxability turns on the production exemption and the for-sale requirement:

• It's production machinery. Because the Authoring System produces "final" tapes used to master discs, it is machinery used directly in a continuous manufacturing process (20 NYCRR § 528.13(c) — acting on material, or with an active causal relationship in producing the product to be sold).
• Exempt when used to make discs for sale. When a buyer purchases it for predominant (more than 50%) use in a process that produces compact discs for sale, the sale is exempt from state and local sales and use tax under Tax Law § 1115(a)(12), if the buyer gives Script Systems a properly completed Form ST-121 (Exempt Use Certificate).
• New York City tax — a timing point. The § 1115(a)(12) exemption doesn't cover the separate New York City tax, but for deliveries in the City the 4% city tax applied only until November 30, 1989 and was exempted effective December 1, 1989 by Chapter 376 of the Laws of 1989.
• Not for sale = taxable. If the Authoring System is bought to produce compact discs not for sale, it does not qualify for § 1115(a)(12) and is taxable under § 1105(a).
• Government/exempt-organization buyers. Sales to governmental entities and exempt organizations are exempt under § 1116(a), substantiated by a government purchase order or a Form ST-119.1 Exempt Organization Certification.

What this means for you

The production exemption hinges on "for sale"

Machinery used directly and predominantly to produce goods for sale can be bought tax-free under § 1115(a)(12). The same machine used to make products the buyer will keep or use — not sell — doesn't qualify, and its sale is taxable. Whether the end product is destined for sale is the controlling question.

Get the exempt-use certificate

The exemption depends on the buyer furnishing a Form ST-121 (Exempt Use Certificate). As the seller, collect that certificate to support treating the sale as exempt; without it, you should charge tax.

Watch local-tax carve-outs and effective dates

The state production exemption didn't automatically cover the New York City tax, which had its own timeline here (city tax through November 30, 1989; exempt from December 1, 1989 under Chapter 376 of the Laws of 1989). Local taxes and their effective dates can differ from the state rule, so check both.

Common questions

Q: Is the machine tax-exempt for any buyer?
A: No. It's exempt under § 1115(a)(12) only when bought for predominant use producing compact discs for sale, with a Form ST-121. If the discs aren't for sale, the sale is taxable.

Q: What about buyers in New York City?
A: The state exemption didn't cover the city tax, but the 4% city tax applied only through November 30, 1989 and was exempted from December 1, 1989 (Chapter 376, Laws of 1989).

Q: We're selling to a government agency or nonprofit — what do we need?
A: A government purchase order or a Form ST-119.1 Exempt Organization Certification to substantiate the § 1116(a) exemption.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on receipts from retail sales of tangible personal property
• Tax Law § 1115(a)(12) — exemption for machinery/equipment used directly and predominantly in production for sale (state and local, not New York City)
• Tax Law § 1116(a) — exemption for sales to governmental entities and exempt organizations
• 20 NYCRR § 528.13(c) — "directly" and "predominantly" (more than 50%) in production
• Chapter 376 of the Laws of 1989 — New York City production-machinery exemption effective December 1, 1989

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_29s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (29)S
Sales Tax
August 21, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890301A

On March 1, 1989 a Petition for Advisory Opinion was received from Script Systems, Inc.,
RD #1 Hinman Road, Mohawk, New York 13407.
The issue raised is whether the sales of Petitioner's "Authoring System" will be subject to
state and local sales tax.
Petitioner is the manufacturer of a newly developed machine, a compact disc-interactive
"Authoring System", which is a computerized electronic device for use in recording live or
prerecorded images (video) and sound (audio) and for entering text by means of a computer keyboard
to a magnetic tape for subsequent transfer, by use of other unrelated equipment, to a compact disc.
The machine is used to produce motion picture films, training films and audio recordings on compact
discs.
In those instances where the "Authoring System" is used to record live performances, the
"Authoring System" may also be used for editing, sound mixing, encoding text, etc., thereby
allowing the purchaser to prepare the "final" tape prior to the transfer of such to the compact disc.
The "final" tape becomes the source for the "master" compact disc.
Petitioner states that potential customers may be motion picture studios, private industry,
governmental entities, and certain institutions and research companies such as encyclopedia and tax
services.
Section 1105(a) of the Tax Law imposes tax on "[t]he receipts from every retail sale or
tangible personal property except as otherwise provided...."
Section 1115(a)(12) of the Tax Law exempts from State and local (but not New York City)
sales taxes the receipts from sales of "[m]achinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property . . . for sale by manufacturing,
processing. . . ."
Section 528.13(c)(1) of the Sales and Use Tax Regulations define the term "directly" to mean
that "the machinery and equipment must, during the production phase of a process: (i) act upon or
effect a change in material to form the product to be sold, or (ii) have an active causal relationship
in the production of the product to be sold, or (iii) be used in the handling, storage, or conveyance
of materials or the product to be sold, or (iv) be used to place the product to be sold in the package
in which it will enter the stream of commerce". Machinery or equipment used in activities collateral
to the production process is not deemed to be used directly in production.
Section 528.13(c)(4) of the Sales and Use Tax Regulations provides that "[m]achinery or
equipment is used predominantly in production, if over 50 percent of its use is directly in the
production phase of a process". Section 528.13(c)(3) of said Regulations provides that "[m]achinery
used to produce other machinery or equipment or parts for self use in production is considered to be
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TSB-A-89 (29)S
Sales Tax
August 21, 1989
used directly in production".
Accordingly, as an "Authoring System" is used to produce "final" tapes of live or prerecorded
video and audio performances, with or without added text, for transfer to a compact disc, it is
considered to be machinery or equipment used directly in a continuous manufacturing process.
In a transaction where an "Authoring System" is purchased for predominant (more than 50%)
use in a manufacturing process resulting in the production of compact discs for sale, Petitioner's sale
of such "Authoring System" will be exempt from state and local sales and use tax pursuant to Section
1115(a)(12) of the Tax Law, provided the purchaser furnishes Petitioner a properly completed form
ST-121, Exempt Use Certificate. However, it is noted that when delivery occurs within New York
City, such sale will be subject to the New York City Tax of 4% until November 30, 1989. Pursuant
to Chapter 376 of the Laws of 1989 such sale shall be exempt from the New York City tax effective
December 1, 1989.
When an "Authoring System" is purchased for predominant use in a production process
which results in the production of compact discs not for sale, the sale of such "Authoring System"
will not qualify for the sales tax exemption provided under Section 1115(a)(12) of the Tax Law but
will be subject to the sales and use tax imposed under Section 1105(a) of the Tax Law.
It is noted that Petitioner may sell its "Authoring System" to governmental entities and to
certain exempt organizations. Section 1116(a) of the Tax Law exempts sales to governmental entities
and to certain organizations from being subject to state and local sales tax. When making sales to
a governmental entity or to an exempt organization, Petitioner must obtain a governmental purchase
order or invoice from the governmental entity or a form ST-119.1, Exempt Organization
Certification from the exempt organization as substantiation that such sales were not subject to state
or local sales tax.

DATED: August 21, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.