Can a photofinisher buy its film processors and printing equipment tax-exempt as production machinery, when part of the work develops the customer's own film?

Plain-English summary

The Photo Lab, Inc. (doing business as Photo U.S.A.) runs a photofinishing business. It asked whether the film processors, disc processors, and disk conversion kits it uses qualify for New York's production-machinery exemption under Tax Law § 1115(a)(12).

The Department split the answer by production step.

• Developing the customer's film → machinery NOT exempt. In the first step, the lab passes the customer's own exposed film through chemical tanks to produce a negative. Because the film already belongs to the customer, the lab isn't producing property for sale — it's performing a taxable processing service under § 1105(c)(2) (developing film is the classic taxable processing example, 20 NYCRR § 527.4(d), Example 2). So the machinery used for this step does not qualify for the § 1115(a)(12) exemption.
• Making the prints → machinery IS exempt. In the second step, the lab uses the negative to expose photographic paper and produce photographic prints. Those prints are the final product sold to the customer — tangible personal property produced for sale. So machinery used directly and predominantly (over 50%, per 20 NYCRR § 528.13(c)) to make the prints qualifies for the § 1115(a)(12) exemption.

What this means for you

"Production machinery" has to produce something you sell. New York's § 1115(a)(12) exemption is only for machinery used directly and predominantly to produce tangible personal property for sale. Equipment used to perform a service on the customer's own property doesn't qualify — even if the work is mechanically identical — because nothing is being produced for sale.

One business, two tax treatments. In photofinishing, the same job has a taxable service leg (developing the customer's film) and a production leg (making prints for sale). Track which machines are used for which step, because the developing gear is taxable to you while the print-making gear can be bought exempt.

Mind the "directly and predominantly" line. To claim the exemption for a machine, more than 50% of its use must be in the actual production phase. Machinery used mostly for collateral or service activities won't qualify.

Common questions

Q: We develop customers' film and also print photos. Is our equipment exempt production machinery?
A: Only the equipment used to make the prints you sell. The film-developing equipment isn't exempt, because developing the customer's own film is a taxable processing service, not production of property for sale.

Q: Why is developing film treated as a service but printing treated as production?
A: The film belongs to the customer, so developing it is a service performed on their property (§ 1105(c)(2)). The prints are new property you produce and sell, so the machines that make them can qualify under § 1115(a)(12).

Q: How much of a machine's use has to be in production to qualify?
A: More than 50% — it must be used directly and predominantly in the production phase (20 NYCRR § 528.13(c)).

Citations and references

Statute and regulation:

• Tax Law § 1105(c)(2) — taxes the service of producing, fabricating, processing, printing, or imprinting tangible personal property furnished by the customer (except when purchased for resale)
• Tax Law § 1115(a)(12) — exempts machinery or equipment used directly and predominantly in producing tangible personal property for sale by manufacturing or processing
• 20 NYCRR § 527.4(d) — "processing" is any service on the owner's tangible personal property that changes its nature, shape, or form; developing film is a taxable processing service
• 20 NYCRR § 528.13(c) — "directly" (acting on material, causal role in production, handling/conveyance, or packaging) and "predominantly" (over 50% of use in the production phase)

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_5s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (5)S
Sales Tax
February 9, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S881219A

On December 19, 1988, a Petition for Advisory Opinion was received from the Photo Lab,
Inc. d/b/a Photo U.S.A., P.O. Box 3843, 106 Boulevard, Salem, Virginia, 24153.
The issue raised is whether the film processors, disc processors and disk conversion kits
purchased and used by Petitioner to conduct its business of photofinishing qualify for exemption
from sales and use tax pursuant to Section 1115(a)(12) of the Tax Law.
Petitioner is engaged in the photofinishing business. Photofinishing is a process which
consists of producing a photographic print from film. Petitioner's photofinishing process begins at
the point where a customer brings in exposed photographic film for processing. The film is placed
in an envelope containing the customer's name and telephone number. Both the film and the
envelope are marked with identical numbers.
The first step in the production process consists of passing the film through a series of tanks
of chemicals in a processor which results in a negative. In the second step, the equipment is used to
pass light through the negative onto photographic paper and the photographic paper is then passed
through a series of tanks of chemicals. During this process, some of the chemicals through which
the photographic print passes become component parts of the final product, the photographic print.
At the end of the production process, both the negative and photographic prints are placed
in the identically numbered envelope for protection and delivery. This entire package which consists
of the negatives, photographic prints and envelope is then delivered to the customer who is charged
sales tax on the total price of the package.
Section l105(a) of the Tax Law imposes a tax on the receipts from retail sales of tangible
personal property, except when purchased for resale. Section 1105(c) imposes a tax on certain
services, including the services of producing, fabricating processing printing or imprinting tangible
personal property which has been furnished by the customer, except when such services are
purchased for resale.
The term "processing" is defined by sales and use tax regulation section 527.4(d) as "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." Example 2 of section 527(d) provides that "[t]he
developing of film by a photographic laboratory is a taxable processing service."

TP-9 (9/88)

-2­
TSB-A-89 (5)S
Sales Tax
February 9, 1989

Section 1115(a)(12) of the Tax Law exempts from tax: "Machinery or equipment for use or
consumption directly and predominantly in the production of tangible personal property ... for sale,
by manufacturing, processing .... "
Sales and use tax regulation section 528.13(c) defines the terms "directly" and
"predominantly" as follows:
(1)

Directly means the machinery or 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.

(2)

Usage in activities collateral to the actual
production process is not deemed to be used
directly in production.
*
*
*

(4)

Machinery or equipment is used
predominantly in production if over 50
percent of its use is directly in the production
phase of a process.

In the first step of Petitioner's process, Petitioner develops a negative from film furnished by
the customer. This process consists of passing the film through a series of tanks of chemicals in a
processor. In these tanks, the latent image contained on the film becomes visible and fixed. This
process results in a negative. Thus, Petitioner is not producing tangible personal property for sale to
its customer since the film is already owned by the customer. Accordingly, Petitioner is providing
a service that is subject to sales tax pursuant to Section 1105(c)(2) of the Tax Law. However,
Petitioner's machinery and equipment used in such process does not qualify for exemption under
section 1115(a)(12) of the Tax Law because such machinery and equipment is not used to produce
tangible personal property for sale.

-3­
TSB-A-89 (5)S
Sales Tax
February 9, 1989

In the next step of the production process, Petitioner utilizes each negative to produce a
photographic print. The photographic print is the final product and constitutes tangible personal
property for sale. Accordingly, machinery and equipment used by Petitioner directly and
predominantly to produce photographic prints for sale qualifies for exemption from sales and use
tax under Section 1115(a)(12) of the Tax Law.

DATED: February 9, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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