Is a technical-manual developer's computer equipment, software, and supplies exempt production machinery under Tax Law Section 1115(a)(12)?

Subject

Issue raised by Petitioner, NF Associates, is whether its purchases of computer equipment, software and supplies qualify for exemption from sales tax under Section 1115(a)(12) of the Tax Law.

What this means for you

A firm developed technical manuals for customers, delivering the finished product as a camera-ready mechanical or a print-ready computer disk that the customer then reproduces and distributes (typically alongside the customer's own saleable product). It asked whether the computer equipment, software, and supplies used to create these deliverables qualify for New York's manufacturing/production-equipment exemption.

New York exempts machinery and equipment used or consumed directly and predominantly (more than 50% of the time) in producing tangible personal property for sale. "Directly" means the equipment must act on the material, have an active causal role in production, handle/store/convey the materials or product, or package the finished product. The Department had already recognized a similar arrangement in a 1980 opinion involving a law-book publisher's manuscript-editing computer equipment.

Because the finished camera-ready mechanicals or print-ready disks delivered to the customer are themselves tangible personal property being produced for reproduction and sale, the Department found that the computer equipment used directly to create them qualifies for the § 1115(a)(12) exemption -- as long as it's used more than 50% of the time for that purpose. Pre-written computer software used directly and predominantly alongside that exempt equipment can also qualify as an exempt part or supply.

Q&A

Q: We develop content (manuals, documents, designs) delivered to clients as camera-ready art or print-ready disks -- is our production computer equipment exempt?
A: It can be, if the equipment is used more than 50% of the time to directly produce that deliverable tangible personal property (the mechanical or disk) that the client reproduces and distributes. Equipment used mostly for other, non-production purposes (billing, general office work) wouldn't qualify.

Q: Does it matter that our customer, not us, does the actual mass reproduction and sale?
A: No -- the exemption follows the equipment's role in producing your own deliverable product (the master mechanical or disk), regardless of who ultimately reproduces and sells copies downstream.

Q: What about software we use alongside the exempt equipment?
A: Pre-written computer software used directly and predominantly with exempt production equipment may itself qualify as an exempt part or supply under the same regulation.

Citations

• Tax Law § 1115(a)(12) -- exempts machinery/equipment used directly and predominantly in producing tangible personal property for sale.
• Tax Law § 1101(b)(6) -- defines tangible personal property, including that prewritten computer software counts regardless of medium.
• 20 NYCRR 528.13(a)(1)(iii) -- exempts parts, tools, or supplies used directly and predominantly in production.
• 20 NYCRR 528.13(c)(1) -- defines "directly" for the production exemption.
• 20 NYCRR 528.13(c)(4) -- defines "predominantly" as over 50% of use.
• Matthew Bender & Co., Adv Op St Tx Comm, September 24, 1980, TSB-H-80(191)S -- computer equipment used to produce/edit manuscripts on magnetic tape for a compositor is exempt production equipment when used predominantly for that purpose.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (18)S
Sales Tax
June 5, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S941228A

On December 28, 1994, a Petition for Advisory Opinion was received from NF Associates,
810 Ridge Road, Webster, New York 14580.
The issue raised by Petitioner, NF Associates, is whether its purchases of computer
equipment, software and supplies qualify for exemption from sales tax under Section 1115(a)(12)
of the Tax Law.
Petitioner uses its computer, software and supplies to develop and produce technical manuals
for its customers. Once the development of these manuals is complete, a hard copy, paper based
version of the manual in the form of a camera ready mechanical or a computer disk that can be used
to print the manual is delivered to the customer. These manuals are then reproduced and distributed
by the customer, usually accompanying their saleable product.
Section 1115(a)(12) of the Tax Law exempts from sales and use taxes "[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 defines the term "directly" to
mean the machinery and equipment must, during the production process (i) act upon or effect a
change in the material to form the product to be sold, or, (ii) have an active causal relationship in the
production of the product to be sold, (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 and equipment used in activities collateral to the
production process are not deemed to be used directly in production.
Section 528.13(c)(4) of the Sales and Use Tax Regulations provide that machinery and
equipment are used "predominantly" in the production of tangible personal property if they are so
employed over 50% of the time.
Section 528.13(a)(1)(iii) of the Sales and Use Tax Regulations provides an exemption for:
"Parts with a useful life of one year or less, tools or supplies for use or consumption directly and
predominantly in the production of tangible personal property, gas, electricity, refrigeration or steam
for sale by manufacturing, processing, generating, assembling, refining, mining or extracting."

-2­
TSB-A-95 (18)S
Sales Tax
June 5, 1995

Section 1101(b)(6) of the Tax Law defines tangible personal property as, "Corporeal personal
property of any nature. . . . Such term shall also include pre-written computer software, whether sold
as part of a package, as a separate component, or otherwise, and regardless of the medium by means
of which such software is conveyed to a purchaser."
It has been held that purchases of computer equipment used to produce and edit manuscripts
on magnetic tapes which are then sent to a compositor for use in producing a final product, are
exempt from sales tax provided such equipment is used predominantly for such purposes. Matthew
Bender & Co., Adv. Op St Tx Comm, Sept. 24, 1980, TSB-H-80(191)S.
Consequently, to the extent that Petitioner is producing tangible personal property for sale
(manuals used for reproduction in the form of camera ready mechanicals or computer disks that can
be used to print the manual), its purchases of computers used directly to produce such items qualify
for the exemption under section 1115(a)(12) of the Tax Law provided they are used more than 50%
of the time for such purposes. Pre-written computer software (tangible personal property) used
directly and predominantly with exempt equipment may qualify as a part or a supply in accordance
with Section 528.13(a) of the Sales and Use Tax Regulations.

DATED: June 5, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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