Is artwork a fabric manufacturer buys and scans to design a computer-generated weaving blueprint for upholstery fabric exempt from New York sales tax as production equipment?

Plain-English summary

Weave Corporation designs upholstery fabric starting from a piece of "artwork" -- often a painting, drawing, antique fabric swatch, carved picture-frame molding, or even the grain pattern in polished stone. The artwork is optically scanned into a digital image, refined on a computer (colors condensed, areas manipulated, weave structures assigned), and eventually encoded onto a disc that drives a Jacquard card punch, which in turn instructs a loom to weave the design. This whole design process happens in New York City; the resulting blueprint is then sent to the company's out-of-state plant to actually manufacture the upholstery fabric for sale. Weave Corporation asked whether its purchases of the initial artwork were exempt from New York sales and use tax.

The Department said yes, applying the same reasoning it uses for printing companies: artwork purchased and used directly and predominantly to produce a manufactured product for sale qualifies for the production machinery and equipment exemption under Tax Law § 1115(a)(12), even though a fabric designer isn't a printer per se -- the process of converting artwork into production data is analogous. The Department did note the exemption applies to the Statewide sales and use tax under §§ 1105(a) and 1110 specifically; it did not separately address New York City's additional local tax under § 1107, which by its own terms incorporates the same state-law exemptions but wasn't the focus of the ruling's holding as phrased.

Separately, the Department flagged an important related point: if a designer merely licenses the right to reproduce a photograph, painting, sketch or illustration (rather than buying the artwork itself), and pays the artist/owner a royalty under a written reproduction agreement, that royalty payment isn't a taxable sale of tangible personal property at all -- and briefly holding the original for the sole purpose of making the reproduction doesn't convert that into a taxable use.

What this means for you

Fabric, textile, and other manufacturers using purchased design source material

If your design process starts from purchased artwork (a painting, an antique object, a natural material pattern) that gets converted into production data -- through scanning, digitizing, or manual translation into machine instructions -- that artwork purchase can qualify for the production exemption, following the same "printer's artwork" precedent used for the terry-product ruling (TSB-A-97(21)S) in the same era.

Businesses licensing rather than buying artistic source material

If you pay a royalty to reproduce someone else's photograph, painting, or design under a written agreement rather than buying the physical artwork outright, that royalty isn't a taxable sale at all -- a materially different (and more favorable) analysis than the production-exemption route, worth considering if you're deciding whether to buy or license source artwork.

Accountants and tax professionals

Note the narrower framing here versus other artwork-exemption rulings: this opinion speaks only to the Statewide tax under §§ 1105(a)/1110, not explicitly to New York City's local tax under § 1107 (even though § 1107 generally incorporates Article 28's exemptions by its own terms) -- worth flagging for a client with NYC-based design operations rather than assuming full local coverage without independent confirmation.

Common questions

Q: Does the manufacturer need to be a printing company to get this exemption?
A: No -- the Department extends the printing-industry artwork exemption by analogy to any manufacturer whose process similarly converts purchased artwork into data used directly to produce a product for sale.

Q: What if I only license the right to reproduce an image rather than buying it?
A: A royalty paid under a written reproduction agreement isn't a taxable sale of tangible personal property at all -- a different and separate rule from the production-machinery exemption.

Q: Can another fabric or design company rely on this ruling?
A: No. This advisory opinion binds the Department only as to Weave Corporation and the specific design process and facts described.

Citations and references

Statutes and regulations:

• Tax Law § 1105-B (temporary reduced-rate/exemption provision for production parts, tools and supplies)
• Tax Law § 1107 (New York City additional sales and use tax)
• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• 20 NYCRR § 528.13 (machinery and equipment used in production; directly and predominantly)
• 20 NYCRR § 526.7(f) (reproduction rights/royalties not a taxable sale)
• Department Publication 842 (12/93), New York State and Local Sales Tax Information for Printers

Prior rulings referenced:

• The Design Council, Ltd., Adv Op Comm T&F, June 28, 1995, TSB-A-95(23)S
• David Berdon & Co. LLP, Adv Op Comm T&F, September 23, 1996, TSB-A-96(56)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_06s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(6)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S961204A

On December 4, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Weave Corporation, 433 Hackensack Avenue,
Hackensack, New Jersey 07601.
The issue raised by Petitioner, Weave Corporation, is whether the purchase
of "artwork", as described herein, used ultimately in the manufacturing of
upholstery fabric is exempt from New York State sales and use taxes imposed under
Sections 1105(a) and 1110 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner states that the beginning of the design process for
manufacturing an upholstery fabric is the purchase of an item of artwork. This
artwork is very often a painting or drawing from which an idea or concept
evolves, initiating the creative process. The artwork may also be an antique
fabric swatch, the carved molding on an old picture frame, or the grain pattern
in a slab of polished stone.
The artwork is run through an optical scanner that converts the visual
material into a digital image, which in turn is transposed onto a computer
screen. Frequently, a color photocopy, or sometimes even a professional color
enlargement photograph, must be made for the scanner in order to capture or omit
some details from the source material. After some technical decisions are made
regarding the structure of the fabric to be manufactured, weaves are then chosen
to formulate the visual and textural character of each area of the fabric which
the designer is seeking to create.
Next, the image (geometry) of the pattern will be brought up onto the
computer screen to begin the editing process. If there are many colors in the
image, they may have to be combined or condensed into a practical and workable
number.
At this point in the process, color represents nothing but the
demarcation of an area of weave structure that differs in form from those areas
adjacent to it, and entire areas may be manipulated (i.e., moved, reduced,
enlarged or eliminated entirely), if it is to the aesthetic advantage of the
resulting fabric. At times, if the artwork is too large, or cumbersome, or if
only portions are actually required, it may be cut up and reassembled prior to
being input onto the computer.
Once all the areas of the design are oriented into desired locations and
manipulated to their correct proportions, weave instructions are assigned to each
of these differently colored areas on the computer image. When this is done, a

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disc is encoded that will instruct a Jacquard card punch to cut a series of
instructions that enable a loom to produce a woven image of the computer
blueprint. A first sample is woven to determine if the instructions were encoded
correctly and that all estimates of threads per inch, both vertical and
horizontal, are in the appropriate proportions and densities for the chosen weave
structures.
If all is technically correct, color choice comes into play for the first
time as it relates to making the design a saleable product. At this point, the
process of playing with multitudes of color possibilities to find the few
probable best combinations to offer to customers begins. After completion of the
design process, which takes place in New York City, the resulting blueprint is
then used at the taxpayer’s out-of-state plant site to produce upholstery fabric
for sale. The end result of this process is a manufactured item of tangible
personal property with a design developed from the initial artwork purchased.
Section 1105-B(a) of the Tax Law provides as follows:
(a) Notwithstanding any other provisions of this article, but
not for purposes of the taxes imposed by section eleven hundred
seven or eleven hundred eight or authorized pursuant to the
authority of article twenty-nine of this chapter, the taxes imposed
by subdivision (a) of section eleven hundred five on the receipts
from the retail sales of parts with a useful life of one year or
less, tools and 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
or for use directly and predominantly in or on telephone central
office equipment or station apparatus or comparable telegraph
equipment where such equipment or apparatus is used directly and
predominantly in receiving at destination or initiating and
switching telephone or telegraph communication shall be paid at the
rate of two percent for the period commencing September first,
nineteen hundred eighty and ending February twenty-eighth, nineteen
hundred eighty-one, and such retail sales shall be exempt from such
tax on and after March first, nineteen hundred eighty-one.
Subdivision (d) of Section 1105-B, as amended, effective September 1, 1996,
provides, for purposes of the sales and use tax imposed in New York City:
Notwithstanding any other provisions of this section or this
article to the contrary, on and after September first, nineteen
hundred ninety-six, the exemptions provided by subdivisions (a), (b)
and (c) of this section shall apply for purposes of the sales and
compensating use taxes imposed by section eleven hundred seven of
this article.

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Section 1107 of the Tax Law provides, in pertinent part, as follows:
Section 1107. Temporary municipal assistance sales and
compensating use taxes for cities of one million or more.--(a)
General. On the first day of the first month following the month in
which a municipal assistance corporation is created under article
ten of the public authorities law for a city of one million or more,
in addition to the taxes imposed by sections eleven hundred five and
eleven hundred ten, there is hereby imposed on such date, within the
territorial limits of such city, and there shall be paid, additional
taxes, at the rate of four percent, which except as provided in
subdivision (b) of this section, shall be identical to the taxes
imposed by sections eleven hundred five and eleven hundred ten.
Such sections and the other sections of this article, including the
definition and exemption provisions, shall apply for purposes of the
taxes imposed by this section in the same manner and with the same
force and effect as if the language of those sections had been
incorporated in full into this section and had expressly referred to
the taxes imposed by this section. (emphasis added)
Section 1115 of the Tax Law provides, in part, as follows:
Sec. 1115. Exemptions from sales and use taxes.--(a) Receipts
from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the
compensating use tax imposed under section eleven hundred ten:
*

*

*

(12) Machinery or equipment 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,
or telephone central office equipment or station apparatus or
comparable telegraph equipment for use directly and predominantly in
receiving at destination or initiating and switching telephone or
telegraph communication, but not including parts with a useful life
of one year or less or tools or supplies used in connection with
such machinery, equipment or apparatus.
This exemption shall
include all pipe, pipeline, drilling rigs, service rigs, vehicles
and associated equipment used in the drilling, production and
operation of oil, gas, and solution mining activities to the point
of sale to the first commercial purchaser.
Section 528.13 of the Sales and Use Tax Regulations provides in part:
Sec. 528.13. Machinery and equipment used in production; telephone
and telegraph equipment; parts, tools and supplies--(Tax Law, Sec.
1115(a)(12)). (a) Exemption. (1) Exemption from statewide tax. An

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exemption is allowed from the tax imposed under subdivisions (a) and
(c) of section 1105 of the Tax Law, and from the compensating use
tax imposed under section 1110 of the Tax Law, for receipts from
sales of the following:
(i) Machinery or equipment (including parts with a
useful life of more than one year) used or consumed
directly and predominantly in the production for sale of
tangible
personal
property,
gas,
electricity,
refrigeration or steam, by manufacturing, processing,
generating, assembling, refining, mining or extracting.
(This exemption includes all pipe, pipeline, drilling
rigs, service rigs, vehicles and associated equipment
used in the drilling, production and operation of oil,
gas and solution-mining activities to the point of sale
to the first commercial purchaser.)
*
(c)

*

*

Directly and predominantly. (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.
*

*

*

(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 this case, the artwork being purchased will be used in the process
of designing a computer image and computer blueprint necessary for printing the
designs on upholstery fabric produced for sale. In accordance with New York
State Department of Taxation and Finance Publication 842 (12/93), New York State
and Local Sales Tax Information for Printers, at page 27, purchases of artwork,
illustrations, layouts, drawings, paintings, mechanicals, overlays, designs,
photographs, pasteups and onionskin by a printing company and used or consumed
directly and predominantly to produce printed material for sale qualify for the
production exemption. Accordingly, while the purchaser is not a printing company

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per se, the printing process and Petitioner's manufacturing process are similar
and the artwork is deemed to be used or consumed by the purchaser directly and
predominantly to produce the upholstery fabric for sale. See The Design Council,
Ltd., Adv Op Comm T&F, June 28, 1995, TSB-A-95(23)S, David Berdon & Co. LLP, Adv
Op Comm T&F, September 23, 1996, TSB-A-96(56)S. Therefore, the purchase by
Petitioner of the artwork described above would be exempt from the Statewide
sales and use taxes imposed under Sections 1105(a) and 1110 of the Tax Law.
It should be noted that the right to reproduce a photograph, painting,
sketch, or illustration is not a sale of tangible personal property, and the
receipts from the sale of this right are not subject to tax, where the payment
made is in the nature of a royalty to the grantor under the laws relating to
artistic and literary property. A right to reproduce exists only if there is a
written agreement between the artist and client setting forth the conditions to
reproduce. Temporary possession by the client for the sole purpose of making the
reproduction is not considered to be a transfer of possession which would convert
the reproduction right into a taxable use. See Section 526.7(f) of the Sales and
Use Tax Regulations.

DATED: February 6, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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