Can a textile manufacturer buy the artwork and design mechanicals it uses to silkscreen or weave patterns into its products tax-free under the production exemption?

Plain-English summary

The Leshner Corporation manufactures terry products -- bath towels, kitchen towels, washcloths, bath sheets and the like -- many of which carry a design, such as a flower drawing or a striped border. Leshner puts these designs onto its products in one of two ways: a classic multicolor silkscreen printing process, or by dyeing individual yarn and setting up its warping-and-weaving machinery to reproduce the pattern as the fabric is woven. Either way, the process starts with a design or "mechanical," either bought from an outside design house or created at Leshner's own New York design studio, which is converted into the specific color-pattern or machine-setup data needed to reproduce it on the product.

Leshner asked whether it could buy that artwork tax-free under New York's production machinery and equipment exemption. The Department said yes. It reasoned that Leshner's process is analogous to a printing company's: printers can buy artwork, illustrations, drawings, mechanicals, overlays and similar art tax-free when it's used directly and predominantly to produce printed material for sale, under the Department's own printing-industry guidance. Even though Leshner isn't a printer, both the silkscreen and warping/weaving processes work the same way -- the purchased art is converted into data that is used directly to manufacture the textile product for sale -- so the same exemption applies.

What this means for you

Manufacturers who use purchased designs or artwork

If your manufacturing process depends on artwork, drawings or "mechanicals" that get converted into machine-setup data or printing patterns to make a product you sell -- not just used for planning, marketing or reference -- that artwork can qualify for New York's production machinery and equipment exemption under Tax Law § 1115(a)(12). The key test is whether the art is used or consumed directly and predominantly in the production process itself, the same standard that applies to any other piece of production equipment.

Textile, apparel and similar manufacturers

This ruling is a useful precedent if your business reproduces a purchased or in-house design into a woven, printed, embroidered or otherwise manufactured pattern. The Department is willing to extend printing-industry exemption guidance by analogy to other manufacturing processes that use art the same way -- as an input converted into production data, not as a separate taxable service or a finished product in itself.

Accountants and tax professionals

Document how the artwork is actually used in production (e.g., converted into silkscreen color separations or a construction sheet driving the weaving machinery) so you can show it's consumed directly and predominantly in the production phase under 20 NYCRR § 528.13, not merely used for design review or marketing purposes.

Common questions

Q: Does this exemption cover all artwork a manufacturer buys?
A: No. It only covers art used or consumed directly and predominantly to produce the tangible product for sale -- art used for planning, marketing, or reference that never becomes part of the actual production process would not qualify.

Q: Does it matter whether the design comes from an outside design house or an in-house studio?
A: No -- the ruling treats both sources the same, since either way the art is converted into the data used to run the production equipment.

Q: Can I rely on this ruling for my own business?
A: No. This is an advisory opinion binding the Department only as to Leshner Corporation and the specific facts it described. Another taxpayer's facts and process may differ enough to change the answer.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• 20 NYCRR § 528.13 (machinery and equipment used in production; directly and predominantly)

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
• Department Publication 842 (12/93), New York State and Local Sales Tax Information for Printers

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_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(21)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S960702A

On July 2, 1996, the Department of Taxation and Finance received a Petition
for Advisory Opinion from The Leshner Corporation, P.O. Box 179, Hamilton, OH
45012-0179.
The issue raised by Petitioner is whether artwork purchased for use in
weaving a design into terry products that Petitioner manufactures is exempt from
the sales and use tax.
Petitioner presents the following facts.
Petitioner is a manufacturer of textile products, including terry products.
Terry products include bath towels, kitchen towels, hand towels, washcloths, bath
sheets, etc., which are manufactured at plant facilities in Alabama and Georgia.
Some terry products have an associated design that is an integral part of
the product. This could be a purely graphical representation, such as a drawing
of a flower, or continuous geometric representation, such as the stripe on a
towel.
Two processes are utilized in producing the design on the terry product.
Some products are printed with dyes in a classic multicolor silkscreen
process.
In the silkscreen process, the design is broken into a number of
patterns, each representing an individual color. This process is either done
manually or through a computer-aided-design program on a PC. These individual
patterns are then sent to Petitioner's manufacturing plant, where individual silk
screens are prepared through a photochemical process. In manufacturing, the
products are sent through a printing machine where each screen ultimately
pigments its individual pattern on the product. The superimposition of all of
the patterns results in the original design, in color, being printed onto the
product.
In other products, individual yarn (i.e., thread) is dyed a specific color,
and the specific manufacturing machinery is set up to produce the design through
the warping and weaving processes. The warping and weaving method can produce
either the geometric designs (e.g., stripes and borders), or the graphical
designs (e.g., towels that have the logo of a lodging establishment or the name
of a medical institution woven into the towel). Because the yarn is permanently
dyed, designs imprinted by means of warping and weaving have a longer useful life
and maintain quality longer than those imprinted by the silkscreen process.
Warping is the process of laying individual continuous ends of yarn
lengthwise, which may be used to provide a lengthwise component of color.
Weaving is taking multiple warps and passing and interlocking fill yarn widthwise
through the lengthwise ends of the warps.

-2­
TSB-A-97(21)S
Sales Tax

The designs, or mechanicals, are originated in one of two ways by
Petitioner. Either they are purchased from outside design houses, or they are
created at Petitioner's design studio in New York. Where a design is imprinted
by the warping and weaving process, the design is placed into production by way
of a construction sheet. In conjunction with the company design studio, the
design on the mechanical is segregated and measured into its component elements.
For example, individual colors are determined, and the number, placement, type,
and sequence of individual yarn is noted on the construction sheet. The
construction sheet is utilized by factory production personnel for determining
what colors need to be dyed into yarn, and for then setting up the warping and
weaving machinery so that the design on the mechanical is accurately reproduced
into the weave of the terry product.
In both the silkscreen and warping and weaving processes, a design, or
mechanical, is obtained. In both, the colors and patterns of those colors must
be ascertained, and converted into data. In the case of silkscreening, that
information is the individual color patterns.
In the case of weaving and
warping, that information is specific set-up data on the construction sheet.
Without the mechanical drawing, the image cannot be reproduced into the terry
product.
Applicable Law and Regulations
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, ...
for sale, by manufacturing, processing, generating, assembling,
refining, mining or extracting, ... 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. ...
Section 528.13 of the Sales and Use Tax Regulations provides, in part, as
follows:
Reg. 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 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:

-3­
TSB-A-97(21)S
Sales Tax

(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. ...
*

*

*

(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.
Opinion
Whether the artwork in question is used in the silkscreen or the warping
and weaving processes, the artwork being purchased will be converted into
specific data to produce the textile products for sale. According to 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
per se, both the printing process and Petitioner's manufacturing processes are
similar and the artwork in each case is used or consumed by the purchaser
directly and predominantly to produce the textile products for sale. See The

-4­
TSB-A-97(21)S
Sales Tax

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 qualifies for the production
exemption from sales and use taxes provided by Section 1115(a)(12) of the Tax
Law.

DATED:

April 3, 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.