Are anti-theft sensor labels sold to manufacturers and retailers exempt from New York sales tax as sales for resale or as packaging material?

Plain-English summary

Petitioner's client sells sensitized, unattached loss-prevention (anti-theft) labels -- thin adhesive labels in bar-code, white or clear varieties -- to manufacturers and retailers nationwide, for products like books, jewelry, videos, medication, wine and appliances. Once a label is deactivated at the point of sale it stays on the product and is never reused. The client asked two things: (1) are sales of these labels to manufacturers, who tuck them inside a finished product's packaging before selling that product on, exempt as sales for resale; and (2) are sales of the same labels directly to retailers, who stick them onto the outside of merchandise they already have on hand, exempt as sales of packaging material.

The Department split the answer. Sales to manufacturers ARE exempt for resale: because the manufacturer buys the label and then resells it (still attached, until deactivated) as part of the finished product it sells to its own customers, that's a classic resale, as long as the manufacturer gives the label seller a resale certificate (Form ST-120). Sales directly to retailers are NOT exempt, on either theory. They aren't a resale, because the test for a resale purchase by a retailer is whether the item becomes a "critical element" of the product sold at retail — and these labels are just loss-prevention overhead the retailer chooses to use, not something the end customer is actually buying as part of the product. And they aren't exempt "packaging material" either, because that exemption covers materials used for packaging or packing (enclosing, covering, protecting) — like boxes, cartons, or gummed address/warning labels — not an adhesive anti-theft tag simply affixed to the outside of an item.

What this means for you

Manufacturers who build components into a product they sell

If you buy a component (like a security label) that stays with and is resold as part of your finished product, give your supplier a resale certificate (ST-120) — that purchase is exempt for resale, and the tax gets collected when you sell the finished product to your own customer.

Retailers who add their own security tags or overhead supplies

Buying loss-prevention labels (or similar overhead items you affix yourself, rather than build into what you sell) is a taxable retail purchase for you — it doesn't qualify as a resale or as exempt packaging material, even though the labels end up physically attached to merchandise you sell.

Accountants and tax professionals

The opinion applies the "critical element" resale test from Celestial Food of Massapequa Corp. v. State Tax Commn. and Matter of Burger King v. State Tax Commn., and leans on Matter of Gem Stores, Inc. (TSB-D-88(30)S) for both the critical-element analysis and for narrowing "packaging material" under § 1115(a)(19) to items that actually enclose, cover or protect goods, as opposed to adhesive labels attached for a retailer's own loss-prevention purposes.

Common questions

Q: If a manufacturer's customers ultimately benefit from lower theft costs, does that make the retailer's purchase a resale?
A: No. The Department acknowledged the cost savings get passed down but held that reducing overhead for competitive reasons doesn't make the labels a "critical element" the customer is buying.

Q: What kind of labels DO count as exempt packaging material?
A: Examples given include gummed address labels and warning labels like "FRAGILE — HANDLE WITH CARE" — items that function as part of packaging or packing, not theft-deterrence tags.

Q: Does the manufacturer's exemption require any paperwork?
A: Yes — a completed resale certificate (Form ST-120) from the manufacturer to the label seller.

Q: Can a different label seller rely on this ruling for its own retailer sales?
A: No. It binds the Department only as to this petitioner's facts; a different fact pattern (e.g., where a label truly functions as packaging) could come out differently.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (tax on retail sale of tangible personal property)
• Tax Law § 1101(b)(4)(i) (retail sale; resale exclusion)
• Tax Law § 1115(a)(19) (exemption for packaging and wrapping materials)
• 20 NYCRR § 526.6(c) (resale certificates and resale exclusion)
• 20 NYCRR § 528.20(b)(1) (definition of packaging material)

Cases and prior rulings referenced:

• Trans World Music Corporation, Adv Op Comm T&F, April 14, 1981, TSB-H-81(52)S (resale exclusion)
• Celestial Food of Massapequa Corp. v. State Tax Commn., 63 N.Y.2d 1020 (critical-element resale test)
• Matter of Burger King v. State Tax Commn., 51 N.Y.2d 614 (critical-element resale test)
• Matter of Gem Stores, Inc., Tax Appeals Tribunal, October 14, 1988, TSB-D-88(30)S (critical-element test; packaging material examples)

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_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(28)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S961010B

On October 10, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Faith L. Levine, c/o Ernst & Young, LLP, Suite
3900, 200 South Biscayne Boulevard, Miami, Florida 33131-5313.
Petitioner
provided additional information pertaining to the Petition on November 25, 1996.
The issues raised by Petitioner are:
(1) Whether the sales of loss prevention labels to manufacturers by Petitioner’s
client qualify for exemption from sales tax as sales for resale.
(2)
Whether the sales of loss prevention labels by Petitioner’s client to
retailers are exempt from sales tax as sales of packaging material.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner’s client is incorporated under the laws of the state of
Delaware. Petitioner’s client is engaged in the business of selling unattached
labels to various manufacturing and retail establishments throughout the United
States. The labels are sensitized for purposes of tracing the items they are
adhered to in order to prevent loss or theft.
They are thin, small, and
available in a wide variety of types including bar code, white, and clear. They
are designed, and are effective for use on products such as books, jewelry,
videos, medication bottles, wine bottles, electronic products, food products and
household appliances (both indoor and outdoor). The labels cannot be removed
without causing damage to the product.
In addition, once the label is
deactivated, it remains with the product sold to the end user and will not be
reused by the manufacturer or retailer.
A manufacturer will purchase the labels from Petitioner’s client at the
request of its customers. The manufacturer will place the label inside the
packaging of the finished product. The finished product, with the label, is then
sold to the manufacturers’ customers. The label remains with the product until
it is sold to the end user and will be deactivated at that time. It is never
reused by the manufacturer.
Labels that Petitioner’s client sells directly to retailers are affixed by
the retailers to the outside of the package of the tangible personal property
that is for sale. When the item of tangible personalty is sold, the label is
deactivated and remains affixed to the property sold. Thereafter, the label is
neither returned nor reused by the retailer.

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Sales Tax

Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes a tax on the “receipts from every
retail sale of tangible personal property . . . . ”
Section 1101(b)(4)(i) of the Tax Law defines “retail sale,” in part, as
follows:
A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical
component part of tangible personal property, or (B) for use by that
person in performing the services subject to tax under paragraphs
(1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five.
With respect to the resale exclusion, Section 526.6(c) of the Sales and Use
Tax Regulations provides, in part:
(1) Where a person, in the course of his business operations,
purchases tangible personal property or services which he intends to
sell, either in the form in which purchased, or as a component part
of other property or services, the property or services which he has
purchased will be considered as purchased for resale and therefore
not subject to tax until he has transferred the property to his
customer.
(2) A sale for resale will be recognized only if the vendor
receives a properly completed resale certificate . . . .
(3)
Receipts from the sale of property purchased under a
resale certificate are not subject to tax at the time of purchase by
the person who will resell the property. The receipts are subject
to tax at the time of the retail sale.
Section 1115(a)(19) of the Tax Law exempts from tax receipts from the sale
of “cartons, containers, and wrapping and packaging materials and supplies, and
components thereof for use and consumption by a vendor in packaging or packing
tangible personal property for sale, and actually transferred by the vendor to
the purchaser.” (Emphasis added)
Section 528.20(b)(1) of the Sales
“packaging material,” in part, as follows:

and

Use

Tax

Regulations

defines

“Packaging material” includes, but is not limited to:
. . . boxes . . . cartons . . . coating . . . gummed labels . . . .
Opinion
The loss prevention labels sold by Petitioner’s client to the manufacturers
do not constitute packaging. However, they do come within the resale exclusion
contained in section 1101(b)(4) of the Tax Law inasmuch as they are resold to

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Sales Tax

their customers. (See Trans World Music Corporation, Adv Op Comm T&F, April 14,
1981, TSB-H-81(52)S). Accordingly, the sales of labels by Petitioner’s client
to the manufacturing establishments are exempt from tax, provided that the
manufacturers supply Petitioner’s client with a completed resale certificate
(Form ST-120).
With respect to the sales of labels to retailers, the applicable test to
find that a purchase is for resale is whether the items purchased at wholesale
form a critical element of the product sold at retail to the consumer (see
Celestial Food of Massapequa Corporation v. State Tax Commn., 63NY2d 1020;
Matter of Burger King v. State Tax Commn., 51 NY2d 614, 623; Matter of Gem
Stores, Inc., Tax Appeals Tribunal, October 14, 1988, TSB-D-88(30)S.) Whether
an item becomes a critical element of the product sold depends upon whether a
critical quality useful to the final customer survives the sale at wholesale.
These loss prevention labels are not critical elements of the merchandise sold.
Instead they are part of the general overhead which the retailers choose in order
to profitably carry on their business, notwithstanding their physical attachment
to a portion of the merchandise. Although, as Petitioner states, the use of
these labels to reduce the cost of theft is ultimately a savings passed down to
the customer, lowering overhead in a competitive marketplace is as necessary for
the retailer’s survival as it is for the customer’s continued patronage (Gem
Stores, Inc., supra.)
Having determined that the retailers did not purchase the labels for
resale, we next address Petitioner’s proposal that the sales of the labels by
its client to the retailers be exempt under Section 1115(a)(19) of the Tax Law
as packaging material. Packaging materials are included within the statute’s
exemption only to the extent that vendors use them for “packaging” and “packing.”
These terms, in turn, deal with enclosing, covering, enveloping, and tightly
protecting things, but not with simply adhering something like a label to a
portion of them.
Although gummed labels are presumably within the intended
meaning of packaging materials, examples of these would be adhesive address
labels and warning stickers like “FRAGILE - HANDLE WITH CARE,” not adhesive
sensitized labels that are used to prevent theft. (Gem Stores, Inc., supra.)
Accordingly, the loss prevention labels sold by Petitioner’s client to the
retailers are subject to sales tax as a retail sale not otherwise exempted from
tax.

DATED:

April 24, 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.