Does a New Jersey company owe New York compensating use tax on free advertising cash-register tapes it manufactures in New Jersey and gives away to New York supermarkets?

Plain-English summary

Cadett Register Tapes Inc., based in New Jersey, sells advertising space to New York businesses and prints those ads on cash register tapes. It buys large paper rolls in New Jersey, converts them into register-sized rolls, and prints the ads -- all in New Jersey -- then gives the finished tapes away for free to supermarkets, some of which are located in New York State, shipping them in by common carrier. Cadett doesn't sell the tapes to the supermarkets and doesn't sell any other tangible personal property or service in New York besides the advertising itself. It asked the Department what the basis for computing New York's compensating use tax should be, since it isn't making an actual sale in the state.

The Department explained that even though Cadett doesn't sell tangible personal property or taxable services in New York (so it doesn't need to register as a vendor), it still owes compensating use tax because New York's definition of "use" specifically includes distributing tangible personal property as promotional materials -- exactly what's happening every time Cadett hands a finished register tape to a New York supermarket. And because Cadett is doing business in the state (marketing and distributing tapes to New York customers), it's treated as a "resident" for use tax purposes with respect to that business activity, even though it's headquartered in New Jersey.

The tax is calculated at the rate in effect where Cadett delivers the tapes, but only on the cost of the New Jersey-purchased paper that actually gets converted into tapes shipped into New York (plus any shipping charges on that paper) -- not on the tapes' final advertising value or any New York-based costs, since the conversion and printing happen entirely in New Jersey. Cadett can also claim a credit against its New York use tax bill for any sales or use tax it already paid to New Jersey on that same paper, but only if New Jersey offers a matching credit for tax paid to New York -- and there's no separate refund available beyond that credit.

What this means for you

Out-of-state manufacturers distributing free promotional materials into New York

Giving away printed, branded, or advertising-bearing materials to New York businesses or customers can trigger New York's compensating use tax even without a single dollar of sales revenue changing hands in the state -- "use" specifically includes distributing promotional materials for free.

Businesses claiming to be nonresidents to avoid use tax

Simply being headquartered outside New York doesn't make you a "nonresident" for use tax purposes if you're actively doing business in the state (here, selling ad space to New York businesses and shipping printed materials there) -- that activity itself makes you a resident with respect to the property used in that business.

Multi-state manufacturers paying tax where materials are purchased

If you already paid sales or use tax to another state on materials that end up used in New York, check whether that state offers a reciprocal credit -- New York's own credit is expressly conditioned on the other state doing the same.

Common questions

Q: Does New York use tax only apply when property is actually sold in the state?
A: No -- "use" is defined broadly to include distributing free promotional materials, so giving away advertising-printed items in New York can trigger use tax even with no sale.

Q: What is the use tax based on here -- the value of the ads, or something else?
A: The tax is based on the cost of the raw paper (from the out-of-state purchase) that's actually converted into the tapes shipped into New York, plus related shipping charges -- not on any advertising revenue or finished-product value.

Q: Can a business get double-taxed if it already paid tax in another state on the same materials?
A: A credit against New York's use tax is available for tax already paid to another state on the same property, but only if that other state provides a reciprocal credit for tax paid to New York.

Q: Does this ruling apply to my out-of-state promotional distribution business?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else.

Citations and references

• Tax Law § 1101(b)(7) (definition of "use," including distribution of promotional materials)
• Tax Law § 1110 (compensating use tax)
• Tax Law § 1118(2) (nonresident use tax exemption and its trade/business exception); § 1118(7) (credit for tax paid to another state)
• 20 NYCRR § 526.15(b) (definition of resident for use tax purposes)

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_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(34)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S951124A

On November 24, 1995, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Cadett Register Tapes Inc., 141 Lanza Avenue,
Garfield, New Jersey 07026.
The issue raised by Petitioner, Cadett Register Tapes Inc., is what the
basis for computing compensating use tax is when it provides free cash register
tapes containing advertising to supermarkets in New York State.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner sells advertising space to New York businesses and places these
ads on cash register tapes.
Petitioner purchases paper by the roll in New
Jersey. The paper is converted from large rolls to register tapes by cutting and
rolling the paper into smaller register size rolls.
The ads are printed by
Petitioner on the cash register tapes. The conversion and printing processes
occur in New Jersey. The tapes are then given free to supermarkets. Some of the
tapes are shipped to supermarkets in New York State. Petitioner delivers its
register tapes to the supermarkets by common carrier. Petitioner does not sell
tangible personal property or services, other than the advertising described
above.
Petitioner notes that it does not sell the tapes to the supermarkets and
asks what the basis for the compensating use tax is.
Applicable Law and Regulations
Section 1101(b)(7) of the Tax Law defines the term "use" as:
The exercise of any right or power over tangible personal property
by the purchaser thereof and includes, but is not limited to, the
receiving, storage or any keeping or retention for any length of
time, withdrawal from storage, any installation, any affixation to
real or personal property, or any consumption of such property.
Without limiting the foregoing, use also shall include the
distribution of only tangible personal property, such as promotional
materials.
Section 1110 of the Tax Law provides in part:
Imposition of compensating use tax. (a) Except to the extent that
property or services have already been or will be subject to the
sales tax under this article, there is hereby imposed on every
person a use tax for the use within this state . . . except as
otherwise exempted under this article, (A) of any tangible personal

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Sales Tax

property purchased at retail, (B) of any tangible personal property
(other than computer software used by the author or other creator)
manufactured, processed or assembled by the user, (i) if items of
the same kind of tangible personal property are offered for sale by
him in the regular course of business or (ii) if items are used as
such . . . if items of the same kind are not offered for sale as
such . . . in the regular course of business. . . .
(b) For purposes of clause (A) of subdivision (a) of this section,
the tax shall be at the rate of four percent of the consideration
given or contracted to be given for such property, or for the use of
such property, including any charges for shipping or delivery as
described in paragraph three of subdivision (b) of section eleven
hundred one, but excluding any credit for tangible personal property
accepted in part payment and intended for resale.
*

*

*

(d) For purposes of subclause (ii) of clause (B) of subdivision (a)
of this section, the tax shall be at the rate of four percent of the
consideration given or contracted to be given for the tangible
personal property manufactured, processed or assembled into the
tangible personal property the use of which is subject to tax,
including any charges for shipping or delivery as described in
paragraph three of subdivision (b) of section eleven hundred one.
Section 1118 of the Tax Law provides in part:
Exemptions from use tax. The following uses of property shall not
be subject to the compensating use tax imposed under this article:
*

*

*

(2) In respect to the use of property purchased by the user while a
nonresident of this state, except in the case of tangible personal
property which the user, in the performance of a contract,
incorporates into real property located in the state.
A person
while engaged in any manner in carrying on in this state any
employment, trade, business or profession, shall not be deemed a
nonresident with respect to the use in this state of property in
such employment, trade, business or profession. (Emphasis added)
Section 526.15(b) of the Sales and Use Tax Regulations defines the term
"resident" as:
(1) Any corporation incorporated under the laws of New York, and
any corporation, association, partnership or other entity doing
business in the State or maintaining a place of business in the
State, or operating a hotel, place of amusement or social or
athletic club in the State is a resident.

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Sales Tax

(2) Any person while engaged in any manner in carrying on in this
State any employment, trade, business or profession shall be deemed
a resident with respect to the use in this State of tangible
personal property or services in such employment, trade, business or
profession. (Emphasis added)
Opinion
Since Petitioner does not sell tangible personal property or taxable
services in New York State, Petitioner is not required to register as a vendor.
Petitioner will owe compensating use tax, however, if it uses tangible personal
property in New York State.
The cash register tapes produced by Petitioner are used in New York State
when Petitioner distributes the tapes to supermarkets in New York. See Section
1101(b)(7) of the Tax Law.
By doing business in the State, Petitioner is
considered a resident for use tax purposes with respect to the property it uses
in its business and, therefore, it is liable for the use tax on the cash register
tapes it provides to supermarkets in New York State. See Section 526.15(b) of
the Sales and Use Tax Regulations. The rate of tax to be applied to Petitioner's
cash register tapes is the rate of tax in effect in the community in which
Petitioner delivers them. The use tax is based on the consideration paid by
Petitioner for that portion of the paper purchased in New Jersey which is
converted into cash register tapes for shipment into New York, including any
charges for shipping or delivery of the paper to Petitioner in New Jersey. See
Section 1110(d) of the Tax Law.
Petitioner may claim a credit against the compensating use tax due New York
State for any sales or use tax paid to New Jersey, without any right to a refund
or credit, on Petitioner's purchase or use of the rolls of paper in New Jersey.
This credit is only allowed if New Jersey allows a corresponding credit against
its tax for sales or use tax paid to New York State. See Section 1118(7) of the
Tax Law.

DATED: June 25, 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.