Are the printing services and production equipment a stamp retailer buys to create 'first day cover' envelopes for resale exempt from sales tax?

Plain-English summary

Mystic Stamp Company sells postage stamps by mail order, including a specialty product called a "first day cover": a postage stamp affixed to a specially designed envelope with printed artwork and text, sold at a premium over the plain stamp. Mystic designs the envelope and hires an outside printer to produce it, supplying the printer with film negatives, color separations, and artwork. Mystic asked whether the printing services and the equipment used to make these envelopes are taxable.

The Department said the printing services Mystic buys are exempt from sales tax, because Mystic is purchasing them in the course of producing a product it will resell to its own customers, a purchase for resale, so long as Mystic gives the printer a properly completed resale certificate (Form ST-120). Mystic will then need to collect sales tax when it sells the finished first day covers to its customers, except for deliveries outside New York. Separately, the film negatives, color separations, and artwork used directly in producing the envelopes qualify for the manufacturing/production exemption under Section 1115(a)(12), as long as more than half of their use is in the actual production phase. The Department also noted that a right to reproduce an original photograph, painting, or illustration, paid as a royalty, isn't itself a taxable sale, and merely holding the artwork temporarily to make the reproduction doesn't count as a taxable transfer of possession.

What this means for you

Retailers and mail-order sellers who outsource printing or manufacturing for resale

Printing (or other production) services you buy to create a product you'll resell to customers are exempt from sales tax as purchases for resale, as long as you give your vendor a properly completed resale certificate -- but you must then collect sales tax when you sell the finished product, unless it ships out of state.

Businesses buying film, artwork, or prepress equipment for a printed product

Equipment and materials used directly in producing your product for sale, such as film negatives, color separations, and artwork, can qualify for the manufacturing exemption if more than half their use is in production -- confirm your actual usage split before assuming the exemption applies.

Accountants and tax professionals working with printers and their customers

This ruling cross-references the Department's Publication 842 (its dedicated printer's guidance) and applies both the resale-purchase rule and the production-equipment "directly and predominantly" test to a specific specialty retail product, plus a useful footnote on royalty-based reproduction rights not being taxable sales.

Common questions

Q: Do I owe sales tax when I hire a printer to make a product I'm going to resell?
A: No, as long as you give the printer a valid resale certificate -- the purchase is exempt as a purchase for resale, but you'll need to collect sales tax when you sell the finished product to your own customers.

Q: Are film negatives, color separations, and artwork used to make a printed product taxable?
A: They can qualify for the manufacturing exemption if more than 50% of their use is directly in producing the product for sale.

Q: Is paying a royalty for the right to reproduce a photograph or illustration a taxable sale?
A: No. A royalty payment for reproduction rights under artistic or literary property law isn't a taxable sale, and briefly holding the artwork just to make the reproduction isn't a taxable transfer of possession either.

Q: Can another mail-order retailer rely on this ruling?
A: No. It's an Advisory Opinion binding the Department only as to Mystic Stamp Company and the specific product and production process it described.

Citations and references

• Tax Law § 1101(b)(4) (retail sale)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(2) (printing services performed on customer-furnished property)
• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• 20 NYCRR § 526.6(c) (resale purchases)
• 20 NYCRR § 526.7(f) (reproduction rights)
• 20 NYCRR § 528.13(c) (directly and predominantly test)
• Publication 842, New York State and Local Sales Tax Information for Printers (12/93)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_49s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(49)S
Sales Tax
July 31, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S980224A

On February 24, 1998, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Mystic Stamp Company, Inc., 9700 Mill Street,
Camden, New York, 13316.
The issue raised by Petitioner, Mystic Stamp Company, Inc., is whether
printing services and equipment purchased for the production of envelopes for
sale are subject to sales or compensating use tax.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner is engaged in the business of direct marketing of postage stamps
to customers through a mail order operation located in Camden, New York. One
product sold by Petitioner is known in the trade as a “first day cover”. These
products are comprised of a postage stamp affixed to an envelope, which includes
some descriptive text and some artwork, printed by an outside vendor. Petitioner
designs the envelope. Petitioner contracts all the printing services for the
product as well as the film negatives, color separations and artwork used in the
production of this product. All the services and supplies, including paper,
necessary for the production of the first day covers are supplied to the printer
and/or prep house. This product is then sold to customers.
Petitioner also offers for sale a stamp identical to the one which is
affixed to the product referred to above, at a much lower price than the first
day cover. There is a premium price associated with the sale of the first day
cover.
Applicable Law and Regulations
Section 1101(b)(4) of the Tax Law defines the following:
Retail sale. (i) 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 ...
retail

Section 1105(a) of the Tax Law imposes a tax on the receipts from every
sale of tangible personal property, except as otherwise provided.

Section 1105(c) of the Tax Law imposes a tax on the receipts from every
sale, except for resale, of the following services:
*

*

*

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TSB-A-98(49)S
Sales Tax
July 31, 1998

(2) Producing, fabricating, processing, printing or imprinting
tangible personal property, performed for a person who directly or
indirectly furnishes the tangible personal property, not purchased
by him for resale, upon which services are performed.
Section 1115(a) of the Tax Law provides:
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...
Section 526.6(c) of the Sales and Use Tax Regulations provides:
(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 526.7 of the Sales and Use Tax Regulations provides, in
part:
(f) Reproduction rights. (1) The granting of a right to reproduce
an
original
painting,
illustration,
photograph,
sculpture,
manuscript or other similar work is not a license to use or a sale,
and is not taxable, where the payment made for such right is in the
nature of a royalty to the grantor under the laws relating to
artistic and literary property.
(2) Mere temporary possession or custody for the purpose of making
the reproduction is not deemed to be a transfer of possession which
would convert the reproduction right into a license to use.

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TSB-A-98(49)S
Sales Tax
July 31, 1998

Section 528.13(c) of the Sales and Use Tax Regulations provides, in part:
(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
being 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 and equipment is used predominantly in production, if
over 50 percent of its use is directly in the production phase of a
process.
Opinion
Petitioner purchases printing services to produce the envelopes known as
“first day covers” for resale to its customers. Publication 842, New York State
and Local Sales Tax Information for Printers, (12/93) specifically addresses the
taxability of tangible personal property and services commonly sold by printers.
Among the services listed in Publication 842 as subject to sales tax is printing
of envelopes, drawings, and office supplies, unless purchased for resale. Since
Petitioner is purchasing the printing services in the course of its business
operations to produce the first day covers for sale, these printing services are
exempt from sales tax under Section 1105(c)(2) of the Tax Law.
To avail itself
of the exclusion from sales tax as a sale for resale, Petitioner must supply the
vendor with a properly completed resale certificate (Form ST-120). Petitioner
would collect applicable sales tax upon sale of the first day covers to its
customers, unless they are delivered to a destination outside of New York State.
Publication 842 classifies film negatives, color separations and artwork
used by printers as equipment used directly in production. Section 1115(a)(12)
of the Tax Law exempts from sales tax purchases of property used directly and
predominantly in production of tangible personal property for sale. Since the
film negatives, color separations and artwork are used directly in the production
of Petitioner’s first day covers for sale, if more than 50% of this equipment’s
use is in the production phase, then the purchase of this equipment will qualify
for exemption from sales and compensating use tax.

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TSB-A-98(49)S
Sales Tax
July 31, 1998

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
purchase of this right is 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. 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: July 31, 1998

NOTE:

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

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