Are the display 'counterbooks' a sewing-pattern maker sells to retailers, and the equipment used to make them, exempt from New York sales tax?

Plain-English summary

Simplicity Pattern Co. makes home sewing patterns -- a tissue-paper pattern, printed instructions, and an illustrated envelope, all sold to retail fabric and craft stores. Because a typical store carries roughly 3,500 different pattern designs, Simplicity also produces a "Counterbook": a catalog that lets shoppers browse photos of every available design, find a design number, and then retrieve the actual pattern from a cabinet. Simplicity sells the Counterbooks to its retailers. Before December 1995, Simplicity's own plant printed the Counterbooks in-house; afterward, it outsourced Counterbook printing to a third-party printer while continuing to make the actual pattern products itself. Simplicity asked three questions: (1) are Counterbooks purchased for resale; (2) do production costs shared between the Counterbooks and the pattern products (like photography and artwork) qualify for the manufacturing-equipment exemption; and (3) which of its production costs qualify for that exemption.

The Department's answers were mostly favorable to Simplicity:

• Resale (question 1): Since Simplicity actually sells the Counterbooks to its retail dealers (they're not given away or sold below cost), the Counterbooks purchased from the outside printer qualify for the resale exclusion, and Simplicity's own in-house production before 1995 was likewise "for sale."
• Production equipment (question 2): Because both the Counterbooks and the Pattern Products are sold to retailers, machinery and equipment used directly and predominantly to produce either one qualifies for New York's exemption for production machinery under § 1115(a)(12).
• Cost categories (question 3): Design services and technical-writing services aren't taxable at all -- they're not on the list of enumerated taxable services. Photography, artwork/illustrations, and color separations count as exempt "equipment" when used directly and predominantly to produce tangible personal property for sale. The Department also noted a rate-history wrinkle: before September 1, 1996, installing, repairing, or maintaining production equipment was exempt from the statewide tax but still subject to New York City's local tax (and other local taxes outside the City); since September 1, 1996, those services are exempt from the New York City local tax too, though still taxable under other localities' rates.

What this means for you

Manufacturers who also produce retailer display/catalog materials

If you sell display catalogs, counterbooks, or similar materials to your retail dealers (rather than giving them away or selling them below cost), those sales can qualify for the resale exemption on your purchase from a printer, just like Simplicity's Counterbooks. Giving copies away for free, though, is treated as a retail purchase by you, not a resale.

Printing and publishing-adjacent manufacturers

Equipment used to physically produce items you sell -- whether the core product or an ancillary catalog/display piece -- can qualify for the manufacturing exemption as long as it's used directly and predominantly (over 50% of the time) in production. Photography, artwork, and color-separation work used in production count as exempt equipment too, a useful reminder for any producer combining creative/graphic-arts inputs with physical manufacturing.

Accountants and tax professionals

Watch the local-tax timing wrinkle on production-equipment installation and repair services: statewide-exempt since before this ruling, but New York City's local tax on those services wasn't exempted until September 1, 1996 (Tax Law § 1105-B). For periods spanning that date, review invoices to confirm the correct local tax treatment applied.

Common questions

Q: Can a manufacturer buy its retailer catalogs tax-free for resale?
A: Yes, if the catalogs are genuinely sold (not given away, and not sold at a token price that doesn't reflect true cost) to the retailers who receive them.

Q: Does the manufacturing exemption cover equipment used to produce a catalog as well as the core product?
A: Yes, as long as both the catalog and the core product are themselves sold, and the equipment is used directly and predominantly in producing them.

Q: Are design and technical-writing services taxable?
A: No. They aren't among New York's enumerated taxable services, so charges for design work and technical writing are not subject to sales tax regardless of the production-exemption analysis.

Q: Can another manufacturer with a similar catalog/counterbook rely on this ruling?
A: Not automatically. This advisory opinion binds the Department only as to the petitioner and the specific facts (genuine resale pricing, dual-use equipment) described.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(4) (definition of retail sale)
• Tax Law § 1115(a)(12) (exemption for production machinery and equipment)
• Tax Law § 1105(c) (tax on enumerated services; design/technical-writing not enumerated)
• Tax Law § 1105-B (local tax treatment of production-equipment installation/repair services)
• 20 NYCRR § 526.6(c) (resale exclusion)
• 20 NYCRR § 528.13(c) (directly and predominantly)
• NYS Dept. of Taxation and Finance 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_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_75s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(75)S
Sales Tax
November 5, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980211A

On, February 11, 1998, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Simplicity Pattern Co., Inc., 2 Park Avenue,
12th Floor, New York, New York 10016.
The issues raised by Petitioner, Simplicity Pattern Co., Inc., are:
1.

Whether Petitioner's Counterbooks
produced for sale, by Petitioner.

are

purchased

for

resale,

or

2.

Whether the production costs related to pattern products which are
also utilized for pages in the Counterbooks represent costs for items
used directly and predominantly in the production of tangible
personal property for sale.

3.

What categories of Petitioner's production costs qualify for the
production exemption?

Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner produces home sewing patterns.
A sewing pattern enables a
consumer to construct a garment by placing the pattern on fabric to properly guide
the cutting of the fabric pieces and then, using the instructions provided, to sew
the appropriate pieces together.
The three key components of a pattern are the printed tissue paper
containing the outline of the garment's shape (the "Pattern"), the written
instructions printed on newsprint quality paper (the "Instructions") and an
envelope (the "Envelope") that either includes an artist’s illustration or photo
of the finished product and a description of fabric and notion materials required
to complete the sewing project.
The consumer will refer to the artist's
illustration or photo on the Envelope as he or she is sewing the garment. The
Pattern and the Instructions are packaged in the Envelope.
The Pattern,
Instructions and Envelope constitute the main product that Petitioner offers for
sale to retailers (the "Pattern Product").
Consumers purchase the Pattern Products at various retail outlets such as
specialty fabric chains, discount stores and chains and independent fabric and
craft stores.
At the retail location, the Pattern Products are contained in
cabinets. A typical assortment of Pattern Products will include approximately
3,500 different items. Due to the large number of Pattern Products offered, the
only effective way for a consumer to purchase a Pattern Product is with the aid
of a counterbook (the "Counterbook"), which the retailer purchases from
Petitioner. The Counterbook shows one or more pictures of all pattern designs
available and is organized into sections based on the merchandising
category/theme.
A consumer will page through the Counterbook and, after viewing either the
photo or artist's illustration of a particular Pattern Product, will decide which
pattern he or she wishes to purchase. Pattern Products are housed in cabinets in
order of design number.
Once the design number has been obtained from the

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Counterbook, a particular pattern can be located in the pattern cabinet for
purchase either by going directly to the cabinet where the Pattern Products are
housed or by asking a sales clerk to obtain the Pattern Product from a secured
area. The only way for a consumer to relate an actual garment pattern (based on
the photo or artist's illustration of the finished garment) to the location of the
Pattern Product in the cabinet is via the use of a design number, which is
obtained from the Counterbook.
In producing the Pattern Products, Petitioner must purchase services from
the following categories of individuals: 1. designers who come up with the ideas
for a particular garment for a particular season or theme; 2. artists who do
artwork depicting a person wearing a particular garment which will appear on the
Envelope; 3. photographers who take pictures of persons wearing the garments which
photos will appear on the Envelope; 4. illustrators who draw the outlines of human
figures that appear on the Instructions; and 5. technical writers who write the
instructions about how to construct the particular garment, which appears on the
Instructions. (Services enumerated 1.-5. are collectively referred to as "Pattern
Product Costs") The same artwork or photography that appears on an Envelope will
also appear in the Counterbook. For example, the illustration or artwork that
appears on the Envelopes is also shown in the Counterbook. Each Counterbook page
is a "by-product" of the Envelope component of the Pattern Product.
Petitioner also produces a great number of specialty booklets and books (the
"Specialty Products"), such as the "Egg Instruction" booklet, "Simply the Best
Book of Sewing," "Simply the Best Book of Home Decorating," and the "Lampshade"
booklet. Produced for sale to retailers, the Specialty Products are designed to
appeal to consumers who do arts and crafts as hobbies in their homes and who sew
or do home decorating. In producing the Specialty Products, Petitioner must
purchase services from the following categories of individuals: 1. crafts people
who come up with ideas for a Specialty Product; 2. writers who write and edit the
text contained in the Specialty Products; 3. artists who draw illustrations and
artwork that appear in the Specialty Products; 4. technical writers who write the
instructions to make the particular craft that is the subject of the Specialty
Product; 5. photographers who take pictures that are reproduced in the Specialty
Product; and 6. color separators and printers who print the Specialty Products
(Services enumerated 1.-6. are collectively referred to as the "Specialty Product
Costs").
The Specialty Product Costs are totally separate from any costs
associated with the production of the Counterbooks and are produced by outside
publishers.
Petitioner did and does the early production of the Pattern Products in New
York City through and including the development of the Envelope, the Instructions
and the Pattern. Petitioner then encodes the production instructions for each of
these components on disks and sends the disks to its production plant in Niles,
Michigan (the "Niles Plant"). The Niles Plant then mass produces the Pattern
Products. During the period through December, 1995, the Niles Plant also produced
the Counterbooks. After December, 1995, Petitioner outsourced the production of
the Counterbooks to an unrelated third party printer. The Niles Plant continued
to produce the Pattern Products.
Petitioner sold the Counterbooks to its retailers for between $13.50 and
$16 per book. Petitioner indicates that prior to outsourcing the production of
the Counterbooks, its cost of producing a Counterbook was approximately $9.50 per
book. Its costs consisted of variable production costs and variable overhead.
The costs excluded allocated fixed overhead because most of the fixed costs were
not directly related to the Counterbook. The fixed overhead allocation consists
of costs of plant service and administrative departments such as Maintenance,
Industrial Engineering, Warehousing, Scheduling, Human Resources, Plant Accounting

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and includes such expenses in these departments as salaries, fringes, supplies,
parts, general insurances, real estate taxes, utilities, depreciation, and
retirees benefits. The Niles Plant continues to incur a significant amount of
these expenses even though the production of the Counterbooks was outsourced in
December, 1995.
After outsourcing in 1995, Petitioner's costs in paying the third party
printer were approximately $12.50 per Counterbook, which included a profit margin
for the printer and still left the cost to Petitioner at less than the selling
costs of the Counterbook.
Applicable Law & Regulations
Section 1101(b)(4) of the Tax Law, in part, defines 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 . . .
Section 1115(a)(12) of the Tax Law, in part, provides an exemption for:
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 . . . .
Section 526.6(c) of the Sales and Use Tax Regulations further explains the
resale exclusion.

(c) Resale exclusion. (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.
*

*

*

(4) (i) Tangible personal property which is purchased and given
away without charge, for promotion or advertising purposes is not
purchased for resale. It is a retail sale to the purchaser thereof,
and is not a sale to the recipient of the property.
(ii) Tangible personal property which is purchased for
promotional or advertising purposes and sold for a minimal charge
which does not reflect its true costs, or which is not ordinarily
sold by that person in the operation of his business, is a retail
sale to the purchaser thereof, and not a sale to the recipient of the
property.

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Section 528.13(c) of the Sales and Use Tax Regulations provides, in part:

(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
Issues
1) Section 526.6(c)(4)(ii) of the Sales and Use Tax Regulations indicates
that tangible personal property purchased for promotional or advertising purposes
and sold for a minimal charge which does not reflect its true costs does not
qualify for the resale provision. That is not the case here. The Counterbooks
qualify for the resale exclusion under Section 526.6(c) of the Sales and Use Tax
Regulations when purchased from outside printers. Prior to December 1995, they
were produced for sale when printed in-house by Petitioner. It should be noted
that Petitioner is making retail sales of the Counterbooks to its dealers.
2) Since the Counterbooks, as well as Petitioner's Pattern Products, are sold
by Petitioner to retail outlets, machinery and equipment that are used directly
and predominantly to produce the Pattern Products and the Counterbooks are exempt
from sales and use tax as provided under Section 1115(a)(12) of the Tax Law.
3) Design services and the services of technical writers are not among the
services subject to tax under Section 1105(c) of the Tax Law.
Photographs,
artwork and illustrations and color separations qualify as equipment for purposes
of section 1115 (a) (12) of the Tax Law when used directly and predominantly to
produce tangible personal property for sale. See 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. Before September 1, 1996, the services of
installing, repairing, maintaining or servicing production equipment were exempt
from Statewide sales tax but subject to the local New York City sales tax and
local sales taxes outside of New York City.
Since September 1, 1996, these
services performed on production equipment have been exempt from local New York

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City sales tax, as well as the Statewide tax, but continue to be subject to local
sales taxes outside New York City. See Section 1105-B of the Tax Law.

DATED:

November 5, 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.