Can a keypunch service rent its keypunch machines and buy its keypunch cards without paying sales tax, when the finished cards are delivered to customers?

Plain-English summary

Benjamin Swartz runs an unincorporated keypunch service. He rents keypunch machines and buys keypunch cards, and had been charged sales tax on both. He uses the machines and cards to make keypunched cards that he delivers to customers (occasionally — less than half the time — transferring the recorded information to a computer tape or cassette at a customer's request). He asked whether he really owes tax on the machine rental and the cards.

The Department held he can obtain both tax-free, because he's producing a product he sells.

• He's making tangible personal property for sale. Because Swartz furnishes the cards on which the customer's source data is recorded and delivers them to the customer, a sale of tangible personal property occurs — he isn't just performing a service.
• Machine rental — exempt with Form ST-121. Since he uses the keypunch machines predominantly to produce tangible personal property for sale, he may rent them exempt under the production-machinery exemption § 1115(a)(12) by giving the vendor a properly completed Exempt Use Certificate (Form ST-121).
• Cards — exempt for resale with Form ST-120. Because the keypunch cards are transferred to the customer as part of the finished product, he may buy them exempt for resale by giving the supplier a properly completed Resale Certificate (Form ST-120) — they aren't purchased for his own use, but to be resold as part of what he delivers.

What this means for you

If you deliver a physical product, you may be a manufacturer/reseller, not just a service. A business that hands the customer tangible goods it created — here, punched cards carrying the customer's data — is producing and selling tangible personal property. That opens up the production-machinery exemption on the equipment and the resale exemption on the materials that become the product.

Use the right certificate for each purchase. Equipment used to make the product goes on an Exempt Use Certificate (ST-121); materials that become part of the product you resell go on a Resale Certificate (ST-120). They're different exemptions with different forms — match them correctly or a vendor will (rightly) charge you tax.

Don't keep paying tax a supplier bills by default. Swartz was being charged tax he didn't owe. Vendors charge tax unless you give them a valid certificate. If your purchases feed a product you sell, get the certificates in place rather than absorbing tax you can avoid.

Common questions

Q: I run a keypunch (data-entry) service — is my machine rental taxable?
A: Not if you predominantly use the machines to produce cards (or other tangible property) you sell to customers. You can rent them exempt under § 1115(a)(12) with an Exempt Use Certificate (Form ST-121).

Q: What about the blank cards I buy?
A: You can buy them exempt for resale with a Resale Certificate (Form ST-120), because the cards are transferred to your customer as part of the finished product.

Q: Does it matter that I sometimes put the data on tape instead of cards?
A: The opinion notes that happened less than half the time. The exemptions rest on your predominant activity — producing and delivering the keypunched cards as tangible personal property for sale.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property; § 1101(b)(4) — "retail sale" and the resale exclusion
• Tax Law § 1115(a)(12) — machinery/equipment used directly and predominantly in production
• Exempt Use Certificate (Form ST-121); Resale Certificate (Form ST-120)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_21s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81 (21) S
Sales Tax
September 10, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810522B

On May 22, 1981, a Petition for Advisory Opinion was received from Benjamin Swartz, 56
Hedgerow Lane, Commack, New York 11725.
The issue raised is whether Petitioner must pay sales tax on the rental of keypunch machines
and on the purchase of keypunch cards.
Petitioner operates an unincorporated keypunch service. All sales by Petitioner are taxable,
except for an occasional tax exempt transaction. Petitioner rents keypunch machines and purchases
keypunch cards and is charged sales tax thereon. Petitioner does not believe that sales tax should be
paid on the rental of the keypunch machine or the purchase of the keypunch cards. Both machine and
cards are used to generate taxable sales. The keypunched cards are delivered to the customer. In
some instances (less than 50% of time) Petitioner will transfer information from cards to a computer
tape or cassette at customer's request.
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) of the Tax Law defines a retail sale as ". . .(i) A
sale of tangible personal property to any person for any purpose, other than (A) for resale as such .
. .". An exemption from the tax imposed pursuant to Section 1105(a) is provided with respect to
"Machinery or equipment for use or consumption directly and predominantly in the production of
tangible personal property . . . for sale, by manufacturing, processing . . . . " (Tax Law §1115(a)(12)).
Petitioner predominantly uses the keypunch machines to produce keypunched cards which
are transferred to Petitioner's customers. Since Petitioner furnishes the cards on which the customer's
source data is recorded, a sale of tangible personal property occurs. Accordingly, as Petitioner is
using the keypunch machines to produce tangible personal property for sale, Petitioner may rent the
machines tax exempt, provided a properly completed Exempt Use Certificate (Form ST-121) is
furnished to the vendor.
Since Petitioner transfers the keypunch cards to the customer as part of the finished product,
Petitioner may purchase the cards tax exempt provided a properly completed Resale Certificate
(Form ST-120) is furnished to the supplier.

DATED: August 25, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR