How does New York's compensating use tax apply to the equipment, supplies, component materials and packaging a rubber printing-plate manufacturer uses?

Plain-English summary

Colby Engraving and Rubber Plate Corp. produces rubber printing plates to customer specifications, copying each plate's design from camera-ready artwork the customer submits. It asked how New York's compensating use tax (the use-tax counterpart to sales tax, under §§ 1110 and 1118(2)) applies to the various items it uses in the business.

The Department sorted Colby's inputs into four exempt buckets and one taxable one:

• Production equipment — exempt (§ 1115(a)(12)). Graphic arts film, magnesium plate and molding board are machinery/equipment used directly and predominantly in production, so their use is exempt.
• Short-lived parts, tools and supplies — § 1105-B phase-out. Emory cloth (a machine part with a useful life of a year or less) and supplies such as fixative developer, Asco red opaque, carbon, developer, webril pads, resistol, lye, pumice, proofing ink and paper, masking tape and grinding powder qualify for the § 1105-B reduced rate: 2% statewide for property first used September 1, 1980–February 28, 1981, and fully exempt from statewide tax for property first used on or after March 1, 1981.
• Component materials — exempt (§ 1118(4)). The uncured rubber that becomes a physical component of the finished plates — and any other items that become actual detectable physical components of the finished product — are exempt as property that is converted into or becomes part of a product produced for sale.
• Packaging — exempt (§ 1115(a)(19)). The corrugated and kraft wrapping paper used to package plates, artwork and proofs for shipment is exempt packaging material transferred to the purchaser.
• Billing invoices — taxable. The invoices Colby uses to bill customers are taxable tangible personal property. Although used in connection with the business, they are not used directly in production (§ 1115(a)(12)), so they are merely administrative supplies.

What this means for you

Sort every input by what it does, not by where it's used. A manufacturer's purchases don't all get the same treatment. Machinery used directly in production is exempt; short-lived parts and supplies ride the § 1105-B phase-out; materials that physically become the product are exempt component parts; and packaging transferred to the customer is exempt. Map each item to the right rule.

"Detectable physical component" is the test for component-part exemption. Materials that end up as an actual, detectable part of the finished product (like the uncured rubber here) are exempt under § 1118(4). Consumable supplies that don't become part of the product fall back to the parts/supplies or general rules.

Administrative items are still taxable. Even in a production shop, things used to run the business rather than make the product — here, billing invoices — are taxable. "Used in connection with" production isn't enough; the exemption requires the item to be used directly in production.

Common questions

Q: Is my production machinery exempt from use tax?
A: Yes, if it's used directly and predominantly in production — here the graphic arts film, magnesium plate and molding board qualified under § 1115(a)(12).

Q: What about consumable supplies and short-lived parts?
A: They ride the § 1105-B phase-out: 2% statewide for property first used September 1, 1980–February 28, 1981, and fully exempt from statewide tax on or after March 1, 1981.

Q: Are the materials that become part of my product exempt?
A: Yes. Property that becomes an actual detectable physical component of the finished product (like the uncured rubber) is exempt under § 1118(4). Packaging transferred to the customer is exempt under § 1115(a)(19). But administrative items like billing invoices are taxable.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1110, § 1118(2) — compensating use tax
• Tax Law § 1115(a)(12) — production machinery/equipment; § 1105-B(c) — reduced rate / phase-out for parts, tools and supplies
• Tax Law § 1118(4) — property converted into or becoming part of a product produced for sale; § 1115(a)(19) — cartons, containers and packaging materials transferred to the purchaser

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_22s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81(22)S
Sales Tax
September 10, 1981

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

PETITION NO. S810319B

On March 19, 1981 a Petition for Advisory Opinion was received from Colby Engraving and
Rubber Plate Corp., 39-44 28th Street, Long Island City, New York 11101.
The issue raised is whether Petitioner's use of certain property utilized in Petitioner's business
is subject to the compensating use tax imposed under Article 28 of the Tax Law.
Petitioner produces rubber printing plates in accordance with customer specifications. The
design of each plate is copied from camera ready artwork submitted by the customer.
The Tax Law imposes a compensating use tax on the use within New York of tangible
personal property purchased by a resident thereof, except to the extent that the property has been or
will be subject to the sales tax imposed under Article 28 of the Tax Law. Tax Law, §§1110, 1118(2).
An exemption from such tax 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, generating, assembling, refining, mining or extracting, . . . 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." Tax Law, §1115(a)(12). This exemption is applicable to
Petitioner's use of graphic arts film, magnesium plate and molding board, which constitute manufac­
turing equipment.
Section 1105-B(c) of the Tax Law provides for reduced tax rates with respect to the use of
parts with a useful life of one year or less, tools and supplies "for use or consumption directly and
predominantly in the production of tangible personal property . . . for sale by manufacturing,
processing." Such rate reduction is applicable, in the present instance, to Petitioner's use of emory
cloth, which constitutes a machine part with a useful life of one year or less, and to the following
items, which constitute supplies:
Fixative Developer
Fixative Carbon for Lights
Asco Red Opaque
Carbon for Arc Lamp
Developer
Webril pads
Resistol

Lye
Pumice
Proofing ink & paper
Masking tape
Grinding powder

Section 1105-B provides for a statewide compensating use tax rate of 2% with respect to property
first used during the period September 1, 1980 through February 28, 1981, and for a full exemption
from statewide tax with respect to such property first used on or after March 1, 1981.
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

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

-2­
TSB-A-81(22)S
Sales Tax
September 10, 1981

Petitioner's use of uncured rubber which becomes a physical component part of the rubber
plates sold to its customers is exempt from compensating use tax pursuant to section 1118(4) of the
Tax Law. That provision exempts ". . . the use of property which is converted into or becomes part
of a product produced for sale by the purchaser." Similarly, Petitioner's use of any other items,
including those classified as "supplies" above, which become actual detectable physical components
of the finished product are also exempt from use tax.
As to Petitioner's use of corrugated paper and kraft wrapping paper which are used to package
plates, artwork and proofs for shipment to the proper designation, such use is exempt from tax
pursuant to Section 1115(a)(19) of the Tax Law, which exempts the use 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."
Petitioner's use of invoices for the billing of its customers is subject to the compensating use
tax because the invoices constitute tangible personal property not described in any exemption
provision of the Tax Law. While they are used in connection with a production process they are not
so used "directly, as required by Section 1115(a)(12) of the Tax Law, thus constituting merely
administrative supply items.

DATED: August 25, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau