Are a record company's master sound tapes, used to make records and cassettes for sale, exempt production machinery — and does the New York City tax still apply?

Plain-English summary

Polydor, Inc., a major U.S. record company, asked whether its purchases of master sound tapes (useful life over one year) between March 1, 1975 and May 31, 1979 were exempt under § 1115(a)(12). A master sound tape is the source recording from which Polydor makes disc records, cassette tapes and 8-track cartridges: it is played to cut a "lacquer master" (for discs) and to make "duplicating masters" (for tapes).

The Department held the master sound tapes qualified for the production exemption — except against the New York City tax.

• They're used "directly" in production. Section § 1115(a)(12) exempts machinery or equipment (including parts with a useful life over one year) used directly and predominantly in producing tangible personal property for sale by manufacturing. "Directly" means having an active causal relationship in producing the product to be sold (20 NYCRR 528.13(c)). Master sound tapes are played to create the masters from which the finished records and tapes are made, so they have that active causal relationship.
• They're used "predominantly" in production. "Predominantly" means over 50% of the item's use is directly in the production phase (20 NYCRR 528.13(c)(14)). Polydor used the master sound tapes solely to produce records and tapes, so this test is met.
• Exempt from State and non-NYC local taxes. The purchases were therefore exempt from the New York State sales and use taxes, and from local sales/use taxes outside New York City (§ 1210(a)(1)).
• But the New York City tax applied. Because § 1115(a)(12) does not apply to the New York City sales and use taxes (§ 1107), Polydor's purchases of master sound tapes were subject to the New York City taxes.

What this means for you

"Machinery or equipment" can include the tooling that drives production, not just the machines. A master sound tape isn't a classic machine, but because it has an active causal relationship in making the product for sale, it qualified for the § 1115(a)(12) exemption.

The two-part test is "directly" and "predominantly." The item must both act with an active causal relationship in production and be used over 50% of the time directly in the production phase. Using it solely in production easily clears the "predominantly" bar.

The exemption stops at the New York City line. Section 1115(a)(12) exempts the State (and non-NYC local) tax but not the New York City tax — so production purchases in the city still bear the NYC tax.

Common questions

Q: Do master recordings or similar production tooling qualify for the machinery exemption?
A: They can. Here master sound tapes qualified because they had an active causal relationship in producing records and tapes for sale and were used solely (over 50%) in production.

Q: Does the exemption cover the New York City tax?
A: No. Section 1115(a)(12) doesn't reach the NYC tax under § 1107, so those purchases were subject to New York City's taxes.

Q: What about local taxes outside New York City?
A: Those purchases were exempt from non-NYC local taxes as well (§ 1210(a)(1)).

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — State sales tax on retail sales
• Tax Law § 1115(a)(12) — production machinery/equipment exemption (State, not NYC)
• 20 NYCRR 528.13(c) — "directly" means an active causal relationship in production
• 20 NYCRR 528.13(c)(14) — "predominantly" means over 50% of use directly in production
• Tax Law § 1107 — New York City sales tax (exemption does not apply); §§ 1110, 1108 — use taxes
• Tax Law § 1210(a)(1) — non-NYC local production exemption

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_66s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(66)S
Sales Tax
April 6, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810320A

On March 20, 1981, a Petition for Advisory Opinion was received from Polydor, Inc., 450
Park Avenue, New York, New York 10022.
The issue raised is whether purchases made by Petitioner between March 1, 1975 and May
31, 1979, of master sound tapes used to produce phonograph records and cassette and cartridge tapes
which are sold to consumers, fell within the exemption from sales and use taxes provided for by
section 1115(a)(12) of the Tax Law. The master sound tapes in question have a useful life in excess
of one year.
Petitioner is a major United States record company. Its business involves the production and
marketing to consumers of products containing recorded music. Those products are disc phonograph
records, cassette tapes and 8-track cartridge tapes.
Master sound tapes are the source from which all phonograph records and tapes are produced
by Petitioner. A master sound tape is a 2-track, 1/4-inch electromagnetic tape, the length of which
depends upon the number and duration of the musical selections recorded. A master sound tape for
an entire album is commonly wound around an aluminum reel 10-1/2 inches in diameter and stored
in a cardboard box. The music heard by playing Petitioner's records and tapes is originally recorded
on master sound tapes.
Master sound tapes are produced by recording artists, producers andsound engineers, in most
cases through independent production companies. After a master sound tape is completed, it is
furnished to Petitioner, which uses it to produce records and tapes. Master sound tapes are used by
Petitioner solely in the production of records and tapes.
To produce records, a master sound tape is played on a tape deck. The tape deck produces
electrical sound signals from the master sound tape. These electrical signals are amplified and routed
by wire to a lathe. The lathe, in response to the signals produced from the master sound tape, cuts
grooves in a lacquer coated aluminum disc, creating a "lacquer master." Several other intermediate
products are formed from the "lacquer master," resulting in the finished disc phonograph record.
To produce 8-track cartridge and cassette tapes, sound on the master sound tape is also
electronically re-recorded, this time onto "duplicating masters." Those duplicating master tapes are
then played over and over again on a duplicating machine so that several machines can
simultaneously re-record the sound onto cartridge or cassette tapes.

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

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

-2­
TSB-A-81(66)S
Sales Tax
April 6, 1982

Section 1105(a) of the Tax Law imposes a tax of four per cent upon the ". . . receipts from
every retail sale of tangible personal property, except as otherwise provided in this article." Section
1107 of the Tax Law imposes an additional tax of four per cent upon such sales within New York
City. Sections 1110 and 1108 of the Tax Law impose correlative compensating use taxes. Section
1115(a)(12) of the Tax Law provides for an exemption from the State (but not New York City) sales
and compensating use taxes with respect to machinery and equipment (including parts therefor which
have a useful life of more than one year) used or consumed directly and predominantly in the
production of tangible personal property for sale by manufacturing.
In defining the term "directly", the Sales and Use Tax Regulations provide that the machinery
and equipment (including parts therefor which have a useful life of more than one year) must during
the production phase of a process, have an "active causal relationship in the production of the
product to be sold." 20 NYCRR 528.13(c).
The Sales and Use Tax Regulations also define the term "predominantly" as follows:
"Machinery or equipment is used predominantly in production, if over 50% of its use is directly in
the production phase of a process." 20 NYCRR 528.13(c)(14)
Master sound tapes are played on a tape deck in order to produce the electrical signals
necessary to form a "lacquer master" from which phonograph disc records are ultimately produced.
Master sound tapes are also played to produce "duplicating masters" from which cassette tapes and
8-track cartridge tapes are produced. Master sound tapes thus have an active causal relationship in
the production of Petitioner's records and tapes for sale, are used solely for such purpose, and are,
therefore, used directly and predominantly in production, within the meaning of section 1115(a)(12)
of the Tax Law.
Accordingly, Petitioner's purchases of master sound tapes between March 1, 1975 and May
31, 1979 fell within the ambit of section 1115(a)(12) of the Tax Law and were, therefore, exempt
from the New York State sales and use taxes. Petitioner's purchases were also exempt from sales and
use taxes imposed by localities other than New York City. Tax Law, §1210(a)(1). However,
inasmuch as section 1115(a)(12) of the Tax Law is not applicable to the New York City sales and
use taxes imposed under section 1107 of the Tax Law, Petitioner's purchases of master sound tapes
were subject to New York City's sales and use taxes.

DATED: December 9, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau