Which mail-room services are taxable, and does the mailer owe tax on the folding and postage machines it buys?

Plain-English summary

Capital District Mailing Co., Inc. provides mail-room services — either as an on-site mail room at a customer's premises or off-site. Customers supply everything to be mailed (envelopes, inserts, imprinted mailing labels) and own the mailing lists; the inserts are mostly invoices, statements and payment notices, sometimes advertising. Capital District's work is limited to collating, folding, inserting, sealing, addressing (pasting on labels), affixing postage by metering, and posting, charged per piece. For on-site work it buys mail-room machinery (folding machines, inserters, addressers, labelers, postage meters) to lease to the customer with an option to buy. It asked how sales tax applies to the services and the machinery.

The services — addressing is taxable, the rest are exempt if separately stated.

• The governing policy. For mailers, the Department follows Article 78 of the New York City rules (Tax Bulletin 1965-3): when performed on the customer's property, folding, sealing, affixing stamps, metering, mailing and postage are not taxable if separately stated — but addressing envelopes (manually or mechanically) is taxable whether or not separately charged.
• Result. Affixing address labels is taxable, at the statewide and local rate where the actual mailing occurs. Collating, folding, inserting, sealing and posting are not taxable if segregated from the taxable amount on the bill; they may be combined under the label "non-taxable mailing" (Form ST-152).

The machinery — not exempt, and lease/purchase is taxable.

• No production exemption. Section 1115(a)(12) exempts only machinery used directly and predominantly in the production phase of manufacturing (20 NYCRR 528.13). Mailing machinery, parts, tools and supplies are not production equipment, so Capital District must pay sales or use tax on folders, inserters, labelers, postage meters and similar devices it buys for its own use.
• Leasing to customers is a taxable sale. A "sale" includes a rental, lease or license (§ 1101(b)(5); 20 NYCRR 526.7(c)). So Capital District must collect tax on its charges to customers for the lease of the machines and, when the purchase option is exercised, on that consideration too. Because it is leasing/reselling the machines, its own purchases of them are purchases for resale (§ 1101(b)(4)) and are tax-free if it gives its supplier a Resale Certificate (Form ST-120).
• Exempt-organization customers. Sales and rentals made directly to a § 1116(a) exempt organization are exempt if the organization gives Capital District an Exempt Organization Certificate (Form ST-119.1).

The Department's separate 1986 mailing opinion, TSB-A-86(15)S (George Silver), later cited this Capital District opinion for the rule that segregated mailing services are exempt.

What this means for you

Split your mailing bill: addressing is the taxable line. New York taxes the addressing step but not folding, inserting, sealing, collating or posting — provided you state those separately (you can group them as "non-taxable mailing"). Bundle them with addressing and you risk taxing the whole charge.

Your mail-room machines aren't production equipment. Folders, inserters, labelers and postage meters don't get the manufacturing exemption. Pay tax on the ones you use yourself.

Leasing machines flips them to resale. If you lease equipment to a customer (even with a buyout option), collect tax on the lease and the buyout — and buy those machines tax-free for resale with an ST-120. You can't have it both ways: machines you consume are taxable to you; machines you lease out are resale inventory.

Exempt customers need the certificate. Direct sales and rentals to a qualifying exempt organization are tax-free only with a completed ST-119.1.

Common questions

Q: Which of my mailing services are taxable?
A: Addressing (affixing labels) is taxable whether or not separately charged. Collating, folding, inserting, sealing and posting are not taxable if you state them separately on the bill.

Q: Can I group the exempt services together?
A: Yes. The non-taxable services may be combined in a single amount labeled "non-taxable mailing," as long as they are segregated from the taxable addressing charge.

Q: Do I owe tax on the folding machines and postage meters I buy?
A: Yes, on machines you buy for your own use — they are not exempt production equipment. Machines you buy to lease to customers are purchased for resale and are tax-free with an ST-120.

Q: A customer is a nonprofit. Do I charge tax on the equipment lease?
A: Not if it is a § 1116(a) exempt organization buying or renting directly from you and it gives you a completed Exempt Organization Certificate (Form ST-119.1).

Citations and references

Statute:

• Tax Law § 1105(c)(2) — taxes processing, printing or imprinting property the customer furnishes
• Tax Law § 1115(a)(12) — production machinery exemption; does not reach mailing equipment
• Tax Law § 1101(b)(5) — "sale" includes a rental, lease or license
• Tax Law § 1101(b)(4) — purchases for resale

Regulation and guidance:

• 20 NYCRR 526.7(c) — rental/lease/license; a lease with a purchase option is taxed on the option consideration when exercised
• 20 NYCRR 528.13 — production exemption applies only to the production phase of manufacturing
• New York State Tax Bulletin No. 1965-3 — addressing is taxable; folding, sealing, metering, mailing and postage are exempt if separately stated
• Form ST-152 — Collecting and Reporting Instructions for Printers and Mailers

Forms:

• Form ST-120 (Resale Certificate) — supports tax-free purchase of machines bought to lease to customers
• Form ST-119.1 (Exempt Organization Certificate) — supports exemption on direct sales/rentals to exempt organizations

Related opinion:

• TSB-A-86(15)S (George Silver) — a later mailing opinion that cited this Capital District opinion on segregated mailing services

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_58s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(58)S
Sales Tax
November 14, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S850919A

On September 19, 1985, a Petition for Advisory Opinion was received from Capital District
Mailing Co., Inc., 1462 Erie Boulevard, Schenectady, New York 12305.
The issue raised is whether services rendered by Petitioner as a mailing room service
business, and the machinery purchased for performing these operations are subject to sales tax.
Petitioner is engaged in the business of providing services for other businesses, either as an
on-site mail room or an off-site mail room.
Petitioner's customers provide all materials to be mailed, usually envelopes, inserts and the
imprinted mailing labels. The customers also purchase and maintain the mailing lists. Inserts
comprise primarily invoices, statements and payment notices and, less frequently, advertising
brochures and catalogs. Petitioner's services are limited to collating, folding, inserting, sealing,
addressing by pasting on mailing labels, affixing postage by metering, and posting. Charges for these
services are based on the number of pieces inserted in the envelopes. Petitioner does not provide
fulfillment services.
Petitioner will establish and operate a mail room at the premises of a customer who requests
on-site mailing services. In that event Petitioner will purchase the necessary mail room machinery,
i.e., folding machines, inserters, addressers, labelers and postage meters for lease to the customer
with an option to buy, if Petitioner's services should terminate.
Section 1105(c) of the Tax Law imposes a tax on the receipts from every sale, except for
resale, of certain enumerated services including: (2). . . "processing, printing or imprinting tangible
personal property, performed for a person who . . . furnishes the tangible personal property, not
purchased by him for resale, upon which such services are performed."
With regard to services performed by mailers the Department of Taxation and Finance
announced in New York State Tax Bulletin No. 1965-3 its election to follow the provisions of
Article 78 of the New York City Rules and Regulations for City sales and compensating use taxes,
which state in part that "when performed upon the property of an ultimate customer, the receipts
from the services of folding written or printer matter for insertion into envelopes, sealing, affixing
stamps, metering and mailing, and the cost of postage, are not subject to the tax if the charges
therefor are separately stated on any evidence of sale rendered to the customer. Receipts from
addressing envelopes, manually or mechanically are subject to the tax whether or not a separate
charge is made therefor."

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(58)S
Sales Tax
November 14, 1985

Accordingly, Petitioner's service of affixing address labels to envelopes is subject to the
statewide and appropriate local sales tax in effect at the point from which the actual mailing service
occurs. Charges for collating, folding, inserting, sealing and posting are not taxable, if segregated
from the taxable amount on the customer's bill. The exempt services may be combined in a single
amount under the designation "non-taxable mailing". (See: Department of Taxation and Finance,
Collecting and Reporting Instructions for Printers and Mailers, Form ST-152 (5/71) and supplement
(5/77)).
Section 1105(a) of the Sales Tax Law imposes a tax on: "The receipts from every retail sale
of tangible personal property. . .".
Section 1115(a)(12) of the Tax Law exempts from tax: "Machinery or equipment for use or
consumption directly and predominantly in the production of tangible personal property. . . for sale,
by manufacturing, processing. . .
Regulations Section 528.13 states that this exemption applies only to machinery and
equipment used directly and predominantly in the production phase of a manufacturing operation.
(NYCRR 528.13[b][2]).
Therefore, machinery and equipment used for mailing services, and parts, tools and supplies
used in connection with its operation, are not exempt. Petitioner is required to pay the applicable
sales or use tax on purchases, for its own use, of folding machines, inserters, labelers, postage meters
and similar devices.
Section 1101(b)(5) of the Sales Tax Law defines a sale as: "Any transfer of title or possession
or both, exchange or barter, rental, lease or license to use or consume, . . . in any manner . . . for a
consideration, . . ."
The pertinent Regulations Section provides as follows: "The terms rental, lease, license to
use refer to all transactions in which there is a transfer of possession of tangible personal property
without a transfer of title to the property. Whether a transaction is a "sale" or a "rental", lease or
license to use" shall be determined in accordance with the provisions of the agreement.
Where a lease with an option to purchase has been entered into, and the option is exercised,
the tax will be payable on the consideration given when the option is exercised, in addition to the
taxes paid or payable on each lease payment." (NYCRR 526.7[c][1],[2]).
In consequence, Petitioner must collect tax on its charges to customers for rental or lease,
including eventual purchase, of mailing machines. Petitioner's purchases of such property are
purchases for resale within the meaning and intent of Section 1101(b)(4) of the Tax Law, and are
therefore not subject to State or local sales tax, provided Petitioner furnishes it supplier a properly
completed Resale Certificate (Form ST-120).

-3­
TSB-A-85(58)S
Sales Tax
November 14, 1985

Where Petitioner's customer is an organization described in Section 1116(a) of the Tax Law
(viz. one of various "exempt" organizations) the receipts from sales and rentals made directly to the
organization would be exempt pursuant to the terms of such statutory exemption provision, if the
customer supplies Petitioner with an Exempt Organization Certificate (Form ST-119.1).

DATED: October 28, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.