Does an out-of-state manufacturer owe New York use tax on free promotional products it ships to New York customers, and on what value?

Plain-English summary

Sara Lee - Hanes Hosiery manufactures ladies' hosiery in plants outside New York and sells wholesale to retailers who resell it in New York. As a promotion, it runs national magazine ads offering a free pair of hose to anyone who mails in a coupon; the free hose are shipped by common carrier from a Minnesota fulfillment house directly to the responding New York residents. (Hanes also operates retail stores in New York.) It asked whether these free promotional items are subject to use tax under § 1110, and if so, on what value.

The Department's answer turned on a 1989 change in the law.

• Before September 1, 1989 — exempt. Promotional materials mailed or shipped by common carrier from outside New York directly to New York customers were exempt from use tax (TSB-M-79(9)S).
• Effective September 1, 1989 — taxable. Two amendments changed the result: § 1101(b)(12) was added to define "promotional materials" (advertising literature, free gifts, and similar items), and § 1101(b)(7) was amended so that "use" now includes the distribution of promotional materials. So Hanes's promotional hose delivered into New York after that date are subject to compensating use tax under § 1110.
• Value — the manufacturer's normal selling price. Because Hanes manufactured the property it gives away, the basis under § 531.3(b) is the price at which it normally sells that hosiery to others (per its price list, catalog, or sales records; otherwise the average of prices charged customers).
• Rate — where delivered. Under the destination rule (§ 525.2), the applicable rate is the rate in the community where the hose are delivered.

What this means for you

Free promotional goods shipped into New York are a taxable "use"

Since the 1989 amendments, giving something away doesn't avoid tax. Distributing promotional materials — free samples, gifts, advertising items — to recipients in New York is itself a "use" that triggers compensating use tax, even when the goods ship from out of state by common carrier directly to the consumer. The old out-of-state-direct-shipment exemption for promotional materials is gone.

If you made the item, you're taxed on what you'd sell it for

A manufacturer that consumes its own product as a giveaway is taxed not on its cost to produce, but on the price at which it normally sells that product to others. So a maker of a low-cost item that wholesales it for more pays use tax on the higher wholesale figure. Keep your price lists and sales records — they set the base.

The local rate follows the recipient

Because the tax is on the in-state distribution, the rate is the one in effect where each recipient is located. A national promotion mailing into many New York localities should apply each locality's rate to the items delivered there.

Common questions

Q: Do I owe New York tax on free samples I ship to New York consumers from out of state?
A: Yes, since September 1, 1989. Distributing promotional materials in New York is a taxable "use" subject to compensating use tax under § 1110.

Q: Weren't out-of-state direct shipments of promotional materials exempt?
A: They were before September 1, 1989 (TSB-M-79(9)S). The 1989 amendments to § 1101(b)(7) and (b)(12) ended that exemption.

Q: What value do I pay tax on if I manufactured the giveaway?
A: Your normal selling price for that product — the price at which you sell it to others per your price list, catalog, or sales records.

Q: Which tax rate applies?
A: The rate in the community where the promotional items are delivered.

Citations and references

Statutes and regulations:

• Tax Law § 1110 — compensating use tax
• Tax Law § 1101(b)(7) — definition of "use," including the distribution of promotional materials (amended eff. Sept. 1, 1989)
• Tax Law § 1101(b)(12) — definition of "promotional materials" (added eff. Sept. 1, 1989)
• 20 NYCRR § 531.3(b) — basis of use tax on property manufactured, processed, or assembled by the user (normal selling price)
• 20 NYCRR § 525.2 — destination tax; rate where delivered

Guidance cited:

• TSB-M-79(9)S — prior treatment exempting out-of-state direct shipments of promotional materials (superseded by the 1989 amendments)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (23)S
Sales Tax
April 16, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S891120B

On November 20, 1989 a Petition for Advisory Opinion was received from Sara Lee - Hanes
Hosiery, 5660 University Parkway, Winston-Salem, N.C. 27105.
The issue raised by Petitioner, Sara Lee - Hanes Hosiery, is whether promotional items sent
by Petitioner from out of state directly to its New York customers by common carrier are subject to
the use tax imposed under Section 1110 of the Tax Law; and if so, what is the basis upon which the
tax is imposed.
Petitioner manufactures ladies hosiery in plants outside New York. Wholesale sales are made
to retailers for resale in New York. As an inducement to prospective customers, Petitioner places ads
in national magazines offering a free pair of hose if the coupon is sent to a fulfillment house address
in Minnesota. The free hose are mailed from Minnesota by common carrier to the New York
residents responding to the ad. Petitioner also operates retail stores in New York State.
Prior to September 1, 1989 promotional materials which were mailed or shipped by common
carrier from outside New York State directly to customers within New York State were exempt from
the use tax. See: TSB-M-79(9)S.
Effective September 1, 1989, two amendments to the Tax Law impacted upon the status of
promotional materials which were sent from out of state directly to the customers of a vendor located
in New York State.
First, a new paragraph (12) was added to Section 1101(b) of the Sales Tax Law which
defined promotional materials as any advertising literature, applications, order forms and return
envelopes related to such advertising literature, free gifts, complimentary maps or other items given
to travel club members, annual reports, promotional displays, cheshire labels and similar items of
tangible personal property used for promotional purposes. Promotional materials include property
that has been personalized through the use of the recipient's name or other information uniquely
related to such person but, does not include invoices, statements and the like.
Second, an amendment to the definition of the term "use" contained in Section 1101(b)(7)
of the Tax Law provided that in addition to the existing criteria that constituted use in this state,
"use" now included the distribution of tangible personal property, such as promotional materials.
Therefore, subsequent to September 1, 1989 Petitioner's promotional items which it delivers
into New York State are subject to the use tax imposed under Section 1110 of the Tax Law.

TP-9 (9/88)

-2­
TSB-A-90 (23)S
Sales Tax
April 16, 1990

Section 531.1 of the Sales and Use Tax Regulations provides in part: (a) Imposition. The
compensating use tax is imposed on the use within the State of tangible personal property and certain
services, except to the extent they have been or will be subject to sales tax.
*
(b)

*

*

Taxable uses. The uses enumerated herein are subject to tax.
(1)

Tangible personal property purchased at retail.

(2)
Tangible personal property manufactured, processed or assembled by the user
if items of the same kind are offered for sale by him in the regular course of business.
(3)
Information services which would be subject to tax under subdivision (1) of
section 1105(c) of the Tax Law.
Section 531.3(b) of the Sales and Use Tax Regulations provides in part:
(1)
A compensating use tax is imposed on the use of any tangible personal
property which was manufactured, processed or assembled by the user, if items of the same
kind of tangible personal property are offered for sale by him in the regular course of
business.
(i)
Items of the same kind mean that items belong to an identifiable class,
but need not be identical.
*

*

*

(3)
Where the user sells items of the same kind to other persons in the regular
course of business, the basis of tax on the use of tangible personal property which is
manufactured, process or assembled by the user is the price at which such items are sold as
evidenced by a price list, catalog price or record of sales. In the absence of a catalog price or
price list, the average of the prices charged various customers will be deemed the price which
the user would sell such item to the persons during the regular course of business.
In accordance with said section of the Regulations, since Petitioner manufactured the tangible
personal property given away, its basis upon which the tax is calculated, is the price at which it
normally sells the hosiery to others.

-3­
TSB-A-90 (23)S
Sales Tax
April 16, 1990

Pursuant to Section 525.2 of the Sales and Use Tax Regulations the rate of tax to be applied
to Petitioners' promotional items is the rate of tax in effect in the community in which they are
delivered, since the point of delivery or point at which possession is transferred by the vendor to the
customer controls both the tax incident and the tax rate.

DATED: April 16, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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