May a lessor buy a CAT-scan machine for resale, and are its lease charges exempt under the production exemption?

Plain-English summary

Segal Equipment Associates owns a CAT-scan machine it leases monthly to a corporation that uses the machine to produce diagnostic images, and it was considering buying and leasing out more such equipment. It asked (1) whether it may buy the machine for resale, and (2) whether its lease charges are exempt under the production exemption in Tax Law § 1115(a)(12).

The Department gave a split answer.

• Buying to lease = buying for resale. Because a lease is itself a "sale" under 20 NYCRR § 526.7, a person who exclusively leases the machine to others is buying it for resale under the resale exclusion (20 NYCRR § 526.6(c)) — so Segal owes no sales tax on its own purchase of the machine.
• But the lease charges aren't production-exempt. The § 1115(a)(12) exemption applies to machinery used to produce tangible personal property for sale. Segal's customer uses the CAT-scan machine to provide a diagnostic service, not to make goods for sale, so the lease payments do not qualify for the exemption.
• "For sale" is the key limit. That requirement is unique to the sales-tax exemption and is not in the investment-tax-credit statutes. The Department illustrated this with snow-making: the Tax Commission allowed the investment tax credit (Plattskill Mountain Ski Center) but denied the sales-tax exemption (Shanty Hollow Corp., aff'd 111 AD2d 968) because the snow wasn't produced for sale.
• A pure image-seller would qualify. If instead the customer merely sold photographs and negatives, performing no diagnostic services and issuing no reports, it would be producing tangible personal property for sale — and its lease payments to Segal would then qualify for exemption.

What this means for you

Buying equipment only to lease it out is a purchase for resale

If you acquire equipment exclusively to lease to others, you don't pay sales tax on your purchase — the lease is the taxable event, collected on the rental stream. The resale exclusion covers you, provided you don't also use the equipment yourself.

The production exemption follows what the end-user does

Whether the lessee's activity produces goods for sale decides if the lease charges are production-exempt. A machine used to deliver a service — here, medical diagnostics — doesn't qualify, even though it "produces" images, because those images aren't sold as goods. The exemption's "for sale" requirement is stricter than the investment-tax-credit rules.

Same machine, different customer, different answer

The identical CAT-scan machine could be exempt or not depending on the customer's use: a diagnostic provider's lease is taxable; a bare seller of photos and negatives could claim the exemption. Look at the end-user's output, not the equipment.

Common questions

Q: Do we pay sales tax when we buy equipment just to lease it out?
A: No. If you exclusively lease it, you're buying for resale under 20 NYCRR § 526.6(c), and the lease is the taxable transaction.

Q: Are our lease charges exempt because the machine "produces" images?
A: Not if the lessee uses it to provide a diagnostic service. The production exemption requires making tangible personal property for sale, which a service provider doesn't do.

Q: When would the lease charges qualify for the exemption?
A: If the customer merely produced and sold photographs and negatives — goods for sale — with no diagnostic services or reports.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) — exemption for machinery/equipment used directly and predominantly to produce tangible personal property for sale
• 20 NYCRR § 526.6(c) — resale exclusion
• 20 NYCRR § 526.7 — leases and rentals are "sales"

Cited authority:

• Matter of Shanty Hollow Corp., Dec. St. Tax Comm., March 9, 1984, TSB-H-84(60)S; aff'd Shanty Hollow v. New York State Tax Commission, 111 AD2d 968 — snow-making denied the sales-tax exemption (not produced for sale)
• Matter of Plattskill Mountain Ski Center, Inc., Dec. St. Tax Comm., March 9, 1984, TSB-H-85(28)C — snow-making allowed the investment tax credit
• Albany Equipment Management Associates, Adv Op Comm T & F, TSB-A-88(10)I — investment tax credit context

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_9s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90(9)S
Sales Tax
March 12, 1990

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK

COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S891017B

On October 17, 1989 a Petition for Advisory Opinion was received from Segal Equipment
Associates, 2206 Genesee Street, Utica, New York 13502.
The issue raised by Petitioner, Segal Equipment Associates, is whether Petitioner may
purchase a "CAT-SCAN" machine for resale and whether its lease charges for the use of such
machine are exempt from sales tax under Section 1115(a)(12) of the Tax Law.
Petitioner currently owns a "CAT-SCAN" machine which it leases on a monthly basis to a
corporation that uses the machine to produce tangible images for diagnostic purposes. Petitioner is
considering future purchases and leasing to others of similar equipment.
Section 526.6(c) of the Sales and Use Tax Regulations provides:
Resale exclusion. (1) Where a person, in the course of his business operations, purchases
tangible personal property or services which he intends to sell, either in the form in which
purchased, or as a component part of other property or services, the property or services
which he has purchased will be considered as purchased for resale, and therefore not subject
to tax until he has transferred the property to his customer.
526.7 Sale, selling or purchases.
(2)
Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal property.
(Emphasis supplied)
Therefore if the Petitioner exclusively leases the "CAT-SCAN" machine to another entity,
it may purchase the machine for resale and will not be subject to the imposition of sales tax upon its
purchase.
Section 1115(a)(12) of the Tax Law exempts "machinery and equipment for use or
consumption directly and predominantly in the production of tangible personal property ... for sale,
by manufacturing..." from the imposition of sales tax.
The investment tax credit for Personal Income Tax purposes was allowed under Section
606(a) of the Tax Law to a taxpayer operating in a manner similar to Petitioners' customers. (Albany
Equipment Management Associates, Adv Op Comm T & F, TSB-A-88-(10)I). However, while the
investment tax credits under the Personal Income Tax and Franchise Tax on Business Corporations
are similar for machinery and equipment to the sales tax exemption for machinery and equipment,
the sales tax exemption set forth in Section 1115(a)(12) of the Tax Law contains an additional

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TSB-A-90(9)S
Sales Tax
March 12, 1990
requirement not found in the investment tax credit sections. The tangible personal property produced
must be "for sale."
This distinction has been applied to snow making equipment. The Tax Commission has
allowed the investment tax credit (Matter of Plattskill Mountain Ski Center, Inc, Dec St Tax Comm,
March 9, 1984, TSB-H-85(28)C), but has not allowed the sales tax exemption (Matter of Shanty
Hollow Corp, Dec St Tax Comm, March 9, 1984, TSB-H-84(60)S). The Decision of the State Tax
Commission was affirmed by the Appellate Division in Shanty Hollow v. New York State Tax
Commission, 111 A.D. 2d 968.
Since Petitioner's customer is using the "CAT-SCAN" machine to provide a diagnostic
service and not for the production of tangible personal property for sale, the lease payments on the
"CAT-SCAN" machine do not qualify for exemption from sales tax under Section 1115(a)(12) of
the Tax Law. If, on the other hand, Petitioner's customer merely sells photographs and negatives to
others and does not perform any diagnostic services or issue any reports, it would be considered to
be making sale of tangible personal property which is subject to sales tax, and would therefore
qualify for exemption from sales tax on the lease payments it made to Petitioner.

DATED: March 12, 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.