Can a retailer buy labeling and hanging services for its resale merchandise tax-free, and is use tax due if the work is done out of state?

Plain-English summary

Morton L. Coren, P.C. asked, for a client that sells clothing and other merchandise, whether the client may buy certain handling services for resale (tax-free), and if not, whether compensating use tax applies when the services are performed outside New York. The client requires price/inventory labels on its goods; it buys blank labels, ink, and plastic attaching devices, owns the label-printing machinery, and has paid sales tax on all of that. It contracts with a separate company to (1) receive and inspect merchandise, (2) receive/inspect and put goods on hangers, (3) affix the client's labels, and (4) print and affix labels using the client's equipment and supplies.

The Department's answer, under Tax Law §§ 1105(c)(2), 1105(c)(3), and 1110:

• Labeling and hanging are taxable services. Section 1105(c) taxes processing (c)(2) and servicing (c)(3) tangible personal property not held for sale. Following Niagara Lubricant Company v. State Tax Commission, the Department reasoned that here the merchandise is sold — not the tags, labels, and hangers — so services performed on those items aren't purchased for resale. Placing merchandise on hangers, printing labels, and affixing them are taxable if performed in New York.
• Out-of-state work triggers use tax. If those services are performed outside New York and the goods are later brought in, they're subject to compensating use tax under § 1110 (§ 1131(4)(c) reaches services rendered to a person in the state whether or not performed in the state).
• Receiving and inspection are not taxable. Pure receiving and inspection services aren't enumerated under § 1105(c), so if separately stated, they aren't subject to sales or use tax.

What this means for you

Servicing goods held for resale isn't automatically exempt

You might expect that work on merchandise you'll resell is bought "for resale." But the Department looks at what is actually sold: the goods, not the labels, tags, or hangers. Services performed on the unsold items (labeling, hanging) are taxable, not resale-exempt.

Out-of-state processing doesn't dodge the tax

Sending goods out of state to be labeled or hung and then bringing them into New York triggers compensating use tax on those services. Cross-border handling is not a workaround.

Separately state your nontaxable receiving/inspection charges

Receiving and inspection on their own aren't taxable services. To keep them nontaxable, make sure they're separately stated from the taxable labeling and hanging charges — bundled charges risk being taxed in full.

Accountants and tax professionals

This is the Morton L. Coren opinion (TSB-A-92-23(S)) that later opinions cite — including the price-ticket marking opinion, TSB-A-92(46)S. It applies the Niagara Lubricant container analysis to deny the resale exclusion for services performed on tags, labels, and hangers.

Common questions

Q: Are label-printing and hanging services taxable in New York?
A: Yes. Printing/affixing labels and placing merchandise on hangers are taxable services under § 1105(c)(2)/(3) when performed in New York.

Q: Can the retailer buy them for resale since the goods are for resale?
A: No. The merchandise is sold, but the labels, tags, and hangers are not, so the services on those items aren't purchased for resale.

Q: What if the services are performed out of state?
A: Compensating use tax under § 1110 applies when the goods are brought into New York.

Q: Is anything not taxable here?
A: Yes — pure receiving and inspection services aren't enumerated taxable services, so if they're separately stated they aren't subject to sales or use tax.

Citations and references

Statutes and authorities:

• Tax Law § 1105(c)(2) (processing tangible personal property furnished by the customer, not purchased for resale)
• Tax Law § 1105(c)(3) (installing, maintaining, or servicing tangible personal property not held for sale)
• Tax Law § 1110 (compensating use tax on services described in § 1105(c)(2)/(3) performed on property brought into the state)
• Tax Law § 1131(4)(c) (services rendered to a person within the state, whether or not performed within the state)
• Niagara Lubricant Company v. State Tax Commission, 120 A.D.2d 885

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (23)S
Sales Tax
March 16, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S911112B

On November 12, 1991, a Petition for Advisory Opinion was received from Morton L. Coren,
P.C., 638 Meadow Court, Westbury, New York 11590.
The issue raised by Petitioner, Morton L. Coren, P.C., is whether Petitioner's client may
purchase certain services used in connection with the sale of clothing and other merchandise for
resale; and if not, would the purchase of said services be subject to the compensating use tax if such
services were performed outside of New York State.
Petitioner's client sells items of clothing and other merchandise. Petitioner's client requires
that labels containing price and inventory information be attached to the items sold. The client
purchases blank labels, ink and plastic devices. The plastic devices are used to attach the labels to
the item for sale. The client owns the machinery used to print the labels. Petitioner's client has paid
sales tax on all the above tangible personal property except the clothing and merchandise held for
resale.
Petitioner's client contracts with a separate company that provides the following services:
1)

receive and inspect merchandise,

2)

receive and inspect merchandise and put the merchandise on hangers supplied by
Petitioner's client,

3)

affix labels supplied by Petitioner's client to merchandise, and

4)

print labels and affix them to merchandise using equipment and supplies owned by
Petitioner's client.

Section 1105(c) of the Tax Law provides, in part, that the receipts from every sale, except
for resale, of the following services shall be taxable:
(2) [p]rocessing. . .tangible personal property, performed for a person who furnishes
the Tangible personal property, not purchased for resale, upon which such services
are performed; and
(3) installing Tangible personal property. . .or maintaining, servicing. . .tangible
personal property, not held for sale in the regular course of business. . .
Section 1110 imposes use tax on any tangible personal property not acquired for resale, upon
which any of the services described in (2) or (3) of section 1105[c], have been performed. For
purposes of said section "the tax shall be at 4% of the consideration given or contracted to be given

-2­
TSB-A-92 (23)S
Sales Tax
March 16, 1992

for the service. . .,plus the cost of transportation. . .except where such cost is separately stated in the
written contract, if any, and on the bill rendered to the purchaser."
The property and services the use of which is subject to tax shall include all services rendered
to a person within the state, whether or not such services are performed within the state, upon
tangible personal property the use of which is subject to tax under §1110 or will become subject to
tax when such property is received by or comes into possession or control of such person within the
state. (Tax Law, §1131 [4][c]).
In considering the question of the taxability of services performed upon containers holding
tangible personal property for sale the Appellate Division held in Niagara Lubricant Company v.
State Tax Commission, 120 AD 2d 885, that the contents of the containers were sold but not the
containers themselves and thus the services performed upon the containers were subject to sales tax.
Similarly in the instant case it is the merchandise and not the tags, labels and hangers that are sold.
Accordingly, the service of placing merchandise on hangers, printing labels, and affixing
them, are subject to the sales tax if performed in New York State, in accordance with Sections
1105(c)(2) and 1105(c)(3) of the Tax Law and subject to the compensating use tax in accordance
with Section 1110 of the Tax Law if performed outside New York State and later brought into New
York State. Since receiving and inspection services are not services which are taxable under Section
1105(c) of the Tax Law, if Petitioner's client separately states such services, they would not be
subject to sales or use tax.

DATED: March 16, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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