Are recording tape and equipment rentals used to make promotional demo tapes taxable, or exempt as production equipment?

Plain-English summary

A company in the business of promoting artists records them, then sends the resulting demonstration tapes to record companies to see if any want to produce an album. Its accountants asked whether the company owes sales tax on the recording tape it buys and the equipment it rents to make those demo tapes.

The Department said yes, both are taxable:

• Buying tape and renting equipment are taxable retail sales. Purchases of tangible personal property, and rentals of equipment, are taxable retail sales unless bought for resale (Tax Law 1105(a), 1101(b)(4), 1101(b)(5)). The demo tapes are not resold -- they're given to record companies for free -- so the resale exclusion doesn't apply.
• The production exemption doesn't fit. Tax Law 1115(a)(12) exempts machinery and equipment used directly and predominantly in producing tangible personal property for sale. The key words are "for sale." The demo tape the company produces is a promotional item given away, not a product held for sale, so the exemption is unavailable.

Because the demo tape is promotional rather than a product for sale, the tape purchases and equipment rentals are subject to sales tax.

What this means for you

Producers of promotional or demo materials

Making something you give away to market yourself is not the same, for tax purposes, as making a product you sell. Equipment and materials used to create promotional pieces -- demo tapes, sample reels, giveaway prototypes -- generally don't qualify for the production-machinery exemption, because that exemption requires the end product to be held for sale.

The exemption tracks the end product, not the effort

It doesn't matter that real "production" work happens. Section 1115(a)(12) asks whether the thing produced is for sale. If it's a freebie, the inputs are taxable.

Renting equipment is a taxable "sale" too

Equipment rentals are treated as sales of tangible personal property in New York, so rental charges are taxable on the same footing as purchases here.

Common questions

Q: We're clearly "producing" something -- why doesn't the production exemption apply?
A: Because section 1115(a)(12) requires the product to be made for sale. A demo tape given free to record companies isn't held for sale, so the exemption doesn't reach the tape and equipment used to make it.

Q: What if we later sell recordings of the artist?
A: This opinion addresses the promotional demo tapes given away. The exemption analysis depends on whether the specific item produced is held for sale; a different, sold product would need its own analysis.

Q: Is renting the equipment really taxable like a purchase?
A: Yes. New York treats a rental or lease as a taxable sale of tangible personal property (Tax Law section 1101(b)(5)).

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner and the facts described. Treat it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law section 1101(b)(4) (definition of retail sale; excludes purchases for resale)
• Tax Law section 1101(b)(5) (definition of sale, including rental and lease)
• Tax Law section 1115(a)(12) (production-machinery exemption -- requires product held for sale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_47s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-93 (47)S
Sales Tax
September 1, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930430A

On April 30, 1993, a Petition for Advisory Opinion was received from Maggio & Maggio
CPA's, 285 Middle Country Rd. Smithtown, New York 11787.
The issue raised by Petitioner, Maggio & Maggio CPA's, is whether Petitioner's client is
required to pay sales tax on the purchase of recording tapes and equipment rentals used to produce
promotional tapes.
Petitioner's client is in the business of promoting artists for the eventuality of producing
record albums. After the artists are taped, the client sends the tapes to various record companies to
see if the companies are interested in producing an album by the artist.
Section 1105(a) of the Tax Law imposes a tax upon "The receipts from every retail sale of
tangible personal property..."
Section 1101(b)(4) of the Tax Law defines a retail sale as, "A sale of tangible personal
property to any person for any purpose, other than (A) for resale as such..."
Section 1101(b)(5) of the Tax Law defines Sale, selling or purchase as, "Any transfer of title
or possession or both, exchange or barter, rental, lease or license to use..."
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..."
(Emphasis supplied)
The purchase of recording tapes and equipment rentals used in the production of a tape used
for promotional or demonstration purposes, or given to record companies without charge, is a retail
sale subject to sales tax when purchased by the artist or promoter since such tapes will not be resold
in accordance with the provisions of Sections 1105(a), 1101(b)(4) and 1101(b)(5) of the Tax Law.
Such purchases do not qualify for the exemption provided by Section 1115(a)(12) of the Tax Law
because the tape produced is not held for sale. Accordingly the purchase of tapes and the rental of
equipment by Petitioner's client are subject to the imposition of sales tax.

DATED: September 1, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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