Is a manufacturer's purchase of source artwork (paintings, antique fabric swatches, or similar images) used to design a computer-generated textile pattern exempt from New York sales and use tax as production equipment?

Plain-English summary

David Berdon & Co. LLP asked, on behalf of an upholstery fabric manufacturer, whether the company's purchases of source "artwork" are tax-exempt. The design process starts with buying an item of artwork -- often a painting or drawing, but sometimes an antique fabric swatch, the carved molding on an old picture frame, or the grain pattern in a slab of polished stone. That artwork is run through an optical scanner (sometimes via an intermediate color photocopy or professional photograph) to create a digital image, which designers then manipulate on a computer screen: combining or reducing colors, moving or resizing pattern areas, and assigning weave instructions to each differently colored region. The finished digital blueprint encodes a punch card that drives a Jacquard loom, which weaves test samples to verify the pattern before production begins at an out-of-state plant. The whole design process happens in New York City; the resulting fabric is manufactured elsewhere for sale.

New York exempts machinery and equipment used "directly and predominantly" (over 50% of the time) in producing tangible personal property for sale (§ 1115(a)(12), 20 NYCRR § 528.13) -- and the Department had already extended that exemption to source artwork purchased by PRINTING companies for use in producing printed material for sale, per its own Publication 842 guidance and a prior ruling, The Design Council, Ltd. Here, even though the upholstery manufacturer isn't literally a printing company, the Department found its process close enough in kind -- the artwork feeds directly into producing the computer blueprint that drives the manufacturing of fabric for sale -- to qualify for the same production exemption. The opinion also flagged a separate, related point: royalty payments for the RIGHT to reproduce a photograph, painting, sketch, or illustration (under a written agreement with the artist) aren't a taxable sale of tangible personal property at all, and merely holding the artwork temporarily just to make the reproduction doesn't count as a taxable transfer of possession either.

What this means for you

Manufacturers using purchased source imagery to design production patterns

If source artwork (paintings, fabric samples, architectural details, natural material patterns, etc.) feeds directly into a computer-based design process that ultimately drives your manufacturing of a product for sale, this opinion supports treating those artwork purchases as exempt production equipment -- even if you're not in the printing industry, so long as your process is functionally analogous (artwork → digitized design → manufacturing instructions → finished product for sale).

Businesses licensing artwork reproduction rights rather than buying artwork outright

If you're paying a royalty under a written agreement for the RIGHT to reproduce a photograph, painting, or illustration -- rather than buying the physical artwork -- that royalty payment isn't a taxable sale of tangible personal property at all, a separate and even more favorable result than the production exemption.

Businesses whose artwork use is incidental or not "direct and predominant"

This exemption specifically requires the artwork be used directly and predominantly (over 50% of the time) in the production process itself -- purely decorative, marketing, or unrelated uses of purchased artwork wouldn't qualify under this reasoning.

Common questions

Q: Does the manufacturer need to be a printing company to use this exemption?
A: No -- the Department extended a printing-industry precedent (and Publication 842 guidance) to this upholstery manufacturer because its artwork-to-blueprint-to-production process was similar enough in substance, even though it isn't a printing company "per se."

Q: Is buying the physical artwork the only tax-favorable option?
A: No -- if a business instead pays a royalty under a written agreement just for the RIGHT to reproduce artwork (rather than buying it), that royalty isn't a taxable sale of tangible personal property at all, an even cleaner result than the production exemption.

Q: Does it matter that the final fabric is manufactured at an out-of-state plant, even though the design work happens in New York?
A: The opinion doesn't turn on that distinction -- it focuses on whether the artwork purchase itself (made in connection with New York design work) is used directly and predominantly to produce tangible personal property for sale, which the Department found satisfied here.

Q: Can another manufacturer rely on this ruling for its own source-material purchases?
A: No. This advisory opinion binds the Department only as to the facts described on behalf of David Berdon & Co. LLP's client; another manufacturer should confirm its own process meets the "directly and predominantly" production-use standard.

Citations and references

Statutes and regulations:

• Tax Law § 1105-B(a) (production supplies phase-in provision)
• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• 20 NYCRR § 528.13 (machinery/equipment used in production; "directly and predominantly")
• 20 NYCRR § 526.7(f) (reproduction rights not a taxable sale)

Prior rulings and cases referenced:

• The Design Council, Ltd., Advisory Opinion, Commissioner of Taxation and Finance, June 28, 1995, TSB-A-95(23)S
• New York State and Local Sales Tax Information for Printers, Publication 842 (12/93)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_56s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (56)S
Sales Tax
September 23, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S950913C

On September 13, 1995, the Department of Taxation and Finance received a Petition for
Advisory Opinion from David Berdon & Co. LLP, 415 Madison Avenue, New York, New York
10017-1178.
The issue raised by Petitioner, David Berdon & Co. LLP, is whether the purchase of
"artwork", as described herein, used ultimately in the manufacturing of upholstery fabric is exempt
from New York State sales and use taxes imposed under Sections l105(a) and 1110 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner states that the beginning of the design process for manufacturing an upholstery
fabric is the purchase of an item of artwork. This artwork is very often a painting or drawing from
which an idea or concept evolves, initiating the creative process. The artwork may also be an antique
fabric swatch, the carved molding on an old picture frame, or the grain pattern in a slab of polished
stone.
The artwork is run through an optical scanner that converts the visual material into a digital
image, which in turn is transposed onto a computer screen. Frequently, a color photocopy, or
sometimes even a professional color enlargement photograph, must be made for the scanner in order
to capture or omit some details from the source material. After some technical decisions are made
regarding the structure of the fabric to be manufactured, weaves are then chosen to formulate the
visual and textural character of each area of the fabric which the designer is seeking to create.
Next, the image (geometry) of the pattern will be brought up onto the computer screen to
begin the editing process. If there are many colors in the image, they may have to be combined or
condensed into a practical and workable number. At this point in the process, color represents
nothing but the demarcation of an area of weave structure that differs in form from those areas
adjacent to it, and entire areas may be manipulated (i.e., moved, reduced, enlarged or eliminated
entirely), if it is to the aesthetic advantage of the resulting fabric. At times, if the artwork is too large,
or cumbersome, or if only portions are actually required, it may be cut up and reassembled prior to
being input onto the computer.
Once all the areas of the design are oriented into desired locations and manipulated to their
correct proportions, weave instructions are assigned to each of these differently colored areas on the
computer image. When this is done, a disc is encoded that will instruct a Jacquard card punch to cut
a series of instructions that enable a loom to produce a woven image of the computer blueprint. A
first sample is woven to determine if the instructions were encoded

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correctly and that all estimates of threads per inch, both vertical and horizontal, are in the appropriate
proportions and densities for the chosen weave structures.
If all is technically correct, color choice comes into play for the first time as it relates to
making the design a saleable product. At this point, the process of playing with multitudes of color
possibilities to find the few probable best combinations to offer to customers begins. After
completion of the design process, which takes place in New York City, the resulting blueprint is then
used at the taxpayer's out-of-state plant site to produce upholstery fabric for sale. The end result of
this process is a manufactured item of tangible personal property with a design developed from the
initial artwork purchased.
Section ll05-B(a) of the Tax Law provides as follows:
(a) Notwithstanding any other provisions of this article, but not for purposes
of the taxes imposed by section eleven hundred seven or eleven hundred eight or
authorized pursuant to the authority of article twenty-nine of this chapter, the taxes
imposed by subdivision (a) of section eleven hundred five on the receipts from the
retail sales of parts with a useful life of one year or less, tools and supplies for use or
consumption directly and predominantly in the production of tangible personal
property, gas, electricity, refrigeration or steam for sale by manufacturing, processing,
generating, assembling, refining, mining or extracting or for use directly and
predominantly in or on telephone central office equipment or station apparatus or
comparable telegraph equipment where such equipment or apparatus is used directly
and predominantly in receiving at destination or initiating and switching telephone
or telegraph communication shall be paid at the rate of two percent for the period
commencing September first, nineteen hundred eighty and ending February twenty­
eighth, nineteen hundred eighty-one, and such retail sales shall be exempt from such
tax on and after March first, nineteen hundred eighty-one.
Chapter 366 of the Laws of 1996 amended subdivision (d) of Section l105-B, effective
September 1, 1996, to provide as follows:
Notwithstanding any other provisions of this section or this article to the
contrary, on and after September first, nineteen hundred ninety-six, the exemptions
provided by subdivisions (a), (b) and (c) of this section shall apply for purposes of
the sales and compensating use taxes imposed by section eleven hundred seven of
this article.
Section 1115 of the Tax Law provides, in part, as follows:
Sec. 1115. Exemptions from sales and use taxes.--(a) Receipts from the
following shall be exempt from the tax on retail sales

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imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*

*

*

(12) Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, gas, electricity,
refrigeration or steam for sale, by manufacturing, processing, generating, assembling,
refining, mining or extracting, or telephone central office equipment or station
apparatus or comparable telegraph equipment for use directly and predominantly in
receiving at destination or initiating and switching telephone or telegraph
communication, but not including parts with a useful life of one year or less or tools
or supplies used in connection with such machinery, equipment or apparatus. This
exemption shall include all pipe, pipeline, drilling rigs, service rigs, vehicles and
associated equipment used in the drilling, production and operation of oil, gas, and
solution mining activities to the point of sale to the first commercial purchaser.
Section 528.13 of the Sales and Use Tax Regulations provides in part:
Sec. 528.13. Machinery and equipment used in production; telephone and telegraph
equipment; parts, tools and supplies--(Tax Law, Sec. 1115(a)(12)). (a) Exemption.
(1) Exemption from statewide tax. An exemption is allowed from the tax imposed
under subdivisions (a) and (c) of section 1105 of the Tax Law, and from the
compensating use tax imposed under section 1110 of the Tax Law, for receipts from
sales of the following:
(i) Machinery or equipment (including parts with a useful life of more than
one year) used or consumed directly and predominantly in the production for
sale of tangible personal property, gas, electricity, refrigeration or steam, by
manufacturing, processing, generating, assembling, refining, mining or
extracting. (This exemption includes all pipe, pipeline, drilling rigs, service
rigs, vehicles and associated equipment used in the drilling, production and
operation of oil, gas and solution-mining activities to the point of sale to the
first commercial purchaser.)
*

*

*

(c)
Directly and predominantly. (1) "Directly" means the machinery or equipment
must, during the production phase of a process:
(i)
or

act upon or effect a change in material to form the product to be sold,

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(ii) have an active causal relationship in the production of the product to be
sold, or
(iii) be used in the handling, storage, or conveyance of materials or the
product to be sold, or
(iv) be used to place the product to be sold in the package in which it will
enter the stream of commerce.
*

*

*

(4)
Machinery or equipment is used predominantly in production, if over
50 percent of its use is directly in the production phase of a process.
In this case, the artwork being purchased will be used in the process of designing a computer
image and computer blueprint necessary for printing the designs on upholstery fabric produced for
sale. In accordance with New York State Department of Taxation and Finance Publication 842
(12/93), New York State and Local Sales Tax Information for Printers, at page 27, purchases of
artwork, illustrations, layouts, drawings, paintings, mechanicals, overlays, designs, photographs,
pasteups and onionskin by a printing company and used or consumed directly and predominantly to
produce printed material for sale qualify for the production exemption. Accordingly, while the
purchaser is not a printing company per se, the printing process and Petitioner's manufacturing
process are similar and the artwork is deemed to be used or consumed by the purchaser directly and
predominantly to produce the upholstery fabric for sale. See The Design Council. Ltd., Adv Op
Comm T&F, June 28, 1995, TSB-A-95(23)S. Therefore, the purchase by Petitioner of the artwork
described above would be exempt from the Statewide sales and use taxes imposed under Sections
1105(a) and 1110 of the Tax Law.
It should be noted that the right to reproduce a photograph, painting, sketch, or illustration
is not a sale of tangible personal property, and the receipts from the sale of this right are not subject
to tax, where the payment made is in the nature of a royalty to the grantor under the laws relating to
artistic and literary property. A right to reproduce exists only if there is a written agreement between
the artist and client setting forth the conditions to reproduce. Temporary possession by the client for
the sole purpose of making the reproduction is not considered to be a transfer of possession which
would convert the reproduction right into a taxable use. See Section 526.7(f) of the Sales and Use
Tax Regulations.

DATED: September 23, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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