Are a pharmacy's printers, toner, and paper used to produce prescription labels and medical information pamphlets exempt from sales tax?

Plain-English summary

Price Chopper operates pharmacies inside its supermarkets and buys printers, toner cartridges, and paper used exclusively to produce two things: prescription drug labels affixed to medication containers, and medical information pamphlets (too detailed to fit on the label itself) that get placed in or stapled to the bag containing the prescription. Price Chopper asked whether these printer purchases and supplies are subject to sales and use tax.

New York's Tax Appeals Tribunal has held that a label counts as a "critical element" of the product it's attached to -- and therefore isn't just taxable overhead -- when the label has a genuinely useful quality to the end customer, rather than existing merely as a marketing or business expense the retailer chooses to bear. The Department found Price Chopper's prescription labels and pamphlets meet that standard: they contain information critical to the customer's proper and safe use of the medication, not just incidental packaging. Because the toner and paper physically become part of that critical product component (the label and pamphlet), they qualify for the ordinary resale exclusion, just like the ingredients of any other manufactured product. And because the printer is used exclusively to produce these labels and pamphlets -- meeting the "directly and predominantly in production" standard -- it qualifies for New York's separate production-equipment exemption. The upshot: none of Price Chopper's printer, toner, or paper purchases for this purpose are subject to sales or use tax.

What this means for you

Pharmacies, retailers, and any business producing product labels in-house

If your labels (or accompanying informational materials) carry genuinely useful, critical information for the customer -- not just marketing or a business-overhead expense -- the printing supplies that become part of them can qualify for the resale exclusion, and equipment used exclusively to produce them can qualify for the production-equipment exemption.

Businesses weighing whether packaging materials are "critical" or just overhead

The key test from Gem Stores is whether the label/packaging has a critical quality useful to the final customer versus simply being an expense the retailer bears to run its business profitably -- generic packaging or promotional materials likely won't qualify, but functional, customer-facing product information can.

Accountants and tax professionals

This is a useful application of the Gem Stores "critical element" test to an in-house printing operation, paired with the standard resale exclusion and production-equipment exemption -- a good template for any retailer producing its own product labeling or accompanying informational inserts.

Common questions

Q: Are all product labels exempt from sales tax as production materials?
A: Only if the label is a critical element of the product sold to the customer (containing genuinely useful information), rather than just packaging overhead or a marketing expense the retailer chooses to bear.

Q: Does a printer used to produce labels qualify for the production-equipment exemption?
A: Yes, if it's used directly and predominantly (over 50% of the time) in producing the labels/pamphlets that become part of the product sold -- exclusive use for that purpose, as in this case, clearly meets the standard.

Q: What's the difference between the resale exclusion and the production-equipment exemption here?
A: The toner and paper qualify for the resale exclusion because they physically become part of the label/pamphlet sold to the customer; the printer itself qualifies separately under the production-equipment exemption because it's used to manufacture that labeled product.

Q: Does this ruling apply to my business's in-house labeling or printing operation?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your own labels and their content would need their own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_62s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(62)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S970710A

On July 10, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Price Chopper Operating Co., Inc., P.O. Box
1074, Schenectady, NY 12301.
The issue raised by Petitioner, Price Chopper Operating Co., Inc., is
whether its purchases of printers, toner cartridges and paper for use in its
pharmacies to produce prescription drug labels and medical information which
accompany the sale of prescription drugs are subject to State and local sales and
use taxes.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner operates pharmacies within its retail supermarket locations.
Petitioner purchases printers and supplies (i.e., toner cartridges and paper)
which are used to produce prescription drug labels which are attached to the
prescription drug containers which are sold to customers. In addition, medical
information pamphlets are produced and placed in the bag or are stapled to the
bag containing the drug container. These pamphlets contain the name of the
medication dispensed, the name and telephone number of the pharmacist,
information about the medication, its proper use and its effects and side
effects. This information is too detailed to be included on the label affixed
to the drug container itself. The printers are used exclusively to produce the
prescription drug labels and the medical information pamphlets.
Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes a tax on the “receipts from every
retail sale of tangible personal property . . . . ”
Section 1101(b)(4)(i) of the Tax Law defines “retail sale,” in part, as
follows:
A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical
component part of tangible personal property, or (B) for use by that
person in performing the services subject to tax under paragraphs
(1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five.
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
imposed under subdivision (a) of section eleven hundred five and the
compensating use tax imposed under section eleven hundred ten:

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TSB-A-97(62)S
Sales Tax

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(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. . . .(emphasis added)
With respect to the resale exclusion, Section 526.6(c) of the Sales and Use
Tax Regulations provides, in part:
(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.
(2) A sale for resale will be recognized only if the vendor
receives a properly completed resale certificate . . . .
(3)
Receipts from the sale of property purchased under a
resale certificate are not subject to tax at the time of purchase by
the person who will resell the property. The receipts are subject
to tax at the time of the retail sale.
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
(c) Directly and predominantly. (1) "Directly" means the machinery
or equipment must, during the production phase of a process,
(i) act upon or effect a change in material to form the
product to be sold, or
(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.
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TSB-A-97(62)S
Sales Tax

(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.
Opinion
In Matter of Gem Stores, Inc., Tx App Trib Dec., October 14, 1988,
TSB-D-88(30)S, the Tribunal stated that a label becomes a critical element of
the product sold if the label has a critical quality useful to the final customer
and is not just an expense or part of the general overhead which the retailer
chooses in order to profitably carry on its business.
In this case, Petitioner states that it purchases printers and supplies
used exclusively to produce prescription drug labels which are affixed to the
prescription drug containers when sold to the customers, as well as medical
information pamphlets which are placed in the bag containing the drug containers
or stapled to the bag. These pamphlets provide additional information which
because of space constraints cannot be included on the labels affixed to the drug
container.
In accordance with Matter of Gem Stores, Inc., supra, a label is a critical
element of the product sold, if it has a critical quality useful to the final
customer and is not just an expense or part of the general overhead which the
retailer chooses in order to profitably carry on its business. The labels and
pamphlets produced by Petitioner do form a critical element of the product sold,
i.e., the medication.
The label and accompanying pamphlet contain critical
information which is useful to the customer for proper usage of the medication.
Since the toner and paper will become a component part of the tangible personal
property sold to the consumer, i.e., the label and accompanying medical
information pamphlet, pursuant to Section 1101(b)(4)(i) of the Tax Law and
Section 526.6(c) of the Sales and Use Tax Regulations the toner and paper may be
purchased for resale. In addition, since the printer will be used exclusively
in the production of labels and medical information pamphlets, the printer will
be deemed to be used directly and predominantly in the production of tangible
personal property for sale and pursuant to Section 1115(a)(12) of the Tax Law may
be purchased exempt from sales and use taxes.

DATED: September 29, 1997

NOTE:

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

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