Does in-store paint-tinting equipment at a retail paint store -- machines that mix custom colorant into a base paint for each customer -- qualify for New York's manufacturing-equipment sales tax exemption?

Plain-English summary

Sherwin-Williams ships an unfinished "white base" paint to its own retail stores from its manufacturing plants. When a customer picks a color -- from a display of over a thousand color chips, or by bringing in a sample to be custom-matched -- a store employee uses a Color Matching System (which can scan a customer's sample with a spectrophotometer and calculate a matching formula), an Automatic Colorant Dispenser (which pumps precise amounts of colorant from internal canisters into the can), and a Shaker (which mixes everything together), all tied together with dedicated computer equipment and a printer that labels each finished can with its color ID and formula. Sherwin-Williams asked whether this whole in-store tinting setup qualifies for New York's exemption for machinery and equipment used directly and predominantly in producing tangible personal property for sale.

The Department said yes. New York's production exemption doesn't require production to happen at a traditional factory -- it defines "production" functionally, running from the handling of raw materials through the last step where a product is finished, packaged, and ready for sale. The unfinished white base is a raw material; selecting the colorant formula, dispensing it, mixing it, and labeling the can are all steps that transform that raw material into the finished, sellable product (custom-tinted paint) -- exactly the kind of activity the Department's own guidance describes as "processing," an operation that changes the nature, shape, or form of tangible personal property. Because each piece of equipment (the Color Matching System, the Dispenser, the Shaker, and the tied-in computer equipment) acts directly on the product to create it, the equipment qualifies for the exemption -- conditioned on the usual rule that more than 50% of each machine's actual use has to be in that production process, rather than administrative or distribution activities.

What this means for you

Retailers who customize or finish products in-store (paint, ink, cosmetics, specialty foods, etc.)

Retail location doesn't disqualify equipment from New York's manufacturing exemption. If your store performs a genuine "processing" step -- changing the nature, shape, or form of a raw material into the finished product the customer actually buys -- machinery used directly in that step can qualify, even though it sits on a retail sales floor rather than in a traditional factory.

Paint, ink, and coatings companies with in-store tinting/mixing programs

This ruling is a useful, closely on-point precedent for tinting and custom-mixing equipment specifically -- color matching systems, dispensers, shakers, and their control computers were all found to qualify, provided their use is predominantly (over 50%) devoted to the actual mixing/blending/labeling production steps rather than other uses.

Accountants and tax professionals

This opinion applies the standard three-part production-exemption analysis (is it production vs. administration/distribution; does the equipment act directly on the product; is usage predominantly -- over 50% -- in production) to an unusually retail-facing fact pattern, making it a good template whenever a client's "manufacturing" happens at the point of sale rather than in a traditional plant.

Common questions

Q: Does equipment have to be located in a factory to qualify for New York's manufacturing exemption?
A: No -- the exemption turns on what the equipment does (act directly on the product during the production phase), not where it's physically located. Equipment on a retail sales floor can qualify if it performs genuine production/processing.

Q: What's the "50%" requirement mentioned in this ruling?
A: The exemption only applies if more than half of the equipment's actual use is devoted directly to the production phase; if a machine is used mostly for something else (administration or distribution), it doesn't qualify even if it's sometimes used in production.

Q: Does the computer equipment (monitor, keyboard, printer) attached to the tinting machines also qualify?
A: Yes, in this ruling -- the Department treated the related computer equipment controlling the Color Matching System and Dispenser as part of the same exempt production equipment, since it's integral to carrying out the blending and labeling process.

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1115(a)(12) (exemption for machinery/equipment used directly and predominantly in production)
• 20 NYCRR § 528.13(b), (c) (production phase and directly/predominantly definitions)
• NYS Dept. of Taxation and Finance Publication 852 (2/96), Sales Tax Information for Producers

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(21)S
Sales Tax
April 8, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990114C

On January 14, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from The Sherwin-Williams Company, 101 Prospect Avenue, N.W., Cleveland,
Ohio 44115-1075.
The issue raised by Petitioner, The Sherwin-Williams Company, is whether mixing and
blending machinery and equipment, and related computer equipment, used in the paint tinting
process in Petitioner's New York retail stores are used directly and predominantly in the production
of tangible personal property for sale and are exempt from the sales and compensating use tax under
Section 1115(a)(12) of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a manufacturer of paint and paint related products. In addition to selling its
products in the wholesale market, Petitioner sells a portion of its products in its company owned
retail stores. Each retail store contains machinery and equipment that blends and mixes paint. The
product that is shipped to the retail stores is a white base, a raw material used in the production of
paint. The white base is produced at one of Petitioner's various primary production facilities located
throughout the United States.
When customers enter one of Petitioner's stores, they are able to select the exact color of
paint desired by examining color cards. Alternatively, the customer may bring in a color sample to
be custom matched. Once the customer selects the desired color, an employee of Petitioner blends
the proper amount of colorant in the can of white base and properly mixes the colored paint.
Petitioner manufactures various types of white base that have differing chemical qualities that relate
to the colorants that will be added. The blending and mixing are accomplished in three independent
steps. The steps are accomplished by using machines called Color Matching Systems, Automatic
Colorant Dispensers, Shakers and related computer equipment (CPU, monitor, keyboard and printer).
In order for the customer to obtain the desired can of colored paint, an employee of Petitioner
must determine the proper formula or recipe to produce the desired color. For a color selected from
the over one thousand color chips on display in the store, the employee enters the proper color
identification number into the computer that controls either the Color Matching System or the
Automatic Colorant Dispenser. The employee then enters information specific to the type of paint
required. If the color needs to be custom matched, the customer's sample is first measured by a

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spectrophotometer or other color sensing device of the Color Matching System. Numerical
representations of the color are processed by sophisticated color matching algorithms and a special
color formula is created on the spot. The formula is then sent to the Dispenser through associated
computer software. The Dispenser contains a pump system, which dispenses a varied number of
colors from canisters housed inside it, and is connected to a computer system, which provides an
electronic message regarding the proper amount of colorant to dispense. The color retrieval
information is supplied to the Dispenser through the use of a computer keyboard and monitor.
The processor on the Dispenser sends signals to the pumps and valves to meter out the proper
amounts of the individual colorants that make up the formula into the can of white base. The liquid
colorant travels through plastic tubes housed within the machine and are dispensed into the can
through nozzles. The Printer attached to either the Color Matching System or the Automatic
Colorant Dispenser is used to produce a small label, which contains the color identification and the
formula ingredients. This label is affixed to each can of tinted paint. This procedure is essential to
completing the product labeling process, as the label on the white base at the primary production
facility only lists the ingredients prior to colorant addition.
Once the proper amount of colorant is added to the white base, the can of paint is placed
inside the Shaker, in which, the paint is properly mixed. If the paint is not thoroughly and
mechanically mixed by Petitioner at the point of sale, the colorant added into the white base by the
Dispenser would not be properly dispersed throughout the can.
Applicable Law and Regulations
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
Section 1115(a) of the Tax Law provides, in part:
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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(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....
Subdivisions (b) and (c) of Section 528.13 of the Sales and Use Tax Regulations provide, in
part:
(b) Production. (1) The activities listed in paragraph (a)(1) of this section
are classified as administration, production or distribution.
(i) Administration includes activities such as sales promotion, general office
work, credit and collection, purchasing, maintenance, transporting, receiving and
testing of raw materials and clerical work in production such as preparation of work,
production and time records.
(ii) Production includes the production line of the plant starting with the
handling and storage of raw materials at the plant site and continuing through the
last step of production where the product is finished and packaged for sale.
(iii) Distribution includes all operations subsequent to production, such as
storing, displaying, selling, loading and shipping finished products.
(2) The exemption applies only to machinery and equipment used directly
and predominantly in the production phase. Machinery and equipment partly used
in the administration and distribution phases does not qualify for the exemption,
unless it is used directly and predominantly in the production phase.
(3) The determination of when production begins is dependent upon the
procedure used in a plant. If on receiving raw materials, the purchaser weighs,
inspects, measures or tests the material prior to placement into storage, production
begins with placement into storage, and the prior activities are administrative.
If the materials are unloaded and placed in storage for production without such
activities, the unloading is the beginning of production.
*

*

*

(4) Production ends when the product is ready to be sold.

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Example 3: A food processor sells canned food in cases of 48 cans. The
canned food is stacked for later labeling and casing. The line of production is
deemed to extend through the labeling and casing operation.
(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.
(2) Usage in activities collateral to the actual production process is not
deemed to be used directly in production.
*

*

*

(4) Machinery or equipment is used predominantly in production, if over 50%
of its use is directly in the production phase of a process.
Opinion
Petitioner manufactures paint and paint related products including paint which is customized
to the color selected by the particular customer. In order to produce this customized paint, Petitioner
combines a certain colorant or colorants with a particular white base depending on the desired color.
The selection of the colorants and the white base, blending and mixing activities and printing of
labels, which result in the final product being processed and ready to be sold are accomplished by
using the Color Matching Systems, the Automatic Colorant Dispensers, the Shakers and the related
computer equipment.
New York Department of Taxation and Finance Publication 852 (2/96), Sales Tax
Information for Producers at page 3, describes "production" as "[t]he process by which products

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are created using one or more of the following operations: manufacturing; processing; fabricating;
generating; assembling; refining; mining; or extracting." Such publication describes "processing"
as "[a]n operation that changes the nature, shape or form of tangible personal property."
The production process for manufacturing, processing and assembling operations ends when
the product is completed, packaged and ready to enter the stream of commerce. See Section
528.13(b) of the Sales and Use Tax Regulations. An interruption in the production cycle before the
product is finished and ready for sale does not terminate the production process. See the above
mentioned Publication 852 at page 7.
Based on the foregoing, the Color Matching Systems, Automatic Colorant Dispensers,
Shakers and related computer equipment are used directly in the production of paint for sale, under
Section 1115(a)(12) of the Tax Law and Section 528.13 of the Sales and Use Tax Regulations.
These items will be exempt from sales and compensating use tax provided that over 50% of their use
is directly in the production of paint for sale as described above. See Section 528.13(c)(4) of the
Sales and Use Tax Regulations.

DATED: April 8, 1999

NOTE:

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

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