Is computer hardware and custom software used to produce books for sale exempt from New York State and county sales and use taxes?

Plain-English summary

Matthew Bender & Company, Inc. (Albany, New York) publishes legal texts and treatises. It uses computer hardware to produce and edit manuscripts on magnetic tapes, which it sends to a compositor to make the final books, and it uses software developed specifically for its operations. It asked whether the hardware and software are subject to New York State and Albany County sales and use taxes.

The answer: neither is taxable.

• § 1105(a) (sales tax) and § 1110 (compensating use tax) reach tangible personal property, and Albany County imposes similar local taxes.
• § 1115(a)(12) exempts machinery or equipment used directly and predominantly in the production of tangible personal property for sale, by manufacturing (excluding short-life parts, tools, and supplies). The parallel local exemption applies under § 1210(a)(1).
• The computer hardware is used exclusively to produce books for sale, so it meets both the State and Albany County production-equipment exemptions.
• Custom software that is specifically tailored to a customer's own data-processing requirements is deemed intangible personal property, and so is not subject to State or local taxes on tangible personal property. Because this software was developed specifically for the publisher's use, it is intangible — and not taxable.

What this means for you

Manufacturing includes producing content for sale. A publisher producing books qualifies as manufacturing tangible personal property for sale, so the equipment it uses directly and predominantly in that production can be exempt — the same rule that covers factory machinery.

Custom software isn't taxed as tangible property. Software written specifically for one customer's needs is treated as intangible personal property in this opinion. That's different from off-the-shelf ("canned") software, which New York taxes as tangible personal property.

The exemption runs to State and county tax alike. Because there's a matching local exemption under § 1210(a)(1), production equipment can be exempt from both the State and the county sales/use tax.

Common questions

Q: Why is publishing treated as manufacturing?
A: The publisher produces tangible personal property — books — for sale. Equipment used directly and predominantly in that production qualifies for the § 1115(a)(12) exemption, just like other manufacturing machinery.

Q: Is all software nontaxable in New York?
A: No. This opinion treats custom software — developed specifically for the customer — as intangible and nontaxable. Prewritten or "canned" software is generally taxed as tangible personal property.

Q: Does the exemption cover the county tax too?
A: Yes. The hardware qualifies under both the State exemption (§ 1115(a)(12)) and the parallel Albany County exemption authorized by § 1210(a)(1).

Citations and references

Statutes and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1110 — imposes the compensating use tax on tangible personal property used in the state
• Tax Law § 1115(a)(12) — exempts machinery or equipment used directly and predominantly in producing tangible personal property for sale by manufacturing
• Tax Law § 1210(a)(1) — authority for the parallel local (Albany County) production-equipment exemption

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h80_191s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-80(191)S
Sales Tax
October 9, 1980

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S800630A

On June 30, 1980, a Petition for Advisory Opinion was received from Matthew
Bender & Company, Inc., 1275 Broadway, Albany, New York 12201.
The issue raised is whether certain computer equipment, including both
hardware and software, used by Petitioner in the production of books is subject
to the New York State and Albany County sales and use taxes.
Petitioner is in the business of publishing legal texts and treatises.
Petitioner employs computer equipment to produce and edit manuscripts on magnetic
tapes. The tapes as so prepared are sent to a compositor for use in producing the
final product. In addition to the computer hardware involved, Petitioner uses
software developed specifically for its operations.
Section 1l05(a) of the Tax Law imposes a tax on the "...receipts from every
retail sale of tangible personal property, except as otherwise provided in this
article." Section 1110 of the Tax Law imposes a compensating use tax on the use
of such property within this state except to the extent subjected to sales tax
under the Tax Law. Similar local taxes have been imposed by Albany County. Local
Laws, 1967, No. 3 of County of Albany. Section 1115(a) (12) of the Tax Law
provides for an exemption from New York State sales and use taxes with respect
to "Machinery or equipment for use or consumption directly and predominantly in
the production of tangible personal property. . .for sale, by manufacturing...but
not including parts with a useful life of one year or less, or tools or supplies
used in connection with such machinery, equipment...." The exemption provided for
under Albany County's sales and use tax law is applicable to "...tangible
personal property for use or consumption directly and predominantly in the
production of tangible personal property... for sale, by manufacturing...." Tax
Law, §12l0(a)(l).
Inasmuch as the computer hardware in question is used exclusively in the
production of books for sale, it meets the requirements of both of the exemption
provisions quoted above.
Software which is specifically tailored to fit a
customer's specific data processing requirements is deemed to constitute
intangible personal property and is thus not subject to State and local taxes on
receipts from the sale of, or on the use of, tangible personal property. Inasmuch
as the software at issue was developed specifically for Petitioner's use, the
same constitutes intangible personal property for purposes of New York State and
Albany County sales and use taxes.
Accordingly, the computer equipment in question, both hardware and
software, described by Petitioner is not subject to either the New York State or
Albany County sales and use taxes.

DATED: September 24,1980

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR