A home-party seller paid use tax on the gifts and supplies she bought — can she get a refund, and does the packaging she passes on to customers qualify for an exemption?

Plain-English summary

Marilyn M. Rieland sells for Home Interiors and Gifts, Inc. through home sales "parties." She awards "hostess gifts" to customers who host parties (they earn "merits" redeemable for free merchandise) and buys supplies such as merchandise brochures, order forms, inscribed pencils, tissue paper, paper bags and hostess envelopes. Because the supplier didn't charge sales tax, she paid use tax on her purchase price — then asked for a refund.

The Department held the use tax was generally proper, with one exception for packaging materials.

• Use tax applies to her purchases. Section 1105(a) taxes retail sales of tangible personal property, and § 1110 imposes a compensating use tax on using such property in New York where sales tax wasn't paid. The tax is measured by the consideration given for the property (20 NYCRR 531.3(a)(1)). Since the supplier didn't collect tax, she owed use tax and is not entitled to a refund on the hostess gifts and general supplies.
• Packaging materials are exempt. Section 1115(a)(19) exempts cartons, containers, and wrapping and packaging materials a vendor uses to package tangible personal property for sale and actually transfers to the purchaser. Packaging materials "include ... bags ... actually transferred with the product to the purchaser" (20 NYCRR 528.20(b)(1)).
• Partial refund available. Her use of bags and similar packaging described in § 1115(a)(19) is not subject to use tax, so she may claim a refund of use tax paid on those items.
• How to claim it. File an Application for Credit or Refund (Form AU-11) with the State Tax Commission, within three years of the 20th day of the month following the end of the quarter in which the purchases were made.

What this means for you

If your out-of-state supplier doesn't charge sales tax, you owe use tax. Buying business supplies and promotional items without paying sales tax doesn't make them tax-free — you self-assess use tax on your cost, and you generally can't refund it just because you consumed the items in your business.

Packaging you actually hand to the customer is a real exemption. Bags, wrapping and containers that go out the door with the product are exempt under § 1115(a)(19). Separate those items out — you shouldn't pay tax on them, and if you already did, you can seek a refund.

Refund claims are deadline-driven. Use Form AU-11 and mind the three-year window (measured from the 20th of the month after the quarter of purchase). Keep records tying the packaging purchases to product actually sold and delivered.

Common questions

Q: The supplier didn't charge me tax — do I still owe anything?
A: Yes. You owe compensating use tax under § 1110 on your purchase price for the hostess gifts and general supplies, measured by the consideration you gave (20 NYCRR 531.3(a)(1)).

Q: Which of my supplies are exempt?
A: Packaging materials you transfer to the customer with the product — bags, wrapping, containers — are exempt under § 1115(a)(19) and 20 NYCRR 528.20(b)(1). Items like brochures, order forms and pencils that you keep and use are not.

Q: How do I get back use tax I overpaid on packaging?
A: File Form AU-11 with the State Tax Commission within three years of the 20th day of the month following the end of the quarter in which you made the purchases.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1110 — imposes compensating use tax on the use of property in New York not subject to sales tax
• Tax Law § 1115(a)(19) — exempts cartons, containers and wrapping/packaging materials used by a vendor and actually transferred to the purchaser
• 20 NYCRR 531.3(a)(1) — use tax is measured by the consideration given for the property
• 20 NYCRR 528.20(b)(1) — packaging materials include bags actually transferred with the product to the purchaser
• Application for Credit or Refund of State and Local Sales or Use Tax (Form AU-11) — refund vehicle, subject to the three-year limit

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h81_121s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(121)S
Sales Tax
June 22,1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810312A

On March 12, 1981 a Petition for Advisory Opinion was received from Marilyn
M. Rieland, 7409 Farmstead Road, Liverpool, New York 13088.
The issue raised is whether Petitioner is due a refund of New York State
use tax paid based on the purchase price of "hostess gifts" and "supplies" which
Petitioner purchased from Home Interiors and Gifts, Inc. Petitioner did not pay
sales tax to the supplier on these purchases, but, rather, remitted use tax based
on Petitioner's purchase price paid.
Petitioner awards "hostess gifts" to customers who have sales "parties" at
their homes. These customers earn "merits" which may be redeemed by the customers
for free merchandise. Petitioner's purchases of supplies include items such as
merchandise brochures, order forms, " Home Interiors' " inscribed pencils, tissue
paper, paper bags, hostess envelopes, etc.
Section 1105(a) of the Tax Law, contained in Article 28 thereof, imposes
a sales tax on the receipts from retail sales of tangible personal property,
Section 1110 of the Tax Law imposes a compensating use tax on the use within New
York of tangible personal property purchased at retail except to the extent that
such property has been or will be subject to sales tax under Article 28. The
Sales and Use Tax Regulations provide that the "...compensating use tax is due
upon the use of tangible personal property in this State which has been purchased
out of state. The applicable tax rate is imposed on the consideration given or
contracted to be given for the property, or the use of the property...." 20 NYCRR
531.3(A)(1).
Accordingly, as Petitioner's purchases of hostess gifts and supplies (with
the one exception noted below) are purchases at retail, within the meaning of
section 1105(a) of the Tax Law, the use of such property is subject to New York
State use tax. As Home Interiors and Gifts, Inc. does not collect sales tax at
the time of the sale of these items to Petitioner, Petitioner is liable for use
tax based on Petitioner's purchase price for the items. Petitioner is therefore
not entitled to a refund of use tax remitted with Petitioner's sales tax returns,
except as described below.
Section 1115(a)(19) of the Tax Law exempts from the operation of the sales
and use taxes "Cartons, containers, and wrapping and packaging materials and
supplies, and components thereof for use and consumption by a vendor in packaging
or packing tangible personal property for sale, and actually transferred by the
vendor to the purchaser."
The Sales and Use Tax Regulations provide that "Packaging materials includes
...bags...actually transferred with the product to the purchaser." 20 NYCRR
528.20(b}(1).

TP-8 (4/80)

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

2
TSB-H-81(121)S
Sales Tax
June 22,1981

Accordingly, Petitioner's use of bags and other property described in
section 1115(a)(19)of the Tax Law and used as described therein, is not subject
to use tax. Where Petitioner has made payments of use tax on such uses she is
entitled to a refund, upon the timely filing of an application therefor. In order
to claim a refund, Petitioner must file an Application for Credit or Refund of
State and Local Sales or Use Tax, Form AU-11, with the State Tax Commission. This
form must be filed within three years of the 20th day of the month following the
end of the quarterly period in which the purchases at issue were made.

DATED: June 8, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau