How the Products You Sell Impact Your Purchase Exemptions

By: Tina M. Chunn, CPA, State and Local Tax Senior Manager at Aprio

At a Glance:

• The Main Takeaway: Two advisory opinions out of New York address the application of sales tax exemptions when purchasing equipment, which can often differ depending on how and what your business sells.
• Impact on Your Business: In this article, we break down the two opinions and explain why the taxpayers in question weren’t able to utilize these exemptions.
• Next Steps: Be proactive in reviewing various types of exemptions and related sales transactions to determine how they apply to your business, and if not, whether you can use an alternative to achieve the best results.

Need professional assistance with reviewing your exemptions and determining the best path of action? Contact Aprio’s State and Local Tax (SALT) team today.

The full story:

Determining whether a sales tax exemption can be used when purchasing equipment will often depend on your business and how you sell your services and products. In other words, if two businesses purchase the same piece of equipment, only one may be eligible for an exemption.

New York recently issued two, separate advisory opinions addressing the use of exemptions and highlighting how the taxpayers’ sales of their products/services impacted their applicability.

The first opinion: Using the resale exclusion

In the first opinion,[1] the taxpayer in question is purchasing teleprompting equipment and is in the business of providing teleprompting services and equipment rentals. A typical teleprompting service package includes a complete teleprompter system, which is dependent on the event’s needs, and an experienced professional technician that will operate the system. The equipment is always under the control of the provided technician and is not directed by the customer; however, sometimes a customer has sufficient experience to operate the teleprompting equipment, in which case the taxpayer only rents the teleprompter system without the technician.

The opinion explained that the sale of the teleprompter service package with the technician does not constitute the transfer of title of possession of the equipment because it always remains in control of the technician. Thus, the taxpayer is not required to collect sales tax on sales of the teleprompter service package since it is a sale of a nontaxable service, rather than the sale or lease of tangible personal property. However, in cases where the taxpayer rents the teleprompter equipment without a technician, that is considered a taxable rental of tangible personal property and the taxpayer is required to collect and remit sales tax.

Based on these sales of services and products, the taxpayer would not be able to use the resale exclusion for the purchase of the teleprompter equipment from its vendors. Specifically, to qualify for the resale exclusion, equipment must be purchased exclusively for the purpose of resale (which includes leases). In this case, however, the taxpayer’s purchase of the equipment is not solely for resale, as it may be used as part of a service transaction and not exclusively for leasing.

The second opinion: The manufacturing exemption

The second opinion considers the use of a manufacturing exemption by a dentist that is purchasing a milling machine to fabricate various dental devices, such as crowns, veneers, inlays and onlays.[1] New York clearly allows for an exemption of machinery or equipment used to produce tangible personal property for sale.[2] However, the opinion explains that the taxpayer is not in the business of selling these dental devices separately from his services.

Even though there is a transfer of tangible personal property to his patients, the dentist is not making a separate sale of the tangible personal property but rather is charging for the service of the dental repair (i.e., a professional service). Therefore, the fabricated dental devices are for use by the taxpayer in rendering his dental services and not for the sale of the dental devices as tangible personal property.  Consequently, the purchase of the machine does not meet the requirements of the manufacturing exemption.

The bottom line

Aprio’s SALT Team is experienced with reviewing these types of exemptions and related sales transactions to determine their applicability to your business, as well as recommend potential alternatives that may achieve the desired result. For example, in the teleprompter case, it is possible that if the taxpayer can segregate equipment used solely for leasing and equipment used solely for the service package, then it could claim a resale exclusion on purchases used solely for leasing. We can also assist you with verifying the documentation needed to support these transactions in the event of an audit.

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn, SALT Senior Manager at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the March 2021 SALT Newsletter.

[1] New York State Department of Taxation and Finance, Advisory Opinion TSB-A-20(34)S, July 14, 2020.

[1] New York State Department of Taxation and Finance, Advisory Opinion TSB-A-20(35)S, July 14, 2020.

[2] Tax Law §1115(a)(12).

Disclosure
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.