Which of a semiconductor/automotive-electronics factory's specialized production support systems (compressed air, vacuum, nitrogen, hydrogen, cooling water, exhaust, and clean-room HVAC) qualify for New York's manufacturing exemption on equipment, parts, maintenance, electricity, and water?

Plain-English summary

Motorola operates a 190,000-square-foot facility manufacturing automotive electronic components, with over 95% of its electricity and water dedicated to production. It asked the Department to classify seven categories of production-support infrastructure for New York's manufacturing exemption on equipment, parts, maintenance services, electricity, and water: a compressed air system (powers robotics, dispenses materials, creates vacuums), a vacuum system (moves and de-airs parts), a nitrogen system (prevents corrosion, pre-stresses parts), a hydrogen system (heats parts to reflow solder), a process cooling water system (cools production machinery), an exhaust system (removes heat/fumes/vapors from ovens and lasers), and a plant-wide HVAC system (maintains 60-75°F and 30-40% relative humidity across the manufacturing floor to prevent electrostatic discharge and component damage).

The Department found the first six systems all qualify as exempt "machinery or equipment used directly and predominantly in production" (§ 1115(a)(12)): each acts directly on parts moving through production, has an active causal role in the process, or removes production byproducts (heat, fumes) that would otherwise damage the equipment or product — and since their entire use (100%) is tied to production, they're exempt in full, along with their maintenance/parts/supplies and dedicated electricity.

The HVAC system came out differently. Even though it demonstrably helps prevent electrostatic-discharge damage to sensitive electronic components, the Department distinguished this case from an earlier ruling (Finch, Pruyn & Co.) where dedicated HVAC units served separate, restricted-access control rooms metered independently and used only for equipment protection. Here, the HVAC serves the entire manufacturing floor where 800 employees work — and the same temperature/humidity range Motorola needs for production is also simply a comfortable working temperature it would have to maintain for employees regardless. That dual purpose means the HVAC isn't used "directly and predominantly" (over 50%) in production, so neither the HVAC equipment nor the electricity powering it qualifies for exemption — it's fully taxable. Water delivered through ordinary mains/pipes, however, is exempt across the board under a separate, simpler provision (§ 1115(a)(2)) regardless of how it's used.

What this means for you

Manufacturers with specialized production-support systems

Systems that act directly on your product or remove genuine production byproducts (fumes, heat, particulates generated by the manufacturing process itself) have a strong case for the production exemption — even if they look like "building infrastructure" at first glance (exhaust fans, cooling towers, gas delivery systems).

Manufacturers relying on climate control for sensitive products

General building HVAC that happens to also protect your product is a much harder case than a dedicated, separately metered, access-restricted system serving only equipment (not employees). If you want HVAC to qualify, structure it as its own isolated system serving only production equipment, not general working floor space.

Accountants and tax professionals

This is a clean side-by-side illustration of when climate control crosses the "directly and predominantly"/"directly and exclusively" line: compare this HVAC (denied, mixed-use, whole-floor) against the Finch, Pruyn precedent (allowed, dedicated, restricted-access control rooms) when advising a manufacturing client on climate-control equipment.

Common questions

Q: Is a factory's compressed air, vacuum, or gas-delivery system exempt as production equipment?
A: Yes, if it acts directly on the product during production (moving parts, dispensing materials, preventing corrosion, etc.) — these qualify as machinery used directly and predominantly in production.

Q: Is exhaust ventilation exempt if it removes fumes generated by the production process?
A: Yes — even though it doesn't qualify under the separate pollution-control exemption, removing production-generated heat/fumes/vapors that would otherwise damage equipment or product is itself an integral, necessary part of the production process.

Q: Is plant-wide HVAC exempt if it protects sensitive electronic components from static damage?
A: Not automatically. If the same climate control is also needed for ordinary employee comfort across a general working floor, the dual-purpose use disqualifies it from the "directly and predominantly"/"directly and exclusively" production exemptions.

Q: Is water used in manufacturing exempt?
A: Yes, as long as it's delivered through the regular water-supply mains/pipes (not bottled or specially treated) — this exemption applies regardless of how the water is ultimately used.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a), (b), (c)(3) (retail sales tax; utility service tax; TPP installation/maintenance)
• Tax Law § 1105-B (parts, tools, supplies production exemption)
• Tax Law § 1115(a)(2) (water through mains/pipes), § 1115(a)(12) (production machinery/equipment), § 1115(a)(40) (pollution control equipment), § 1115(c)(1) (fuel/electricity directly/exclusively in production)
• 20 NYCRR § 526.8 (tangible personal property definition, incl. water)
• 20 NYCRR § 527.5 (installing/maintaining/servicing tangible personal property)
• 20 NYCRR § 528.3 (water through mains/pipes)
• 20 NYCRR § 528.13 (directly and predominantly test, Example 3)
• 20 NYCRR § 528.22 (directly and exclusively test, Example 4)
• NYS Dept. of Taxation and Finance Important Notice N-00-2 (Expanded Exemption for Services to Property Used in Production, Feb. 2000)
• NYS Dept. of Taxation and Finance Publication 852 (Sales Tax Information for Manufacturers, 12/97)

Cases and prior rulings referenced:

• Matter of International Salt Co. v. New York State Tax Commission, 79 AD2d 343
• Matter of Niagara Mohawk Power Corporation v. Wanamaker, 286 AD 446, affd 2 NY2d 764
• Matter of Deco Builders, Inc., TSB-D-91(39)S
• Chrysler Corporation, TSB-A-85(62)S
• Finch, Pruyn & Co., Inc., TSB-A-96(51)S
• MOD-PAC Corp., TSB-A-85(20)S
• Weber-Knapp Company, TSB-A-85(15)S
• Fancher Chair Co., Inc., TSB-A-83(11)S
• Crystal Clear Water, Ltd., TSB-A-83(28)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a03_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(27)S
Sales Tax
June 24, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S000502C

On May 2, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Motorola, Inc., 611 Jamison Road, Elma, NY 14059. Petitioner, Motorola, Inc.,
provided additional information pertaining to the Petition on May 18, 2000 and March 7, 2001.
The issues raised by Petitioner are:
(1) Whether certain equipment used in connection with Petitioner’s production of automotive
electronic components for sale is exempt from sales and compensating use tax.
(2) Whether the purchase of parts and maintenance for the equipment is exempt from sales
and compensating use tax.
(3) Whether the purchase of electricity and water used in Petitioner’s manufacturing
operations is exempt from sales and compensating use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a manufacturer of automotive electronic components. Petitioner’s manufacturing
area houses 800 employees. More than 95% of the electricity and water used at Petitioner’s 190,000
square foot facility is dedicated to the manufacturing of Petitioner’s products. The water is used in
the facility’s cooling system to cool production machinery and comes from Petitioner’s regular
water supply, i.e., is delivered through pipes and mains. Petitioner has submitted the following list
of equipment used in its manufacturing operations along with a description of the function of each
item:
•

Compressed Air System - consists of four 150 hp, one 350 hp, and one 75 hp oil free
rotary screw and two smaller duplex reciprocating air compressors, six air dryers,
filtration, and associated piping.
The compressed air produced by this system is used in manufacturing for control and
material handling during production such as powering robotics and pick and place
operations. The air is also used for pressurizing and purging chambers such as
ovens, wave soldering machines, and dryers which contain parts in process. Where
liquids, pastes, or gels need to be dispensed onto parts as they move along production
lines, compressed air forces the material through nozzles or other applicators. Some
air is used to create a vacuum for manufacturing processes via venturi eductors, in
lieu of running a separate vacuum pipe to that machine.

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•

Vacuum System - consists of six 7 ½ hp and one 20 hp vacuum pumps and
associated piping.
A vacuum is used in production primarily for picking up parts as they are moved
throughout the automated manufacturing process and to de-air some materials for
further processing.

•

Nitrogen System - consists of two bulk liquid nitrogen tanks with appropriate
vaporization, a Praxair packaged nitrogen-generating plant which separates nitrogen
from other gases in ambient air, and associated piping.
Nitrogen is used in the manufacturing process to prevent corrosion of parts for
proper bonding of soldered connections by blanketing these parts with this dry inert
gas during the assembly. Liquid nitrogen is used in thermal shock chambers to pre­
stress component parts prior to further assembly along the lines to eliminate failure
from thermal stresses encountered during completion. It is also mixed with
hydrogen for one soldering machine on a Sensor manufacturing line.

•

Hydrogen System - consists of a tank farm of pressurized cylinders and associated
supply piping.
This system provides a hydrogen atmosphere directly into one reflow oven which
heats parts, re-flowing solder to a liquid state. Hydrogen also mixes with nitrogen
for proper atmosphere in another soldering machine on a Sensor manufacturing line.

•

Process Cooling Water System - consists of one 200 ton rotary liquid chiller, a multi­
circuit shell and tube heat exchanger, a cooling tower, six circulating pumps, and
associated piping.
This closed-loop system flows 500 gallons per minute of water at 65 degrees
Fahrenheit to provide heat rejection for manufacturing equipment on the production
lines. Equipment requiring cooling includes air compressors, ovens, thermal
chambers, and production lasers.

•

Exhaust System - consists of approximately 27 rooftop centrifugal exhaust fans with
sizes ranging from approximately one to five horsepower, and associated collection
and discharge ductwork.
These are required for production by serving to exhaust heat, noxious fumes and
vapors from ovens, dryers, solvent filled parts cleaners and the like, all of which
contain parts in process of production. They also vent ozone discharges from the
production lasers. All are NYSDEC permitted for production use.

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•

Heating, Ventilation and Air Conditioning Units (HVAC) System - consists of 18
primarily rooftop air handlers distributed throughout the facility area. Each unit
includes an air cooled condensing unit, a supply fan, a return fan, a direct expansion
cooling coil, electric heating coil, filters, ductwork and, typically, three compressors
totaling 95 tons of cooling capacity. Associated with each air handler is a humidifier
which injects steam into the ductwork manifold. These air handlers predominantly
serve manufacturing floor space, which comprises the vast majority of the area of the
plant.
This system is needed to create specific temperature and humidity conditions for the
high tech electronic components to be produced. These products require strict
adherence to environmental specifications as follows:
Integrated circuit (IC) chips which are applied to circuit boards in Petitioner’s
Autobody control lines cannot be used if exposed to excessive humidity for certain
durations (different for specific chips).
In the Phase I Print and Fire area of the plant precious metals and inks are printed
onto ceramic substrates, requiring the maintenance of specific temperature and
relative humidity ranges for proper curing while controlling electrostatic discharge
(ESD).
Soldering is performed throughout all areas of the plant using soldering paste in a
reflow or wave oven. To maintain consistency for uniform flowing and product
quality, the paste is required to be kept at the same parameters as the items discussed
above, 60 - 75 degrees Fahrenheit and 30 - 40% Relative Humidity (RH).
Laser processes require maintaining consistent temperatures and relative humidity
to perform properly. The lasers trim conductive ink from circuit boards to set the
proper resistive values in the product. If temperature or humidity levels exceed the
range of 60 - 75 degrees Fahrenheit and 30 - 40% relative humidity, the laser beam
will act erratically, trimming out of value and creating scrap product.
Finally, the purpose of providing space conditioning in an electronics manufacturing
environment is to control electrostatic discharge (ESD). ESD will cause damage to
sensitive electronic parts as static electricity is discharged to the product. This can
even happen from machine operators touching the product, as static might have built
up on their bodies in the same way as static results from walking across a (“dry”)
carpet at home and touching a doorknob. Damage can be done even at threshold
levels not detected by the person. Special precautions are used to help prevent this
such as wrist and foot grounding straps and special ESD resistant frocks and mats.
Also, ESD is minimized when space temperature and relative humidity are
maintained between 60 - 75 degrees Fahrenheit and 30 - 40%, respectively. From

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local experience, industry practice, and customer requirements, this space
conditioning is a requirement to produce quality electronic products.
As part of its Petition, Petitioner has submitted a user manual, technical bulletins, and
product information from its suppliers which indicate the optimum relative humidity levels that
should be maintained in ESD controlled work areas for their products.
Applicable Law and Regulations
Section 1105 of the Tax Law imposes sales tax, in part, on:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
(b)(1) The receipts from every sale, other than sales for resale, of the
following: (A) gas, electricity, refrigeration and steam, and gas, electric, refrigeration
and steam service of whatever nature. . . .
Section 1105(c) of the Tax Law imposes sales tax, in part, upon:
The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property . . . or maintaining, servicing or
repairing tangible personal property . . . not held for sale in the regular course of
business, whether or not the services are performed directly or by means of coin­
operated equipment or by any other means, and whether or not any tangible personal
property is transferred in conjunction therewith. . . .
Section 1105-B of the Tax Law provides, in part:
(a) Receipts from the retail sales of parts with a useful life of one year or less,
tools and supplies for use or consumption directly and predominantly in the
production of tangible personal property . . . for sale by manufacturing, processing,
generating, assembling, refining, mining or extracting shall be exempt from the tax
imposed by subdivision (a) of section eleven hundred five of this article.
(b) Receipts from every sale of the services of installing, repairing,
maintaining or servicing the tangible personal property described in paragraph
twelve of subdivision (a) of section eleven hundred fifteen of this article, including
the parts with a useful life of one year or less, tools and supplies described in
subdivision (a) of this section, to the extent subject to such tax, shall be exempt from

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the tax on sales imposed under subdivision (c) of section eleven hundred five of this
article.
Section 1115 of the Tax Law provides, in part:
(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:
*

*

*

(2) Water, when delivered to the consumer through mains or pipes.
*

*

*

(12) Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property . . . for sale, by
manufacturing, processing, generating, assembling, refining, mining or extracting,
but not including parts with a useful life of one year or less or tools or supplies used
in connection with such machinery or equipment. . . .
*

*

*

(40) Machinery or equipment for use or consumption directly and
predominantly in the control, prevention, or abatement of pollution or contaminants
from manufacturing or industrial facilities, to the extent such machinery or
equipment is not otherwise exempt under paragraph twelve of this subdivision.
*

*

*

(c)(1) Fuel, gas, electricity, refrigeration and steam, and gas, electric,
refrigeration and steam service of whatever nature for use or consumption directly
and exclusively in the production of tangible personal property . . . for sale, by
manufacturing, processing, assembling, generating, refining, mining or extracting
shall be exempt from the taxes imposed under subdivisions (a) and (b) of section
eleven hundred five and the compensating use tax imposed under section eleven
hundred ten of this article. (Emphasis added)
Section 526.8 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. The term tangible personal property means corporeal
personal property of any nature having a material existence and perceptibility to the
human senses. Tangible personal property includes, without limitation:

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*

*

*

(5) water.
Section 527.5 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. (1) The tax is imposed on receipts from every sale of the
services of installing, maintaining, servicing or repairing tangible personal property,
by any means. . . .
*

*

*

(10) Tax is not imposed on receipts from services rendered to certain
machinery, equipment or apparatus, or parts, tools or supplies used in connection
therewith, as described in section 1105-B of the Tax Law. . . .
Section 528.3 of the Sales and Use Tax Regulations provides, in part:
(a) Water when delivered through mains or pipes is exempt.
(b) Water sold in bottles or by any means other than through mains or pipes
is taxable.
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
(a)(1) Exemption from statewide tax. An exemption is allowed from the tax
imposed under subdivisions (a) and (c) of section 1105 of the Tax Law, and from
the compensating use tax imposed under section 1110 of the Tax Law, for receipts
from sales of the following:
*

*

*

(iii)(a) Parts with a useful life of one year or less, tools or supplies 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.
*

*

*

(b)(1)(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.

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*

*

*

(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.
*
Example 3:

*

*

A manufacturing plant has two boilers which generate steam
carried by piping systems through two turbines. One turbine
. . . provides mechanical power to drive the production
machinery. The steam is then used in other phases of the
manufacturing process, converted to water by condensation
and returned to the boilers. The boilers, piping systems and
condenser are all machinery and equipment used directly in
the production of tangible personal property . . . for sale.
(Emphasis added)
*

*

*

(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.
Section 528.22 of the Sales and Use Tax Regulations provides, in part:
(a) Exemption. (1) Fuel, gas, electricity, refrigeration and steam and gas,
electric, refrigeration and steam service of whatever nature is exempt from the sales
and compensating use tax when used directly and exclusively in the production, for
sale, of tangible personal property . . . by one of the following endeavors:

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(i) manufacturing . . . .
(2) Fuel, gas, electricity, refrigeration and steam and like services used or
consumed in the heating, cooling or lighting of buildings . . . or in the storage of
tangible personal property, are subject to the sales tax. (Emphasis added)
*

*

*

(4) An exempt use certificate (Form ST-121) is used to make purchases
eligible for this exemption, without payment of sales tax. . . .
*

*

*

(c) Directly and exclusively. (1) Directly means the fuel, gas, electricity,
refrigeration and steam . . . must during the production phase of a process, either:
(i) operate exempt production machinery or equipment; or
(ii) create conditions necessary for production; or
(iii) perform an actual part of the production process.
(2) Usage in activities collateral to the actual production process is not
deemed to be use directly in production.
*

*

*

(3) (i) Exclusively means that the fuel, gas, electricity, refrigeration and steam
. . . are used in total (100%) in the production process. ( Emphasis added)
(ii) Because fuel, gas, electricity, refrigeration and steam when purchased by
the user are normally received in bulk or in a continuous flow and a portion thereof
is used for purposes which would make the exemption inapplicable to such
purchases, the user may claim a refund or credit for the tax paid only on that portion
used or consumed directly and exclusively in production.
(iii) In the alternative, an exempt use certificate (Form ST-121) may be used,
providing full liability is assumed for any State and local tax due on any part of
purchases used for other than exempt purposes described in subdivision (a) of this
section. The taxable portion of these purchases is to be reported as a “purchase
subject to use tax” on a sales and use tax return required to be filed with the
Department of Taxation and Finance.

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(iv) The user must maintain adequate records with respect to the allocation
of fuel, gas, electricity, refrigeration and steam used directly and exclusively in
production and for nonexempt purposes.
(v) For purpose of substantiating the allocation of fuel, gas, electricity,
refrigeration and steam and like services used directly and exclusively in production
from that used for nonexempt purposes, the user must, when claiming a refund or
credit, submit an engineering survey or the formulae used in arriving at the amounts
used in an exempt manner.
*
Example 4:

*

*

A manufacturing plant purchases electricity to power its
production machinery and also to light its buildings. Only the
electricity used to power the production machinery is used
directly in production

Opinion
Petitioner is a manufacturer of automotive electronic components. An exemption from sales
and use tax is provided for machinery and equipment used or consumed directly and
predominantly in producing tangible personal property for sale by manufacturing. See Section
1115(a)(12) of the Tax Law. For equipment to be used directly in production it must perform a
continuous, synchronized operation that is necessary and integral to the production process. See
Matter of International Salt Co. v. New York State Tax Commission, 79 AD2d 343; Matter of
Niagara Mohawk Power Corporation v. Wanamaker, 286 AD 446 affd 2 NY2d 764; Matter of Deco
Builders, Inc., Dec Tx App Trib, May 9, 1991, TSB-D-91(39)S. In Petitioner’s case, the
Compressed Air and Vacuum Systems are used in the handling of parts and materials and act upon
parts as they move along production lines. Also acting upon parts along the lines are the Nitrogen
System, which covers them with nitrogen to prevent corrosion, and the Hydrogen System, which
provides a hydrogen atmosphere for heating them. The Process Cooling Water System is
interrelated with production machinery and equipment to the extent it performs a cooling function
essential to the effective operation of production machinery and equipment. See Chrysler
Corporation, Adv Op St Tx Comm, December 4, 1985, TSB-A-85(62)S. Each of the
aforementioned systems is an integral part of the continuous production process and has an active
causal role in the manufacture of automotive electronic components. Without the processes
provided by each of these systems, Petitioner would not be able to produce its products. Therefore,
the Compressed Air, Vacuum, Nitrogen, Hydrogen, and Process Cooling Water Systems are used
directly in production as this term is defined in section 528.13(c) of the Sales and Use Tax
Regulations. In addition, these systems are predominantly used in production since their entire use
(100%) is intimately and directly connected to the process of producing automotive electronic
components. Accordingly, they qualify as machinery and equipment used directly and
predominantly in production and are exempt from sales and compensating use taxes.

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With regard to Petitioner’s Exhaust System consisting of 27 rooftop fans and associated
collection and discharge ductwork, which serves to exhaust heat, noxious fumes and vapors from
ovens, dryers, and the like, it is first noted that such Exhaust System does not qualify under the
machinery and equipment exemption provisions contained in section 1115(a)(40) of the Tax Law
because it is not used to control, prevent, or abate pollution or contaminants from Petitioner’s
facility. However, Petitioner’s description of the Exhaust System suggests that in its absence the
production equipment and/or the automotive electronic components being produced would be
harmed by the heat, noxious fumes and vapors emitted by the production process. The heat, noxious
fumes and vapors which the equipment is used to remove are a by-product of the final product being
produced, and removal of them is a necessary and integral operation in the production of the
automotive electronic components. See International Salt Co. v. New York State Tax Commission,
supra. The use of the Exhaust System is at all times intimately connected to the production process.
Accordingly, the Exhaust System used to remove the heat, noxious fumes and vapors constitutes
equipment used directly and predominantly in the production of tangible personal property for sale
and is likewise exempt from sales and compensating use tax.
Lastly, Petitioner maintains constant temperatures of 60 - 75 degrees Fahrenheit and relative
humidities of 30 - 40% in its manufacturing area. This is accomplished through the use of 18
HVAC units distributed throughout the facility area. In Finch, Pruyn & Co., Inc., Adv Op Comm
T&F, September 4, 1996, TSB-A-96(51)S, it was found that dedicated HVAC systems used to
maintain specific environmental conditions in separate individual control rooms, for the protection
of various electrical components which were directly connected to manufacturing line equipment,
were considered machinery and equipment used directly and predominantly in producing tangible
personal property for sale. These dedicated HVAC units were controlled and monitored separately
and the electricity usage for HVAC operations was metered separately. Employee access or use of
the rooms was restricted to maintenance and service functions only. By contrast, in Petitioner’s case
the HVAC units serve the entire manufacturing floor space, which comprises the vast majority of
the area of the plant. This area houses 800 employees. Although keeping the temperature and
humidity in a specified range will minimize the potential for static generation and damage to
sensitive electronic parts, Petitioner is required to maintain this reasonably comfortable temperature
and humidity in the manufacturing area in any event for purposes of employee comfort. Therefore,
the HVAC System is not deemed to be used directly and predominantly (more than 50%) in
production within the meaning of section 1115(a)(12) of the Tax Law and is not exempt from sales
and use tax.
Concerning Issue (2), the service of maintaining machinery and equipment used directly and
predominantly in the production of tangible personal property for sale is exempt from New York
State and local sales and use taxes. See section 1105-B(b) of the Tax Law; New York State
Department of Taxation and Finance Important Notice –00-2, Expanded Exemption for Services to
Property Used in Production, February 2000. Purchases of replacement parts and supplies (such as
oil, grease and sandpaper) installed on exempt production machinery or equipment or used in the
maintenance of exempt production machinery, equipment, parts, and tools are exempt from State
and local sales and use taxes because they are considered to be used directly and predominantly in

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the production process. See sections 1105-B(a) and 1115(a)(12) of the Tax Law; and New York
State Department of Taxation and Finance Publication 852 (12/97), Sales Tax Information for
Manufacturers, at page 21. Accordingly, since Petitioner’s HVAC System does not constitute
exempt production equipment, the purchase of parts and maintenance for such equipment is not
exempt. However, Petitioner may claim an exemption from State and local sales taxes for the
purchase of maintenance service, replacement parts, and supplies for its Compressed Air, Vacuum,
Nitrogen, Hydrogen, Process Cooling Water, and Exhaust Systems by providing vendors with Form
ST-121, Exempt Use Certificate, within 90 days of the purchase. See section 1132(c) of the Tax
Law.
With regard to Issue (3), Petitioner’s purchases of electricity for use directly and exclusively
in the production process qualify for exemption from sales tax. See section 1115(c) of the Tax Law.
“Directly" means the electricity must either operate exempt production machinery, create conditions
necessary for production, or perform a part of the production process. "Exclusively" means electric
power is used 100% in the production process. See section 528.22(c) of the Sales and Use Tax
Regulations. The electricity consumed by Petitioner’s HVAC System is taxable since this electricity
is used to power equipment not entitled to the production exemption. Moreover, electricity used for
general heating and cooling of plant areas does not qualify for the exemption (see MOD-PAC Corp.,
Adv Op St Tx Comm, June 12, 1985, TSB-A-85(20)S; Weber-Knapp Company, Adv Op St Tx
Comm, May 29, 1985, TSB-A-85(15)S; Fancher Chair Co., Inc., Adv Op St Tx Comm, March 15,
1983, TSB-A-83(11)S. Electricity consumed by Petitioner's HVAC System insures the proper
temperature and humidity for production, but it is also necessary for employee comfort. This dual
use renders it ineligible for the exemption applicable only to electricity consumed exclusively in
production. See Fancher Chair Co., Inc., supra. However, electricity consumed by Petitioner is
fully exempt when operating machinery and equipment employed 100% of the time directly in
production. Therefore, Petitioner’s purchases of electricity used to power its Compressed Air,
Vacuum, Nitrogen, Hydrogen, Process Cooling Water, and Exhaust Systems qualify for the
exemption from tax provided under section 1115(c) of the Tax Law (see Finch, Pruyn & Co., Inc.,
supra).
When providing power to machinery and equipment used for both production and
nonproduction purposes, electricity must be apportioned accordingly and exemption may be claimed
only for the quantity consumed directly and exclusively in the production process. The exemption
may be claimed by using Form ST-121, Exempt Use Certificate. Petitioner then assumes full
liability for the State and local taxes due on that portion not used directly and exclusively in exempt
production activities. As an alternative, Petitioner may pay tax on its entire energy bill and apply
for a refund or credit for sales tax paid on that portion of the energy used directly and exclusively
in production. See section 528.22(c)(3) of the Sales and Use Tax Regulations. To help calculate
allocation percentages see Publication 852, supra, Appendix A, at page 44.
Lastly, the water at issue in this Advisory Opinion is part of Petitioner’s regular water supply
that is delivered through mains and pipes to Petitioner’s manufacturing facility. The water
purchased, being neither in a heated nor chilled state, is not considered a steam or refrigeration

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Sales Tax
June 24, 2003
service subject to tax pursuant to section 1105(b) of the Tax Law, but instead, merely water
delivered to Petitioner via pipes and mains. Water delivered to a consumer in this manner, for
whatever purpose, is exempt from sales and use tax. See section 1115(a)(2) of the Tax Law. This
exemption provision is generally aimed at, and has in practice been applied to, the sale of water by
public utilities and the like where the water is brought from a distant location to the customer's home
or place of business by mains or pipes. See Crystal Clear Water, Ltd., Adv Op St Tx Comm,
June 24, 1983, TSB-A-83(28)S. Accordingly, provided Petitioner is merely purchasing water as such
and not a steam or refrigeration service subject to tax under section 1105(b)(1) of the Tax Law,
Petitioner’s purchases of water delivered to it by way of pipes or mains are exempt from sales and
use tax.

DATED: June 24, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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