Can a diesel-engine manufacturer get back the New York petroleum business tax it paid on kerosene and No. 2 fuel oil used to run and test the engines it makes, when none of the fuel is used on the highways?

Plain-English summary

ABC Company, a global designer and manufacturer of diesel engines, runs a New York plant that makes heavy-duty diesel engines for the automotive industry. The plant buys kerosene and No. 2 fuel oil from a registered distributor, which delivers the fuel into two outdoor 20,000-gallon storage tanks and charges various taxes, including the Article 13-A petroleum business tax. The fuel is pumped to headers above 17 test stands and used exclusively to start and test the engines ABC produces, to confirm they meet ABC's standards. None of the fuel is used to run motor vehicles on the road. Through its representative Ernst & Young, ABC asked whether it can get reimbursement or credit of the petroleum business tax it paid on that fuel.

The answer depends on whether the testing is part of production and whether the fuel is "enhanced" — but reimbursement is available in the right circumstances.

• Engine testing can be part of the "production phase." Under the Sales and Use Tax Regulations (20 NYCRR 528.13(b)), production runs from handling and storing raw materials through the last step where the product is finished and packaged for sale. If the engine tests occur before the engines are completed and packaged for sale, and all engines are tested, the testing is within the production phase (the opinion compares Al Tech Specialty Steel Corp., TSB-A-81(29)S).
• Then the fuel is "manufacturing gallonage." Fuel used directly and exclusively in producing tangible personal property for sale, all on the manufacturing site and off the highways, is "manufacturing gallonage" under Tax Law § 300(m). ABC may claim reimbursement of the Article 13-A petroleum business tax under § 301-c(j) — but only if the diesel is not enhanced diesel motor fuel, 100% is consumed in production, and ABC proves the tax was paid and absorbed by it.
• Kerosene has its own relief. Even if the fuel is not manufacturing gallonage, as long as the kerosene is not blended with other fuel and not used to run a motor vehicle, ABC may claim a refund of the Article 13-A tax on the kerosene under § 301-b(a)(1) (the opinion cites Petro, Inc., TSB-A-02(1)M).
• The excise and sales taxes can also come back. Because the fuel is used off-highway in production, ABC would additionally be eligible for a refund of the Article 12-A diesel excise tax (§ 289-c(3)) and the Article 28 sales tax (§ 1120). (These taxes are jointly administered under § 315(b), which is why all three articles have to be read together.)
• "Enhanced diesel motor fuel" breaks the petroleum-business-tax relief. If the fuel is blended, or is designated "Diesel fuel," "No. 1 Diesel fuel," or "No. 2 Diesel fuel" (an automotive-engine designation), it is enhanced diesel motor fuel (§ 282(16), § 300(c)(1)(B)). Enhanced diesel is not eligible for petroleum business tax reimbursement or refund under § 301-b(a)(1) or § 301-c(j) — though it may still qualify for the Article 12-A and 28 refunds for off-highway use.
• Blending makes ABC an "enhancer." If ABC itself combines the kerosene with the No. 2 fuel oil, it is "enhancing" diesel motor fuel, which requires ABC to register as a diesel motor fuel distributor (§ 282-a(2)), pay the Article 13-A tax (no manufacturing-gallonage exemption for enhanced diesel), and pay any Article 12-A tax — while remaining eligible for a refund or credit for off-highway use.

What this means for you

New York taxes fuel by how it is used, and a manufacturer that consumes fuel inside its own production process can often recover the tax — but through refund/reimbursement, not by buying tax-free. The distributor charges the petroleum business tax up front; the manufacturer's path to relief is to show that the fuel is manufacturing gallonage consumed directly and exclusively in production, then claim it back. The key factual question is whether the step that consumes the fuel (here, engine testing) falls inside the production line — before the product is finished and packaged for sale.

"Enhanced diesel motor fuel" is the trap. The manufacturing-gallonage relief for the petroleum business tax is available only for unenhanced diesel. If the fuel is blended or carries an automotive "Diesel/No. 1/No. 2 Diesel fuel" designation, the petroleum-business-tax reimbursement disappears — even though the excise and sales tax refunds for off-highway use may survive. And if you do the blending yourself, you become a diesel distributor with registration and tax obligations of your own.

Documentation and "100%" are non-negotiable. Reimbursement of the petroleum business tax as manufacturing gallonage requires that all of the fuel be consumed in production and that you can prove the tax was paid and absorbed. Because fuel, gas, and electricity are received in bulk and some may be diverted to non-exempt uses, the regulations (20 NYCRR 528.22(c)) require careful allocation records — often an engineering survey — to support the exempt portion.

Common questions

Q: We're a manufacturer — can we just buy the fuel without the petroleum business tax?
A: No. The distributor charges the tax up front. The relief comes as a reimbursement/refund once you establish the fuel is manufacturing gallonage (or otherwise off-highway production use), the diesel is unenhanced, and the tax was paid and absorbed.

Q: Does running engines on a test stand count as "production"?
A: It can. If the testing happens before the engines are finished and packaged for sale, and all engines are tested, it is within the production phase (20 NYCRR 528.13(b)), like the testing in Al Tech Specialty Steel, so the fuel used is used directly in production.

Q: What's the catch with "enhanced" diesel?
A: Enhanced diesel motor fuel — blended fuel, or fuel designated as Diesel/No. 1/No. 2 Diesel fuel for motor-vehicle engines — cannot get the petroleum business tax reimbursement under § 301-b(a)(1) or § 301-c(j). Only the Article 12-A excise and Article 28 sales tax refunds for off-highway use may remain available.

Q: What if we blend the kerosene into the fuel oil ourselves?
A: Then you are "enhancing" diesel motor fuel and must register as a diesel motor fuel distributor under § 282-a(2), pay the Article 13-A tax (no manufacturing-gallonage exemption for enhanced diesel) and any Article 12-A tax, though you can seek a refund or credit for off-highway use.

Q: Why do three different taxes come up when we only asked about the petroleum business tax?
A: Because Articles 12-A (diesel excise), 13-A (petroleum business), and 28 (sales) are jointly administered under Tax Law § 315(b) and cross-reference each other, so the Department reads them together to determine the fuel's full tax treatment.

Citations and references

Statutes:

• Tax Law § 282(16) — "enhancement" and "enhanced diesel motor fuel"; § 300(c)(1)(B) parallel definition
• Tax Law § 282-a(2) — registration as a diesel motor fuel distributor required to enhance, sell, or produce diesel
• Tax Law § 289-c(3) — reimbursement of excise tax for fuel not consumed operating a vehicle on the highways
• Tax Law § 300(m) — "manufacturing gallonage" (unenhanced diesel/residual product used directly and exclusively in production, all on-site and off-highway)
• Tax Law § 301-a — Article 13-A petroleum business tax; § 301-b(a)(1) — kerosene exemption for registered diesel distributors
• Tax Law § 301-c(j) — reimbursement of petroleum business tax for manufacturing gallonage
• Tax Law § 302(a) — petroleum business registration as a distributor of motor fuel / diesel motor fuel
• Tax Law § 315(b) — joint administration of Articles 12-A, 13-A, and 28; § 1120 — Article 28 refund
• Tax Law § 1105-B and § 1115(c)(1) — sales tax exemptions for parts/tools and fuel used directly in production
• 20 NYCRR 528.13(b) and 528.22(c) — Sales and Use Tax Regulations on the production phase and "directly and exclusively"

Prior advisory opinions discussed (described, not linked, per corpus practice):

• Al Tech Specialty Steel Corp., TSB-A-81(29)S — testing within the production line
• Petro, Inc., TSB-A-02(1)M — kerosene refund under § 301-b(a)(1)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/gasoline_ao.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/misc/a03_2m.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M030129A

On February 24, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Ernst & Young, 1400 Key Tower, 50 Fountain Plaza, Buffalo, New York
14202.
The issue raised by Petitioner, Ernst & Young, on behalf of its client, ABC Company (ABC),
is whether, under the circumstances presented, ABC is eligible for reimbursement or credit of
Article 13-A tax paid on the purchase of kerosene and No. 2 fuel oil from ABC’s distributor.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
ABC, with headquarters outside of New York State, is a global leader in the design and
manufacture of diesel engines, with various business units that design, manufacture, distribute and
service engines and related products. ABC operates a manufacturing plant in New York. This plant
manufactures heavy-duty diesel engines used in the automotive industry.
The New York plant purchases kerosene and No. 2 fuel oil (collectively “fuels”) from a
registered distributor which delivers these fuels directly to the plant and charges various taxes,
including the New York petroleum business tax imposed under Article 13-A. The fuels are
dispensed directly into two aboveground 20,000-gallon storage tanks from the distributor’s delivery
truck via a 3-inch pipe connection. These storage tanks are located outside, in the rear of the
manufacturing plant, in an area commonly referred to as the “tank farm.” These storage tanks have
no nozzles to dispense the fuels directly from the tanks.
After delivery into the storage tanks, the fuels are then pumped into the plant via two
dedicated in-line pumps. These pumps continuously operate to circulate the fuels from the storage
tanks to a fuel header located above the test cells. Once the fuels are transported to the fuel headers
located above each test cell area, they are measured and dispensed directly to engines via a hose.
The fuels are used exclusively to operate the engines produced at the manufacturing plant.
The engines are started in one of the 17 test stands, and then tested to make sure they operate within
various standards established by ABC. None of the fuels are used to operate motor vehicles over
the road.
Applicable law and regulations
Section 282 of the Tax Law provides, in part:

-2­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003

1. (b) With respect to Diesel motor fuel, “distributor” means any person, firm,
   association or corporation (i) who or which imports or causes to be imported into the state,
   for use, distribution, storage or sale within the state, any Diesel motor fuel; (ii) who or which
   produces, refines, manufactures or compounds Diesel motor fuel within the state; (iii) who
   or which engages in the enhancement of Diesel motor fuel in this state . . . (Emphasis added)
   *

*

*

16. “Enhancement” when used in this article with respect to Diesel motor fuel shall
    mean the addition or blending of kerosene or any other substance . . . to or with fuel oil or
    other middle distillate which improves or enhances such middle distillate's performance in
    the operation of a motor vehicle engine of the diesel type . . . “Enhanced Diesel motor fuel”
    shall mean the combined or blended product which has resulted from the act of enhancement
    (not the purchase of the ingredients to make the blend) and any product specifically
    designated “Diesel fuel” or “No. 1 Diesel fuel” or “No. 2 Diesel fuel” or any like industry
    designation commonly used to refer to a fuel used in the operation of a motor vehicle engine
    of the Diesel type which meets standard industry specifications. . . . (Emphasis added)
    Section 282-a of the Tax Law provides, in part:
17. No person shall engage within this state in the enhancement of Diesel motor fuel,
    make a sale or use of Diesel motor fuel . . . or produce, refine, manufacture or compound
    Diesel motor fuel within the state unless such person shall be registered by the department
    of taxation and finance as a distributor of Diesel Motor fuel. . . . (Emphasis added)
    *

*

*

3. (b) The tax on the incident of sale or use imposed by subdivision one of this
   section shall not apply to:
   (i) the sale to or use by the consumer of previously untaxed Diesel motor fuel
   which is not enhanced Diesel motor fuel and which is used . . . for the purpose of use
   or consumption directly and exclusively in the production of tangible personal
   property, gas, electricity, refrigeration or steam, for sale, but only if all of such fuel
   is consumed other than on the highways of this state; provided, however, this
   exemption shall in no event apply to a sale of Diesel motor fuel which involves a
   delivery at a filling station or into a repository which is equipped with a hose or other
   apparatus by which such fuel can be dispensed into the fuel tank of a motor vehicle.
   ...
   Section 289-c. 3. (a) of the Tax Law provides, in part:

-3­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003

Except as otherwise provided in paragraph (b) of this section, any person who shall
buy any motor fuel or diesel motor fuel, on which the tax imposed by this article shall have
been paid, and shall consume the same in any manner except in the operation of a motor
vehicle upon or over the highways of this state, or in the operation of a pleasure or
recreational motor boat upon or over the waterways of the state including waterways
bordering on the state, shall be reimbursed the amount of such tax in the manner and subject
to the conditions herein provided except that there shall be no reimbursement of tax paid on
motor fuel or diesel motor fuel taken out of this state in a fuel tank connected with the engine
of a motor vehicle and consumed outside of this state. (Emphasis added)
Section 300 of the Tax Law provides, in part:
(c)(1) The term (A) “diesel motor fuel” means such term as defined in subdivision
fourteen of section two hundred eighty-two of this chapter and regulations thereunder
including any regulations relating to product specifically designated “No. 4 diesel fuel” and
not suitable as a fuel used in the operation of a motor vehicle engine, and
(B) “enhanced diesel motor fuel” means such term as defined in subdivision sixteen
of section two hundred eighty-two of this chapter . . . (Emphasis added)
(C) (i) “nonautomotive type diesel motor fuel” as used in relation to the rates of the
tax imposed by section three hundred one-a of this article means any diesel motor fuel, as
described in subparagraph (A) of this paragraph, which would be excluded from the diesel
motor fuel excise tax imposed by section two hundred eighty-two-a of this chapter solely by
reason of the enumerated exclusions based on ultimate use of the product set forth in
paragraph (b) of subdivision three of such section, and (ii) “automotive-type diesel motor
fuel” as used in relation to the rates of tax imposed by such section three hundred one-a
means diesel motor fuel which is not nonautomotive-type diesel motor fuel.
*

*

*

(m) “Manufacturing gallonage” means residual petroleum product or diesel motor
fuel (which is not enhanced diesel motor fuel) used and consumed directly and exclusively
in the production of tangible personal property for sale by manufacturing, processing or
assembly, but only if all of such fuel or product is delivered on the manufacturing site and
is consumed other than on the highways of this state. “Manufacturing gallonage” shall in
no event include diesel motor fuel delivered at a filling station or into a repository which is
equipped with a hose or other apparatus by which such fuel can be dispensed into the fuel
tank of a motor vehicle. The commissioner shall require such documentary proof to
substantiate the classification of product as “manufacturing gallonage” as the commissioner
deems appropriate. (Emphasis added)

-4­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003

Section 301-a of the Tax Law provides, in part:
(a) General. Notwithstanding any other provision of this chapter . . . there is hereby
imposed upon every petroleum business for the privilege of engaging in business, doing
business, employing capital, owning or leasing property, or maintaining an office in this
state, a monthly tax for each or any part of a taxable month equal to the sum of the motor
fuel component determined pursuant to subdivision (b) of this section, the automotive-type
diesel motor fuel component determined pursuant to paragraph one of subdivision (c) of this
section, the nonautomotive-type diesel motor fuel component determined pursuant to
paragraph two of subdivision (c) of this section and the residual petroleum product
component determined pursuant to subdivision (d) of this section.
*

*

*

(f)(4) Notwithstanding any other provision of this article, commencing January first,
nineteen hundred ninety-eight, nonautomotive-type diesel motor fuel which is
“manufacturing gallonage,” as such term is defined in subdivision (m) of section three
hundred of this article, shall be exempt from the measure of the nonautomotive-type diesel
motor fuel component of the tax imposed under this section. (Emphasis added)
Section 301-b. (a)(1) provides an exemption for gallonage otherwise includable in the
measure of the tax imposed by Article 13-A of the Tax Law for:
Kerosene sold or used by a petroleum business which is registered under article
twelve-A of this chapter as a distributor of diesel motor fuel so long as (i) such product has
not been blended or mixed with any other product constituting diesel motor fuel or motor
fuel or a residual petroleum product and (ii) such product is not used by the petroleum
business as fuel to operate a motor vehicle or sold by such petroleum business to a consumer
for use as fuel to operate a motor vehicle.
Section 301-c (j) of the Tax Law provides:
Reimbursement for manufacturing gallonage. Commencing January first, nineteen
hundred ninety-eight, a subsequent purchaser shall be eligible for reimbursement of any
taxes imposed under this article with respect to gallonage of residual petroleum product and
diesel motor fuel (which is not enhanced diesel motor fuel), subsequently sold by such
purchaser to a consumer as “manufacturing gallonage.” This reimbursement may be
claimed only where (1) any tax imposed pursuant to this article has been paid with respect
to such gallonage and the entire amount of such tax has been absorbed by such purchaser,
and (2) such purchaser possesses documentary proof satisfactory to the commissioner
evidencing the absorption by it of the entire amount of such tax. Provided, however, that the
commissioner shall require such documentary proof to qualify for any reimbursement of tax

-5­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003
provided by this subdivision as the commissioner deems appropriate including a certificate
by the consumer that such product is to be used and consumed exclusively as
“manufacturing gallonage”. (Emphasis added)
Section 302(a) of the Tax Law provides, in part:
Registration required. Each petroleum business with respect to motor fuel must be
registered with the department of taxation and finance as a distributor of motor fuel under
article twelve-A of this chapter. Each petroleum business with respect to diesel motor fuel
must be registered with the department of taxation and finance as a distributor of diesel
motor fuel under article twelve-A of this chapter. . . . (Emphasis added)
Section 315(b) of the Tax Law provides, in part:
Joint administration of taxes. In addition to the powers granted to the commissioner
in this chapter, the commissioner is hereby authorized to make provisions for the joint
administration, in whole or in part, of the taxes imposed by articles twelve-A and
twenty-eight and pursuant to the authority of article twenty-nine of this chapter upon
automotive fuel and the taxes imposed by this article, including the joint reporting,
assessment, collection, determination and refund of such taxes, and for that purpose to
prescribe that any of the commissioner's functions under such articles, and any returns,
forms, statements, documents or information to be submitted to the commissioner under
such articles, any books and records to be kept for purposes of the taxes imposed or
authorized to be imposed by such articles, any schedules of amounts to be collected under
such articles, any registration required under such articles, and the payment of taxes under
such articles, shall be on a joint basis with respect to the taxes imposed by or pursuant to
such articles. Provided, notwithstanding any provision of this article to the contrary, in the
furtherance of joint administration, the provisions of subdivision one of section two hundred
eighty-five-a and subdivision one of section two hundred eighty-nine-c of this chapter shall
apply to the taxes imposed under this article with the same force and effect as if those
provisions specifically referred to the taxes imposed hereunder and all the products with
respect to which the taxes are imposed under this article. . . . (Emphasis added)
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. (Emphasis added)
Section 1115(c)(1) of the Tax Law provides, in part:

-6­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003
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, gas, electricity, refrigeration or steam, 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.
Section 528.13(b) of the Sales and Use Tax Regulations provides:
(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.
Example 1: A crane is used to unload raw materials, which are immediately placed
in storage at a plant. From the storage site, the material is placed on an assembly line
without testing. The crane is being used in production.
Example 2: Testing equipment used to test incoming materials is not used in
production and is subject to tax.

-7­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003
(4) Production ends when the product is ready to be sold.
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.
Section 528.22(c) of the Sales and Use Tax Regulations provides, in part:
(1) Directly means the fuel, gas, electricity, refrigeration and steam and like services,
and 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. (Emphasis added)
*

*

*

(3) (i) Exclusively means that the fuel, gas, electricity, refrigeration and steam and
like services 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.
*

*

*

(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 the 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.
Opinion
ABC operates a manufacturing plant in New York State. This plant manufactures heavy­
duty diesel engines used in the automotive industry. This plant purchases kerosene and No. 2 fuel
oil from a registered distributor which delivers these fuels directly to the plant and charges various

-8­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003
taxes, including the New York State petroleum business tax imposed under Article 13-A of the Tax
Law. The fuels are used exclusively to operate the engines produced at the manufacturing plant.
The engines are started and tested in one of ABC’s 17 test stands to make sure they operate within
various standards established by ABC. None of the fuel is used to operate motor vehicles over the
highways of New York State.
Although Petitioner's questions relate specifically to petroleum business tax, it is necessary
to include in this discussion Articles12-A and 28 of the Tax Law (diesel motor fuel excise tax and
sales and compensating use tax), because Article 13-A incorporates portions of these articles by
reference. See section 315(b)of the Tax Law. While each of these taxes is imposed by a separate
article of the Tax Law, these taxes are all jointly administered. Thus, it is necessary to look at the
provisions of each of these taxes to better understand the application of the Tax Law to the
circumstances at issue.
The definition of manufacturing gallonage under Article 13-A of the Tax Law and the
exemptions provided under Articles 12-A and 28 pertain to property and fuel used and consumed
“directly and exclusively” or “directly and predominantly” in the production of tangible personal
property for sale by manufacturing, processing or assembly. See sections 282-a(3)(b), 300(m),
1105-B and 1115(c)(1) of the Tax Law.
Section 528.13(b)of the Sales and Use Tax Regulations provides that manufacturing
activities can be classified as administration, production or distribution. In clarifying the production
phase in the manufacturing process, the regulation section states that 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.” The determination of when production begins and ends is dependent upon the procedure used
in a plant. In the present case it is important to note that production ends when the product is ready
to be sold.
Assuming the engine tests in the present case are part of the production line before packing
for shipment for sale and all engines are so tested, it would appear that the testing is within the
production phase. See Al Tech Specialty Steel Corporation, Adv Op Comm T&F, October 5, 1981,
TSB-A-81(29)S. If the testing takes place prior to the completion of the engines (i.e., testing occurs
within the production phase of the process), then the fuels purchased by ABC for use in such testing
will be used or consumed directly in the production of tangible personal property for sale by
manufacturing. In such case, the fuels will be manufacturing gallonage under section 300(m) of
the Tax Law and ABC may be eligible for reimbursement of the taxes imposed by Article 13-A,
provided that the diesel motor fuel purchased is not enhanced diesel motor fuel and 100% of such
fuel is used or consumed in production. To claim the reimbursement, ABC must substantiate that
the Article 13-A tax was paid on the fuel and absorbed by ABC. Even if the fuels are not
manufacturing gallonage, and as long as they are not blended or used in a motor vehicle, ABC may
claim a refund of the Article 13-A tax with respect to its purchases of kerosene. See section 301-b
(a)(1) of the Tax Law and Petro, Inc., Adv Op Comm T&F, July 26, 2002, TSB-A-02(1)M. As the

-9­
TSB-A-03(2)M
Miscellaneous Tax
November 18, 2003
fuel is not consumed on the highways of this state, and assuming that the fuel in question is used in
production, ABC would also be eligible for a refund of the taxes imposed by Articles 12-A and 28.
See sections 289-c (3) and 1120 of the Tax Law.
If the fuel is blended prior to delivery, or designated by the distributor as “Diesel fuel” or
“No. 1 Diesel fuel” or “No. 2 Diesel fuel” or any like industry designation commonly used to refer
to a fuel used in the operation of a motor vehicle engine, then the fuel meets the definition of
“enhanced diesel motor fuel.” See sections 282(16) and 300(c)(1)(B) of the Tax Law. Although
the enhanced diesel motor fuel may meet the refund eligibility requirements of sections 289-c (3)
and 1120 of the Tax Law for automotive fuel excise and sales tax purposes, it is not eligible for
refund or reimbursement of tax pursuant to section 301-b(a)(1) or section 301-c (j) of the Tax Law
for petroleum business tax purposes. Also see section 300(m) of the Tax Law. Therefore, ABC
would not be eligible for reimbursement or refund of petroleum business tax on its purchases of
enhanced diesel motor fuel.
In addition, if ABC is itself combining or blending the kerosene with No. 2 fuel oil, ABC
is considered to be “enhancing” the diesel motor fuel. This activity would require ABC to register
as a distributor of diesel motor fuel under Article 12-A of the Tax Law. ABC would be required to
pay the Article 13-A tax on the fuel (as noted above, there is no manufacturing gallonage exemption
for enhanced diesel motor fuel). ABC would also be required to pay any appropriate Article 12-A
tax, but would be eligible for a refund or credit for off-highway use. See sections 282(1)(b)(iii),
282(16), 282-a(2), 289-c(3), and 302(a) of the Tax Law.

DATED: November 18, 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.