Can a toll galvanizing processor buy forklifts, forklift repairs, and forklift fuel tax-free when the forklifts move customers' steel between storage, the galvanizing plant, and shipping?

Plain-English summary

O. W. Hubbell & Sons galvanizes steel that its customers own and supply — bonding a zinc coating onto the customer's iron or carbon steel to make it rust-resistant, then returning the finished, galvanized product. The company uses forklifts to unload incoming zinc ingots and customer steel, move both between the storage yard and the galvanizing plant, then move the finished galvanized product back to the yard and load it onto trucks for shipment. The company estimated its forklifts spend 85% of the time on yard-to-plant transport and 15% on truck loading/unloading.

New York exempts machinery used "directly and predominantly" (over 50%) in the actual production phase of making goods for sale — but the Department first had to confirm that a toll processor like this galvanizer even counts as "producing for sale," since it never takes title to the steel it works on. The answer: yes, as long as the customer ultimately intends to resell the finished galvanized product (evidenced by the customer giving Hubbell a resale certificate), the processor's work is treated as an extension of the customer's own manufacturing line, and the processor's production equipment can qualify for the exemption just like a manufacturer's would. From there, the Department drew New York's usual sharp line between production and distribution: unloading raw materials (that aren't first weighed/inspected/tested before storage) and moving them to the production line is production-phase use, but moving the FINISHED product from the end of the line back to the yard and loading it for shipment is distribution — which doesn't count toward the exemption, no matter how essential it feels to the overall operation. So a forklift only gets the tax-free treatment if more than half its total use falls into the qualifying production-phase category; if half or more of its use is really distribution work (or moving materials the customer intends to keep and use itself, rather than resell), the whole forklift purchase is taxable. Repairs and lubricating supplies for a qualifying forklift ride along exempt, but the forklift's fuel is judged separately and more strictly — only the portion of fuel actually used in the exclusively-production activities is exempt, and Hubbell has to keep records to claim a refund on that share.

What this means for you

Toll processors, contract manufacturers, and subcontractors working on a customer's own materials

Not owning the material you're processing doesn't disqualify your production equipment from the manufacturing exemption — what matters is whether your customer intends to resell the finished product. Get a properly completed Resale Certificate from each customer to document that intent, since the exemption analysis depends on it.

Businesses whose forklifts or material-handling equipment do double duty

Track how your equipment's time actually splits between production-phase tasks (moving raw material into and within the production line) and distribution-phase tasks (moving finished goods to storage or loading them for shipment) — the same forklift can be exempt or fully taxable purely based on which side of that 50% line its total usage falls on.

Manufacturers claiming a fuel exemption for material-handling equipment

Don't assume qualifying equipment automatically means qualifying fuel. Fuel gets the stricter "directly and exclusively" (100% in production) standard rather than the "predominantly" (50%+) standard that applies to the equipment itself — track and document the production-only share of fuel usage separately if you want to claim a refund.

Common questions

Q: Does a company that processes materials it doesn't own qualify for New York's manufacturing exemption on its own equipment?
A: Yes — as long as the customer intends to resell the finished processed product (documented with a resale certificate), the processor's work is treated as an extension of the customer's manufacturing, and its qualifying production equipment can be exempt.

Q: Is moving finished product to a shipping area considered part of "production" for exemption purposes?
A: No — that's distribution-phase activity, which doesn't count toward the 50%+ production-use threshold, even though it happens at the very end of making the product.

Q: If our forklift is used 50% for production and 50% for shipping, does it qualify for the exemption?
A: No — the machinery must be used MORE than 50% (a genuine majority) in the production phase; an even 50/50 split does not qualify.

Q: Is fuel used in exempt production equipment automatically tax-free too?
A: No — fuel is judged by a stricter "directly and exclusively" (100%) production-use standard, separate from the equipment's own "predominantly" (over 50%) test, and requires supporting records to claim a refund on the qualifying portion.

Citations and references

Statutes and rules:

• Tax Law § 1105(a) (retail sales tax)
• Tax Law § 1105-B (short-life parts/tools/supplies exemption)
• Tax Law § 1115(a)(12), (c)(1) (production machinery/equipment exemption; production fuel exemption)
• 20 NYCRR 527.4 (processing services; toll-processor resale exclusion)
• 20 NYCRR 528.13 (production/administration/distribution phases; directly-and-predominantly test)

Prior advisory opinions relied on:

• Burn Brite Metals Company, Inc., TSB-A-88(17)S (toll processor as extension of customer's manufacturing)
• Henry & Henry Inc., TSB-A-02(17)S (production begins with unloading absent prior testing/inspection)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a04_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(22)S
Sales Tax
September 2, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S031224A

On December 22, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from O. W. Hubbell & Sons, Inc., P. O. Box 37, New York Mills, New York,
13417. Petitioner, O. W. Hubbell & Sons, Inc., provided additional information pertaining to the
Petition on March 9, 2004.
The issue raised by Petitioner is whether its purchase of forklifts, supplies associated with
such forklifts, and repairs to such forklifts are subject to sales or compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a processor of various galvanized steel products. Petitioner acquires steel from
its customer and galvanizes this material pursuant to the customer’s specifications. Galvanizing is
a process by which a zinc coating is bonded to iron or carbon steel, thereby forming an impermeable
barrier against corrosion. Once Petitioner has galvanized the customer’s steel, it is a finished
product ready to be returned to the customer. Petitioner does not install its product onto real
property but merely delivers the product to its customer.
Petitioner uses its forklifts to unload raw materials consisting of zinc ingots and its
customers’ steel at its premises, and transport the ingots which are to be used in the galvanizing
process and steel which is to be galvanized from the storage area (the yard) to the galvanizing plant.
The forklifts are then used to return the finished product (the galvanized steel) to the yard after
processing and subsequently load the product onto trucks for shipment from Petitioner’s plant.
Petitioner asserts that the forklifts are used 85% of the time to transport ingots and finished product
between the storage area and galvanizing plant and 15% of the time for loading and unloading
trucks.
Applicable law and regulations
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax On and after June first, nineteen hundred seventy-one, there
is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
Section 1105-B of the Tax Law provides:

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(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, gas, electricity, refrigeration or steam 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 the tax on sales imposed under subdivision (c) of section
eleven hundred five of this article.
(c) Parts with a useful life of one year or less, tools and supplies described in
subdivision (a) of this section and services described in subdivision (b) of this section shall
be exempt from the compensating use tax imposed by section eleven hundred ten 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:
*

*

*

(12) Machinery or equipment 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. . . .
*

*

*

(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, 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 527.4 of the Sales and Use Tax Regulations provides, in part:
Sale of services of producing, fabricating, processing, printing or imprinting.

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(a) Imposition. (1) Section 1105(c)(2) of the Tax Law imposes a tax on the receipts
from services of producing, fabricating, processing, printing or imprinting tangible personal
property, performed for a person who directly or indirectly furnishes the property.
(2) The enumerated services are not taxable when:
(i) purchased for resale; or
(ii) performed on property intended for resale.
*

*

*

(d) Processing. Processing is the performance of any service on tangible personal
property for the owner which effects a change in the nature, shape, or form of the property.
*

*

*

(f) Resale. (1) When the services enumerated in this section are rendered on property
held for resale, the services are not taxable.
Example 1: A manufacturer of home appliances has certain of the component
appliance parts galvanized by a plating firm. The service of galvanizing is not
taxable since it is being performed on a product which will be sold by the
manufacturer.
(2) Where a person performing a service subject to tax purchases tangible personal
property, which becomes a part of the property on which the services are performed or which
is later transferred to the purchaser of the service in conjunction with the service performed,
the purchase of the property is for resale and is not subject to the sales tax.
Example 2: A plating company purchases zinc for galvanizing steel which is
furnished by its customer. The zinc becomes part of the steel. The purchase of the
zinc by the plating company is a purchase for resale which is not subject to tax.
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
Machinery and equipment used in production; telephone and telegraph equipment;
parts, tools and supplies.
(a) Exemption. (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:

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(i) Machinery or equipment (including parts with a useful life of more than one year)
used or consumed directly and predominantly in the production for sale of tangible personal
property, gas, electricity, refrigeration or steam, by manufacturing, processing, generating,
assembling, refining, mining or extracting. . . .
*

*

*

(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.
*

*

*

(iv) The services of installing, repairing, maintaining or servicing the exempt
machinery, equipment, apparatus, parts, tools or supplies identified in subparagraph (i), (ii)
or (iii) of this paragraph.
*

*

*

(b) Production. (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

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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.
*

*

*

(4) Production ends when the product is ready to be sold.
*

*

*

(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.
*

*

*

(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.
Example 11: A fork lift is used 60 percent of the time on an assembly line and 40
percent of the time for loading finished products onto railroad cars for delivery. The
fork lift is used predominantly in production.
Opinion
Petitioner is a processor of various galvanized steel products. Petitioner acquires steel from
its customers and galvanizes this material pursuant to the customers’ specifications.

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Petitioner is engaged in the processing of its customers’ materials (steel) by applying a
galvanizing coating to the customers’ materials. This application creates a material which, unlike
raw steel, is extremely resistant to rust and corrosion. Since Petitioner sells a service performed on
its customers’ tangible personal property rather than making direct sales of tangible personal
property to its customers, a threshold question in this case is whether Petitioner is a person engaged
in the production for sale of tangible personal property for purposes of section 1115(a)(12) of the
Tax Law.
Publication 852, entitled Sales Tax Information For: Manufacturers, Processors,
Generators, Assemblers, Refiners, Miners and Extractors, and Other Producers of Goods and
Merchandise (12/97), provides that “The purchase of machinery and equipment used by a
subcontractor to perform part of a production process may also be entitled to exemption as
production machinery and equipment.”
Petitioner processes a material (raw steel) which is quite susceptible to rust and corrosion
into a galvanized (zinc coated) material which is extremely rust and corrosion resistant, thereby
effecting a change in the nature of the material. Petitioner’s services clearly fall within the meaning
of processing as defined under section 527.4(d) of the Sales and Use Tax Regulations. Section
1115(a)(12) of the Tax Law provides an exemption for machinery or equipment used or consumed
directly and predominantly in the production for sale of tangible personal property by processing.
If Petitioner’s customer intends to sell the finished product (i.e., the galvanized steel), then Petitioner
is performing a part of a production process for its customer and its services are, in effect, performed
as part of a continuous production line which is an extension of its customer’s manufacturing
process. See Burn Brite Metals Company, Inc., Adv Op Comm T & F, February 29, 1988,
TSB-A-88(17)S. Accordingly, Petitioner’s purchases of machinery and equipment qualify for
exemption from sales and use tax pursuant to section 1115(a)(12) of the Tax Law, provided such
machinery and equipment are used directly and predominantly (more than 50% of their use) to
process material intended for resale by Petitioner’s customers. Such intent is evidenced by the
customer’s issuance of a properly completed Resale Certificate (Form ST-120) to Petitioner
pertaining to the customer’s purchases of Petitioner’s processing services.
It is noted that machinery and equipment used by Petitioner to process a customer’s material
which that customer intends to use itself (e.g., where Petitioner processes steel for a contractor who
intends to install the steel as part of a capital improvement) are not used in the production of tangible
personal property for sale. Such machinery and equipment will not qualify for the production
exemption under section 1115(a)(12) of the Tax Law unless the machinery and equipment are
otherwise used directly and predominantly in the production phase to process material intended for
resale.
Petitioner uses its forklifts to unload raw materials consisting of zinc ingots and customers’
steel at its plant, and transport the ingots which are to be used in the galvanizing process and steel
which is to be galvanized from the storage area (the yard) to the galvanizing plant. The forklifts are

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then used to return the finished product (the galvanized steel) to the yard after processing and
subsequently load the product onto trucks for shipment from Petitioner’s plant.
Petitioner uses the forklift to unload and place raw materials in storage prior to their being
moved to the production area. Section 528.13(b)(3) of the Sales and Use Tax Regulations provides
that, “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.” Conversely, where raw materials are unloaded without being
weighed, inspected, measured or tested prior to placement into storage, production begins with the
unloading of raw materials. See Henry & Henry Inc., Adv Op Comm T & F, June 26, 2002,
TSB-A-02(17)S.
Presuming that Petitioner’s customers intend to resell the finished product as such,
Petitioner’s use of forklifts to unload raw materials and place them in the yard, provided that such
materials are not weighed, inspected, measured or tested prior to placement into storage, and to
transport the raw materials from the yard to the galvanizing plant are uses directly in the production
phase as described in section 528.13(b)(1)(ii) and (3) of the Sales and Use Tax Regulations.
Petitioner’s use of forklifts to move the finished product from the end of the production line to the
yard, and to load the finished product onto trucks for shipment from the plant, are uses in the
distribution phase rather than the production phase. See section 528.13(b)(1)(iii) and (4) of the Sales
and Use Tax Regulations. Provided that Petitioner maintains records substantiating that the forklifts
are used predominantly (more than 50% of use) to (1) unload raw materials which are used in the
processing of materials intended by the customer for resale, and are not weighed, inspected,
measured or tested prior to placement into storage, and (2) to move such materials between other
areas of the production process, such equipment may be purchased exempt from sales tax. See
section 528.13(c)(4) of the Sales and Use Tax Regulations. However, where 50% or more of a
forklift’s use is to move raw materials which are used in the processing of materials not intended
by the customer for resale, to unload materials which are weighed, inspected, measured or tested
prior to placement into storage, to move the finished product from the end of the production line to
storage in the yard and/or to load the finished products for shipment from Petitioner’s plant, such
forklift is not eligible for the exemption under section 1115(a)(12) of the Tax Law and its purchase
is subject to sales tax.
Charges for repair services to forklifts which qualify for exemption as described above are
exempt from sales tax pursuant to section 1105-B(b) of the Tax Law. See section 528.13(a)(1)(iv)
of the Sales and Use Tax Regulations. Consumable supplies used to keep the exempt forklifts in
operating condition (e.g., lubricating oil, grease, etc.) may also be purchased without payment of
sales tax pursuant to section 1105-B(a) of the Tax Law. See section 528.13(a)(1)(iii)(a) of the Sales
and Use Tax Regulations. Fuel used in the forklifts must be used exclusively in the production
phase as described above in order to qualify for the exemption from sales tax. See section
1115(c)(1) of the Tax Law. Petitioner must maintain records substantiating the amount of fuel used
in the forklifts directly and exclusively in the production phase in order to obtain a refund or credit
of the sales tax paid on fuel so used. It is noted that fuel used in the forklifts to unload or move

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materials between production areas will not be exempt where the materials are not intended for
resale by Petitioner’s customer.

DATED: September 2, 2004

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.