Does the production-machinery exemption cover equipment, repairs, utilities, and building improvements at a standalone cold storage facility that holds fruit for processors?

Plain-English summary

KM Davies operates cold storage facilities that hold fruit owned by fruit processors, using controlled cooling and conditioning to slow the fruit's natural ripening until the processor is ready to feed it into its own production line — which may be next door or entirely out of state. KM Davies never buys the fruit, never takes title, and doesn't grow or process it; it's purely a storage intermediary between the grower/processor's purchase and the processor's own production run.

New York exempts machinery and equipment used "directly and predominantly" in the PRODUCTION phase of manufacturing or processing for sale — but production, under the regulations, means the production LINE AT THE PLANT SITE, starting with handling raw materials there and continuing through packaging the finished product. KM Davies's storage happens at an entirely separate facility from the processor's plant, isn't part of a continuous production line, and (following a 1986 precedent on nearly identical facts, Middleport Cold Storage) doesn't itself count as "processing" — refrigeration alone doesn't change the fruit's nature, shape, or form the way processing requires.

Because the storage machinery and equipment don't qualify for the exemption, everything that flows from that classification is taxable too: the machinery and equipment purchases themselves, repair and maintenance services on them, and the utilities (electricity, refrigeration service) used to run the facility — none of these get the production exemption's benefit. Building improvements to the facility are taxable for the same reason UNLESS they independently satisfy the separate three-part capital-improvement test (value-added, permanently affixed, intended as permanent) — that's a different exemption track entirely, turning on the building work itself rather than on whether the facility counts as "production."

What this means for you

Cold storage, warehousing, and logistics operators serving food processors

Simply slowing spoilage or holding raw material for a customer's later use — without changing the product's form and without operating as part of a continuous, on-site production line — doesn't qualify your equipment, repairs, or utilities for New York's production machinery exemption, even if your storage is essential to the processor's eventual production run.

Fruit, produce, and food processors who outsource storage

If cold storage happens at a facility SEPARATE from your own production plant, that storage step generally sits outside the "production" umbrella for sales tax purposes — plan for the storage provider's costs (including sales tax on its own equipment/utilities) to be baked into what it charges you, since the storage facility itself can't buy tax-free.

Accountants and tax professionals

Middleport Cold Storage remains the controlling precedent nearly 20 years later: storage that merely retards ripening or spoilage, performed off the processor's plant site and disconnected from a continuous production line, is not "processing" for exemption purposes. Building improvements at such a facility need their own independent capital-improvement analysis — they don't inherit any exemption from the storage function itself.

Common questions

Q: Does a cold storage facility that holds raw fruit for a processor qualify for New York's production machinery exemption?
A: No, when the storage happens at a separate facility from the processor's own plant and isn't part of a continuous production line — refrigeration alone isn't "processing."

Q: Are utilities used to run the cold storage facility exempt?
A: No — since the machinery and equipment aren't exempt production property, the utilities used to operate them are taxable too.

Q: Are building improvements at the facility automatically taxable?
A: They're taxable unless they independently satisfy the separate three-part capital-improvement test, which doesn't depend on whether the facility counts as production.

Q: Can another cold storage operator rely on this Advisory Opinion?
A: No. It binds the Department only for the petitioner and facts described; a facility physically integrated into a processor's own plant and production line could reach a different result.

Citations and references

Statutes, regulations, and case law:

• Tax Law §§ 1101(b)(9); 1105(a), (b)(1), (c)(3)(iii), (c)(5); 1105-B; 1115(a)(12), (17); 1115(c)(1), (2); 1132(c)(1)
• 20 NYCRR 528.13(a), (b), (c); 531.2(e)
• Matter of Middleport Cold Storage, State Tax Commn, October 20, 1986, TSB-H-86(190)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_47s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-05(47)S
Sales Tax
December 28, 2005

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S050303A

On March 3, 2005, the Department of Taxation and Finance received a Petition for
Advisory Opinion from KM Davies Co., Inc., 6509 Lake Avenue, Williamson, New York,
14589.
The issues raised by Petitioner, KM Davies Co., Inc., are:
1) Whether purchases of machinery and equipment, repair and maintenance
services, and building improvements installed upon and used in a cold storage
facility used to store fruit owned by fruit processors are subject to sales tax.
2) Whether purchases of utilities used in the operation of such cold storage
facility are subject to sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner operates several cold storage facilities located in Williamson, New York.
Petitioner’s facility is used to store fruit, some of which is owned by fruit processors. The cold
storage facility provides a cooling and conditioning process in a controlled environment which is
necessary to retard the fruit's natural ripening process until the fruit is ready to be placed in the
fruit processor’s production line.
The production facilities for Petitioner's customers who are fruit processors may be as
close as next door to Petitioner's cold storage buildings or may be located outside of New York
State.
The fruit processor purchases the fruit from the grower. The fruit is then sized and
graded to determine the purchase price. The fruit processor then contracts with Petitioner to
store the fruit until the fruit processor is ready for the fruit to be placed in the fruit processor's
production line. The fruit is considered part of the fruit processor’s inventory while stored at
Petitioner’s facility. When the fruit processor is ready for the fruit to be placed in its production
line, the fruit is transported to the fruit processor’s plant site where the fruit is placed in the
production line. Petitioner does not grow or process the fruit. Petitioner at no time takes title to
the fruit.
Applicable law and regulations
Section 1101(b)(9) of the Tax Law provides, in part:

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Capital improvement. (i) An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or article
itself; and
(C) Is intended to become a permanent installation.
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.
(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; . . .
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(c) The receipts from every sale, except for resale, of the following services:
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3) Installing tangible personal property, excluding a mobile home, or maintaining,
servicing or repairing tangible personal property, including a mobile home, 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, except:
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(iii) for installing property which, when installed, will constitute an addition or
capital improvement to real property, property or land, as the terms real property,
property or land are defined in the real property tax law as such term capital improvement
is defined in paragraph nine of subdivision (b) of section eleven hundred one of this
chapter; . . .

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(5) Maintaining, servicing or repairing real property, property or land, as such
terms are defined in the real property tax law, whether the services are performed in or
outside of a building, as distinguished from adding to or improving such real property,
property or land, by a capital improvement as such term capital improvement is defined
in paragraph nine of subdivision (b) of section eleven hundred one of this article, . . .
Section 1105-B of the Tax Law provides:
(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:
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(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. . . .
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(17) Tangible personal property sold by a contractor, subcontractor or repairman
to a person other than an organization described in subdivision (a) of section eleven
hundred sixteen, for whom he is adding to, or improving real property, property or land
by a capital improvement, or for whom he is about to do any of the foregoing, if such
tangible personal property is to become an integral component part of such structure,
building or real property; provided, however, that if such sale is made pursuant to a
contract irrevocably entered into before September first, nineteen hundred sixty-nine, no
exemption shall exist under this paragraph.
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(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.
(2) Fuel, gas, electricity, refrigeration and steam, and gas, electric, refrigeration
and steam service of whatever nature for use or consumption either in the production of
tangible personal property, for sale, by farming or in a commercial horse boarding
operation, or in both, 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 1132(c)(1) of the Tax Law provides, in part:
For the purpose of the proper administration of this article and to prevent evasion
of the tax hereby imposed, it shall be presumed that all receipts for property or services of
any type mentioned in subdivisions (a), (b), (c) and (d) of section eleven hundred five . . .
are subject to tax until the contrary is established, and the burden of proving that any
receipt . . . is not taxable hereunder shall be upon the person required to collect tax or the
customer. . . .
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

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the compensating use tax imposed under section 1110 of the Tax Law, for receipts from
sales of the following:
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(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 . . . processing . . . .
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(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.
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(4) Production ends when the product is ready to be sold.
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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

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(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.
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(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 531.2(e) of the Sales and Use Tax Regulations provides:
Processing. Processing is the performance of any service on tangible personal
property which effects a change in the nature, shape or form of the property.
Opinion
Petitioner operates cold storage facilities in which fruit owned by fruit processors is
stored. Petitioner does not grow or process the fruit. Petitioner at no time takes title to the fruit.
Section 1105(a) of the Tax Law imposes sales tax on receipts from the sale of tangible
personal property. Section 1105(b) of the Tax Law imposes sales tax on receipts from the sale of
gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam service of
whatever nature. Purchases of tangible personal property or utility services taxed under section
1105 of the Tax Law are presumed to be subject to sales tax unless the contrary is established.
See section 1132(c) of the Tax Law.
Section 1115(a)(12) of the Tax Law exempts from tax machinery and equipment used
directly and predominantly in the production of tangible personal property for sale by processing.
Section 528.13(b)(1)(ii) of the Sales and Use Tax Regulations provides that production includes
the production line of the plant starting with the handling and storing of raw materials at the
plant site and continuing through the last step of production where the product is finished and
packaged for sale.
Petitioner’s refrigeration of fruit is not processing as contemplated in sections 1105-B
and 1115(a)(12) of the Tax Law. See Matter of Middleport Cold Storage, State Tax Commn,

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October 20, 1986, TSB-H-86(190)S. While Petitioner’s storage constitutes storage of raw
materials for the processor, the storage does not occur at the processor’s plant site as called for in
section 528.13(b)(1)(ii) of the Sales and Use Tax Regulations. Petitioner’s services and facilities
are separate and distinct from its customer’s production activities. The fruit stored for the
processor at Petitioner’s facilities is awaiting transportation to a processor’s plant. Such storage
is not part of a continuous production line. Therefore, Petitioner’s machinery and equipment
used to store fruit for its customers who are processors are not used directly in the production for
sale of tangible personal property. Accordingly, Petitioner’s purchases of machinery and
equipment used to store fruit for its customers are not exempt from sales or use tax under section
1115(a)(12) of the Tax Law.
Since Petitioner’s machinery and equipment used in its cold storage facilities for storage
of fruit owned by processors are not exempt from sales or use tax, repair and maintenance
services performed on such machinery and equipment are not exempt from tax under section
1105-B(b) of the Tax Law. Utilities used to operate equipment used in Petitioner’s storage
facilities to store fruit awaiting transportation to a processing facility are not used directly in
the production of tangible personal property for sale as contemplated in section 1115(c) of the
Tax Law. Therefore, purchases of such utilities are subject to sales tax under section 1105(b) of
the Tax Law.
Lastly, building improvements to Petitioner’s cold storage facilities fail to qualify as
property used directly and predominantly in the production of tangible personal property for sale,
and thus are ineligible for exemption from tax under either section 1105-B of the Tax Law or
section 1115(a)(12) of the Tax Law. If such improvements meet the requirements of section
1101(b)(9)(i) of the Tax Law for a capital improvement, charges for the installation of such
improvements would not be subject to sales tax. See sections 1105(c)(3)(iii) and 1115(a)(17) of
the Tax Law.

DATED: December 28, 2005

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.