Is a company that applies coatings to manufacturers' parts a 'producer,' and is its coating equipment and fuel exempt from sales tax?

Plain-English summary

The Petitioner applies protective coatings (specialty paint, ceramic linings, metal coatings) to its customers' equipment and precision component parts to add corrosion/temperature/chemical resistance and reduce friction and wear. Its customers are manufacturers; the Petitioner picks up their parts, prepares the surface (grinding, abrasive/grit blasting), then applies the coatings in paint bays with quality control at each step, and ships the parts back for the continuation of the customer's production. It asked (1) whether it is a producer under Tax Law 1115(a)(12), and (2) whether its machinery, tools, supplies, fuel and utilities qualify for the production exemption.

The Office of Counsel concluded the Petitioner is a producer and its production equipment/fuel can qualify, with limits:

• Coating = "processing." Processing is performing a service on property that changes its nature, shape, or form (20 NYCRR 527.4(d)). The coatings change the nature of the parts (resistance, reduced wear), so the work is processing.
• Production for sale -- if the parts are sold by the customer. The Petitioner doesn't sell the parts, but if the coated parts are, or become a component of, property the customer sells, the Petitioner is performing part of a continuous production line extending the customer's manufacturing -- so it is engaged in production for sale (1115(a)(12); TSB-A-04(22)S).
• "Directly and predominantly" (>50%). Only machinery/equipment used directly and predominantly in the production phase is exempt (and the parts/tools/supplies used with it, under 1105-B). Production here begins when the parts are placed in the lay-down area and ends at final inspection (20 NYCRR 528.13). So forklifts that move parts into the lay-down area qualify, but transport vehicles to/from the plant don't (not used in production). Equipment used 50%+ in administration or distribution doesn't qualify.
• Fuel/utilities -- "directly and exclusively." Fuel and utilities that power exempt production equipment are exempt under 1115(c)(1), but the standard is directly and exclusively. The Petitioner may exempt the portion used to power exempt equipment during production, and must keep records and an engineering study/formula allocating exempt vs. non-exempt use.

What this means for you

Coaters, finishers, platers, and other contract processors

If you perform a step that changes the nature/shape/form of a customer's goods that the customer then sells, you're treated as part of the customer's production line -- a producer eligible for the manufacturing exemptions. Your coating/finishing equipment, and the tools and supplies used with it, can be bought exempt under 1115(a)(12)/1105-B.

Map the production phase carefully

The exemption runs from where production begins (here, placement in the lay-down area) to final inspection. Equipment used before production (pickup/transport) or after (delivery) -- or used mostly in admin/distribution -- doesn't qualify. The ">50% in production" test is per-machine.

Fuel is a tougher standard -- document it

Utilities/fuel exemption requires "directly and exclusively" in production. Expect to allocate with an engineering study and keep detailed records to support the exempt percentage.

Common questions

Q: I apply coatings/finishes to other manufacturers' parts. Am I a "producer" for the exemption?
A: Yes, if your work changes the nature/shape/form of the parts and the parts become goods your customer sells. Then you're part of the customer's production line.

Q: Which of my equipment is exempt?
A: Machinery used directly and predominantly (more than 50%) in the production phase -- from lay-down through final inspection -- plus the parts, tools and supplies used with it. Transport vehicles and admin/distribution equipment aren't exempt.

Q: Is my electricity/fuel exempt too?
A: Only the portion used directly and exclusively to power exempt production equipment, supported by records and an engineering study.

Citations and references

• Tax Law section 1115(a)(12) (exemption for machinery and equipment used directly and predominantly in production)
• Tax Law section 1105-B (parts, tools, and supplies used with exempt production machinery)
• Tax Law section 1115(c)(1) (exemption for fuel and utilities used directly and exclusively in production)
• 20 NYCRR section 527.4(d) (definition of processing)
• 20 NYCRR section 528.13 (production phase; directly and predominantly)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-14(14)S
Sales Tax
July 2, 2014

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S121022A

The Department of Taxation and Finance received a Petition for Advisory Opinion
from REDACTED REDACTED REDACTED REDACTED REDACTED REDACTED.
Petitioner asks whether: (1) Petitioner is a person engaged in the production for sale of
tangible personal property for purposes of § 1115(a)(12) of the Tax Law; and (2) Petitioner’s
purchase of machinery, equipment, tools, materials, supplies, and utilities used to apply
coatings to its customers’ property qualify for exemption from sales and use tax.
We conclude that Petitioner’s purchases of machinery and equipment described below,
and the parts, tools and supplies used in conjunction with such machinery and equipment, will
be exempt from sales and use tax pursuant to § 1115(a)(12) of the Tax Law if used directly
and predominantly in the production process and if the property on which the coatings are
applied is, or becomes a component part of, property sold by its customer. We further
conclude that Petitioner’s purchase of fuel and utilities to power exempt production
equipment will be exempt from sales tax under § 1115(c)(1) of the Tax Law if used directly
and exclusively in the production process.
Facts
Petitioner applies coatings that improve the performance of equipment and precision
component parts. The coatings provide corrosion, temperature, and chemical resistance to the
items to which they are applied. In addition, the coatings help to reduce friction and wear on
the parts to which they are applied. The coating process involves the use of various types of
coatings depending on the specifications of the customer. Some examples include: specialty
paint, ceramic lining and metal coatings. Petitioner prepares its customers’ manufactured
items to accept the coatings and performs the coating process according to the manufacturer’s
specifications and the Petitioner’s trade secret coating application process. Petitioner prepares
the coatings, develops the coating processes, and provides the coating processes to its
customers’ manufactured items at Petitioner’s operating facility in New York State.
Petitioner’s customers typically are manufacturers of equipment and precision
component parts. Petitioner applies the coatings to equipment and precision component parts
(tangible personal property) that are being manufactured by Petitioner’s customers. Tangible
personal property that is to be processed is picked up from the customer’s manufacturing
facility in one of Petitioner’s vehicles used only for that purpose. Once the tangible personal
property is received at Petitioner’s plant, it is reviewed to verify that it matches the shipping

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documentation in type and quantity prior to being unloaded by forklift to a lay down area.
When the tangible personal property is ready to be worked on, it will be moved from the lay
down area to the mineral abrasive or grit blasting plants, where it will be placed on stable
structures to allow access to the pieces so that they can be inspected and surface preparation
can begin.
Hardened edges & welds will have grinding performed on them and corners receive a
radius. This is performed so the coatings to be applied will bond properly around sharp
edges. Metal preparation by blasting will then begin. The preparation of the surface typically
involves the use of various blasting media (i.e. mineral abrasives, steel grit, glass bead, etc.).
The purpose of using the blasting media is to change the texture and composition of the
surface area of the tangible personal property in order for the coating application to bond
properly. During this process, some of the blasting media permanently remains a part of the
tangible personal property.
After the preparation process is complete and quality control approves that the work
specification is met, the material will be moved from the blasting plant to one of four paint
bays. The tangible personal property will be cleaned using compressed air or by vacuuming to
remove any remaining dust or other media. Masking and protection of surfaces that will not
be coated is also performed. Once the property is cleaned, masked and approved by quality
control, the application of the customers’ material specification begins. Examples include but
are not limited to metalizing with 99.9% zinc, inorganic and organic zincs, epoxies and
polyurethanes. Depending on the specifications of the particular project, multiple coatings
may be applied. After each coating, an inspection is performed for quality assurance.
After all applications are complete and final approval is given by quality control, the
pieces are placed back on the original shipping structures and stored until final delivery to the
customer. Each group is then protected with foam and shrink wrap for undamaged delivery to
the customer in one of Petitioner’s vehicles, for the continuation of the customer’s production
process.
Petitioner provided a detailed list of machinery and equipment that is used in the
various stages of the process described above. For purposes of brevity, this equipment
generally falls into the following categories:
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Vehicles used for product transportation.
Cranes, forklifts, magnets, steel beams.
Mobile carts.
Pallets and skids, and skid steer for material handling.
Air compressor system and dryer to remove moisture from air supply. All moisture
must be removed to prevent corrosion of steel. This is very critical to the production
process.
Grinders, needle guns, roto-peaners; bristle blasters for steel preparation.
Dust collectors, fans and filters.

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Sales Tax
July 2, 2014

Reclaimer, vacuum, and storage drums for grit recycling system (allows grit to be used
multiple times in the coating process).
Air hoses, hoppers, blast pots, blast cradles and blast hoses for blasting operations.
Liquid metal and paint spraying equipment.

Analysis
Tax Law § 1115(a)(12) provides an exemption from sales and use tax for “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 . . . .” Parts with a useful
life of one year or less, and tools and supplies used in connection with such machinery or
equipment are exempt under § 1105-B of the Tax Law. An exemption is also allowed for
“[f]uel, 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 . . . .” Tax
Law § 1115(c)(1).
“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.” 20 NYCRR §
527.4(d). Petitioner’s application of its coatings to its customers’ tangible personal property
effects a change in the nature of the tangible personal property by providing corrosion,
temperature and chemical resistance, and by reducing friction and wear on the parts to which
they are applied. Petitioner’s services to its customers’ tangible personal property fall within
the meaning of “processing” as provided in Regulation § 527.4(d).
Petitioner is not selling the tangible personal property on which the processing is
performed to its customer. However, if tangible personal property processed by Petitioner is,
or becomes a component part of, property sold by Petitioner’s customer, Petitioner would be
“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.” TSB-A-04(22)S. Petitioner would, therefore, be engaged in the
production for sale of tangible personal property for purposes of Tax Law § 1115(a)(12).
In order to qualify for exemption, Petitioner’s machinery and equipment described
above, and the parts, tools and supplies used in conjunction with such machinery and
equipment, must be used “directly and predominantly” in the production of tangible personal
property for sale.
“Predominantly” means more than 50%. Sales and Use Tax Regulations § 528.13
describes the three stages of manufacturing as administration, production, and distribution.
Only machinery and equipment used directly and predominantly in the production phase of

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manufacturing is exempt from sales tax under Tax Law § 1115(a)(12). Section 528.13 (b)
provides in part:
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.
Petitioner picks up the customer’s tangible personal property in its own trucks used
specifically for that purpose. When the customer’s incoming tangible personal property is
received at Petitioner’s facility, it is checked against shipping documents, unloaded, and
stored in a lay down area until it is ready to be worked on. At that point it is moved to the
mineral abrasive or grit blasting plant, where the property is inspected and surface preparation
can begin.
We conclude that the production phase begins when the customer’s equipment is
placed in the lay down area and concludes when the final inspection is completed. In order to
satisfy the “directly” requirement of the exemption, Petitioner’s machinery and equipment,
and any parts and supplies used in conjunction with such machinery and equipment, must be
used during this phase. The vehicles used to transport the tangible personal property to and
from Petitioner’s facility are not used in the production process and, therefore, do not qualify
for exemption. However, the equipment used to place the tangible personal property in the
laydown area (such as forklifts) would be used during the production process. See 20
NYCRR § 528.13(b)(3) example 1.
In order to satisfy the “predominantly” requirement, the machinery or equipment must
be used more than 50% during the production process. If machinery or equipment that is used
in the production process is also used 50% or more in the administrative or distribution phase,
it would not qualify for the production exemption. See 20 NYCRR § 528.13(c)(4).
Similarly, the utilities used to power the machinery and equipment exempt under §
1115(a)(12) are also exempt from tax. However, while machinery and equipment is exempt if
it is used predominantly for production, § 1115(c)(1) exempts “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 . . . .” Petitioner may claim an exemption for the portion of the fuel, electricity, gas,
refrigeration or steam used to power exempt machinery and equipment during the production
process. Petitioner must maintain adequate records with respect to the allocation of such fuel,
electricity, gas, refrigeration or steam used for exempt and non-exempt purposes, and must
provide an engineering study or the formula used to substantiate that allocation. See 20
NYCRR § 528.22(c)(3); Publication 852, Sales Tax Information For: Manufacturers,

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Processors, Generators, Assemblers, Refiners, Miners and Extractors, and Other Producers
of Goods and Merchandise.

DATED: July 2, 2014

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued
or for the specific time period at issue in the Opinion. The information provided in
this document does not cover every situation and is not intended to replace the law
or change its meaning.