NY TSB-A-20(67)S Sales Tax 2020-11-24

Is a service/maintenance contract bought to cover exempt production equipment subject to New York sales tax?

Short answer: No. A plastics manufacturer bought a factory protection plan covering only its on-site generator, which produces the electricity that directly and predominantly powers its production equipment. Maintaining, servicing, and repairing tangible personal property — and contracts for that work — are generally taxable. But Tax Law § 1105-B(b) exempts those services when performed on exempt production equipment described in § 1115(a)(12). Because the plan relates solely to the maintenance and repair of equipment the petitioner treats as exempt production equipment, the plan is also exempt. (The opinion assumes, without deciding, that the generator actually qualifies as exempt production equipment.)

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A manufacturer of plastic packaging generates most of the electricity for its production line on-site, using a solar array and a generator. It treats the generator as exempt production equipment because the electricity it makes is used directly and predominantly to power equipment that directly and predominantly manufactures plastic packaging for sale. The manufacturer bought a factory protection plan from the generator's seller — a service contract covering only repairs and maintenance to that generator — and asked whether the plan is exempt from sales tax.

The Office of Counsel said yes:

Services of maintaining, servicing, or repairing tangible personal property are generally taxable (Tax Law § 1105(c)(3)), and maintenance/service/repair contracts are generally taxable too (20 NYCRR 527.5(d)).
But Tax Law § 1105-B(b) exempts those services when performed on exempt production equipment — the machinery and equipment described in Tax Law § 1115(a)(12) (used directly and predominantly in production for sale by manufacturing).
A service plan tied solely to maintaining and repairing exempt production equipment is exempt (following TSB-A-13(9)S, which exempted warranties tied solely to qualifying solar equipment).

The opinion assumes without deciding that the generator actually is exempt production equipment; if that underlying assumption fails, so does the exemption for the plan.

What this means for you

Manufacturers and processors

Your maintenance, service, and repair contracts ride on the tax status of the equipment they cover. A plan that covers only equipment qualifying under § 1115(a)(12) is exempt under § 1105-B(b) — even though service contracts are taxable as a general rule.

Keep the coverage clean

The exemption worked here because the plan covered only the generator and no other property at the facility. A plan bundling exempt production equipment with non-exempt equipment invites apportionment problems — keep qualifying-equipment contracts separate.

The exemption is only as good as the equipment's status

The Department expressly didn't decide whether the generator qualifies. Be ready to support the directly-and-predominantly-in-production test for the underlying equipment; the contract's exemption collapses if the equipment doesn't qualify.

Common questions

Q: Aren't service and maintenance contracts always taxable?
A: As a general rule, yes — but § 1105-B(b) exempts service, maintenance, and repair of exempt production equipment, and a contract covering only such equipment is exempt too.

Q: What makes the generator "exempt production equipment"?
A: It's used directly and predominantly to produce the electricity that directly and predominantly powers the manufacturing equipment making goods for sale (§ 1115(a)(12)). The opinion assumes this is true.

Q: What if my plan also covers office HVAC or other non-production gear?
A: Then it isn't "solely" for exempt production equipment, and the clean exemption in this opinion wouldn't squarely apply.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

Tax Law § 1105(c) (services subject to sales tax)
Tax Law § 1105(c)(3) (taxable maintaining, servicing or repairing of tangible personal property)
Tax Law § 1105-B(b) (exemption for services to exempt production equipment)
Tax Law § 1115(a)(12) (exemption for machinery/equipment used directly and predominantly in production for sale)
20 NYCRR 527.5(d) (maintenance/service/repair contracts); TSB-A-13(9)S; TSB-A-16(25)S

Source

Original ruling text

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Sales taxNovember 24, 2020Office of Counsel

The Department of Taxation and Finance received a Petition for Advisory Opinion from Redacted ("Petitioner"). Petitioner asks whether its purchase of a service contract for production equipment—a generator that produces electricity consumed directly and predominantly in manufacturing tangible personal property for sale—is exempt from New York State and local sales tax (sales tax or tax). We conclude that the purchase of a service plan for exempt production equipment is also exempt from tax.

Facts

Petitioner manufactures and sells plastic packaging. Petitioner generates most of the electricity used to power its manufacturing equipment on-site using a solar array and a generator. Petitioner also purchases some utilities—primarily for nonmanufacturing activities—from a local utility company.

Petitioner determined that its generator qualified for the exemption from sales tax for production equipment because it generates electricity used directly and predominantly to power equipment that is used directly and predominantly to manufacture tangible personal property—plastic packaging—for sale.1 Petitioner also purchased from the company that sold and installed the generator a factory protection plan that covers repairs to and maintenance of the generator. The plan does not cover or include any other property or equipment at Petitioner’s facility.

Petitioner asks only whether the purchase of the service plan for the generator is exempt from sales tax.

Analysis

Sales tax is imposed on the receipts from sales of enumerated services except as otherwise specifically provided. See Tax Law § 1105(c). Maintaining, servicing or repairing tangible personal property are generally taxable services. See Tax Law § 1105(c)(3). Sales of maintenance, service and repair contracts for tangible personal property are likewise also generally taxable. See 20 NYCRR 527.5(d).

Tax Law § 1105-B(b) provides a sales tax exemption for sales of the services of maintaining, servicing or repairing tangible personal property described in Tax Law 1115(a)(12). Tax Law § 1115(a)(12) describes, and provides an exemption for, as relevant here, machinery or equipment used directly and predominantly in the production of tangible personal property for sale by manufacturing (exempt production equipment).

Thus, while services to tangible personal property, including service plans, are generally subject to sales tax, Tax Law § 1105-B(b) exempts from tax services to exempt production equipment. Likewise, a service plan that relates solely to the maintenance and repair of exempt production equipment is exempt. See TSB-A-13(9)S (exempting from tax repair and replacement warranties related solely to solar equipment that qualified for exemption pursuant to Tax Law §§ 1115[a][12] & 1105-B).

Petitioner’s purchase of the service plan would qualify for exemption pursuant to Tax Law § 1105-B(b) if it is purchased to service exempt production equipment. The plan was purchased to maintain and repair a generator that Petitioner avers is exempt production equipment because it is used directly and predominantly in the production of tangible personal property for sale. Assuming the generator is, in fact, exempt production equipment, the plan that Petitioner purchased—solely for the repair and maintenance of that generator—would be exempt from sales tax pursuant to Tax Law § 1105-B(b).

Deborah R. Liebman
Deputy Counsel

Note: 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.

1 This Advisory Opinion accepts without deciding Petitioner’s determinations and assertions of fact that: (1) Petitioner’s manufacturing equipment is exempt production equipment for purposes of Tax Law § 1115(a)(12) and (2) the electricity generated by the generator is used directly and predominantly to power Petitioner’s exempt production equipment such that the generator is also exempt production equipment (See, e.g., TSB-A-16[25]S). This Advisory Opinion does not decide and the Department is not bound by these assertions of fact.