Does laboratory testing and quality-control equipment used during steel production qualify for New York's manufacturing exemption, even if it sits in off-line labs?

Plain-English summary

Al Tech Specialty Steel Corporation uses laboratory equipment at both of its plants — more than 50% of the time — to test steel during production: chemically analyzing molten steel to confirm its composition, and physically testing hardened steel for tensile strength, all to make sure the finished product meets the buyer's specifications. Al Tech asked whether that testing equipment qualifies as exempt production equipment.

The Department held it does.

• Production-line testing and quality control count as "production." The § 1115(a)(12) manufacturing exemption covers machinery or equipment used directly and predominantly (over 50% of its use, per 20 NYCRR 528.13(c)(4)) in producing tangible personal property for sale, and "production" runs the full production line through the last step where the product is finished (20 NYCRR 528.13(b)).
• Testing equipment used for quality control qualifies. Because Al Tech's equipment is used directly and predominantly to perform the chemical and physical analyses that keep the steel conforming to specifications during production, it is exempt manufacturing equipment.
• Exempt from State and local tax — except New York City. The exemption reaches the State and local sales and compensating use taxes but not the New York City local tax.
• Off-line labs don't break the exemption. The equipment qualifies even though it sits in laboratories off the production line, not on the line itself.

What this means for you

Quality-control testing is part of production, not separate from it. If you make a product to sell and use equipment predominantly to test the goods during manufacturing so they meet specifications, that testing gear can qualify for the manufacturing exemption — you don't lose it just because testing feels like a support function rather than "making" the product.

Location isn't the test — use is. Putting your testing equipment in a separate lab off the main line doesn't disqualify it. What matters is that it's used directly and predominantly (over 50%) in the production process. Track that usage; the 50% threshold is what carries the exemption.

Remember the New York City carve-out. This manufacturing exemption applies to the State tax and to local taxes generally, but not to the New York City local tax. If you operate in the City, don't assume the exemption zeroes out your local tax there.

Common questions

Q: Our lab equipment doesn't touch the product on the line — can it still be exempt?
A: Yes. Equipment used directly and predominantly for production-line testing and quality control qualifies under § 1115(a)(12), and the exemption applies even when the equipment sits in off-line laboratories.

Q: How much of the equipment's use has to be for production?
A: More than 50%. "Predominantly" means over 50% of the equipment's use is directly in the production phase (20 NYCRR 528.13(c)(4)).

Q: Does this exemption cover the New York City tax too?
A: No. It applies to the State and local sales and use taxes but not to the New York City local tax.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1115(a)(12) — machinery/equipment used directly and predominantly in production for sale
• 20 NYCRR 528.13(b) — production runs the full line through finishing; 528.13(c)(4) — "predominantly" means over 50% of use

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_29s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81 (29) S
Sales Tax
October 5, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810422B

On April 22, 1981, a Petition for Advisory Opinion was received from Al Tech Specialty
Steel Corporation, Willowbrook Avenue, Dunkirk, New York 14048.
The issue raised is whether testing equipment used in Petitioner's laboratories located at both
of its production plants qualifies as production equipment and whether, as such, it is exempt from
state and local sales tax.
Petitioner uses the equipment in its laboratories predominantly (more than 50 per cent of use)
to perform chemical and physical tests of steel during the production process. Molten steel is
chemically analyzed to insure that all components of the product meet the purchaser's specifications.
Hardened steel is physically tested to insure that the tensile strength of the steel also meets the
purchaser's specifications.
Section 1105(a) of the Tax Law imposes a tax on: "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article." An exemption from such
tax is provided with respect to "Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, . . . for sale, by manufacturing,
processing . . ." Tax Law §1115(a)(12).
In explaining the application of the manufacturing exemption, the Sales and Use Tax
Regulations state: "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 . . . " 20 NYCRR 528.13(b). The Regulations further
provide that: "Machinery or equipment is used predominantly in production, if over 50% of its use
is directly in the production phase of a process." 20 NYCRR 528.13(c) (4).
Equipment used directly and predominantly for production line testing and quality control
qualifies for exemption from State and local taxes, except the New York City local tax.
Since Petitioner's testing equipment is used directly and predominantly in performing
chemical and physical analyses of the steel during the production process to insure conformity with
purchaser specifications, the testing equipment used for such quality control is manufacturing
equipment which qualifies for exemption from State and local sales and compensating use taxes
(except the New York City tax) pursuant to section 1115(a)(12) of the Tax Law. Such exemption is
applicable even though the equipment is situated in off-line laboratories.
DATED: September 18, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR