Is a manufacturer's chip-filtration and cooling system exempt from New York sales tax as production equipment?

Plain-English summary

Cummins Engine Co., Inc. manufactures diesel engines and, as part of its production, runs a central filtration and cooling system alongside its machining equipment. The system meets cutting-tool and precision requirements, satisfies State and federal safety/environmental rules, retards machine wear, and collects and reclaims metal chips worth about $1.14 million a year. Cummins asked whether buying the filter system is subject to sales tax.

The Department held the filter system is exempt production equipment.

• Pollution-control equipment counts as used in production. Under 20 NYCRR 528.13(d)(1), machinery used to prevent air or water pollution is treated as used directly and predominantly in production if it's bought by a manufacturer and used predominantly to treat, bury or store waste from a production process, and over 50% of the waste treated comes from production. The filter system removes metal chips from the air, so it's pollution-control equipment within that rule.
• Reclaiming chips for sale is itself production. Using the system to reclaim metal chips that Cummins then sells is production of tangible personal property for sale under § 1115(a)(12).
• Result: the filter system qualifies for the § 1115(a)(12) exemption. Cummins may purchase it tax-exempt by issuing a properly completed Exempt Use Certificate (Form ST-121) to its supplier.

What this means for you

Production-line pollution-control equipment can be exempt, even though it doesn't touch the product. New York's regulation treats a manufacturer's air- or water-pollution-control equipment as used "directly and predominantly in production" when it predominantly handles waste from the production process. So dust collectors, filtration systems and similar gear can qualify for the § 1115(a)(12) exemption.

Reclaiming and selling a byproduct is its own path to the exemption. If your equipment recovers scrap, chips or other byproducts that you actually sell, that recovery is production of tangible personal property for sale — an independent basis for exemption. Cummins had both grounds.

Use an Exempt Use Certificate (ST-121). When a purchase qualifies under § 1115(a)(12), give your supplier a properly completed ST-121 so it doesn't charge you tax. Keep records showing the qualifying use (here, waste from production and the resale of reclaimed chips).

Common questions

Q: The filter system doesn't shape the engines — how is it "production" equipment?
A: Two ways. As pollution-control equipment, 20 NYCRR 528.13(d) deems it used directly and predominantly in production if it predominantly treats production waste. And by reclaiming chips that are sold, it's producing tangible personal property for sale.

Q: Does it matter how much of the waste comes from production?
A: Yes. The pollution-control rule requires that over 50% of the waste treated, buried or stored result from the production process. Cummins's system met that.

Q: How do we claim the exemption at purchase?
A: Issue a properly completed Exempt Use Certificate (Form ST-121) to the supplier, and keep documentation supporting the qualifying use.

Citations and references

Statute, regulation and form:

• Tax Law § 1115(a)(12) — machinery/equipment used directly and predominantly in production for sale
• 20 NYCRR 528.13(d)(1) — pollution-control equipment treated as production use (over 50% of waste from production)
• Form ST-121 (Exempt Use Certificate)

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_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(34)S
Sales Tax
October 19, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810309A

On March 9, 1981 a Petition for Advisory Opinion was received from Cummins Engine
Co., Inc., Jamestown Engine Plant, 4720 Baker St. Extension, Lakewood, New York 14750.
The issue raised is whether or not machine filter systems are subject to sales tax.
Petitioner is engaged in the manufacture of diesel engines for sale. As part of its
production process, Petitioner uses a central filtration and cooling system in conjunction with
certain machinery and equipment.
The central filtration and cooling system is necessary to:
1.

Meet cutting parameters of tooling,

2.

Meet the precision characteristics of piece parts which are components of
Petitioner's diesel engines,

3.

Meet the safety and environmental restrictions of both State and Federal Laws,

4.

Collect and reclaim the metal chips with a resale value of $1,140,000 a year,

5.

Reclaim natural resources (metals),

6.

Retard machine wear of metal moving parts.

Section 1115(a)(12) of the Tax Law provides an exemption for "Machinery or equipment
used or consumed directly and predominantly in the production of tangible personal property, . . .
for sale by manufacturing
The Sales and Use Tax Regulations state, in relevant part, as follows: "Machinery and
equipment used for disposing of industrial waste, as a part of a process for preventing water or air
pollution, will be considered as being used directly and predominantly in production by
manufacturing . . . if
(i)

the machinery and equipment is purchased by a manufacturer and used
predominantly to actually treat, bury, or store waste materials from a production
process and

(ii)

over fifty percent of the waste treated, buried or stored results from the production
process." 20 NYCRR 528.13(d)(1).

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

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81(34)S
Sales Tax
October 19, 1981
As Petitioner uses the filter system to remove metal chips from the air, such equipment is
being used to prevent air pollution within the meaning and intent of Regulation 528.13(d).
Also, the use of the system to reclaim chips, which are sold, constitutes the production of
tangible personal property for sale pursuant to section 1115(a)(12) of the Tax Law.
Accordingly, Petitioner's purchase of a filter system qualifies for the exemption provided
by section 1115(a)(12) of the Tax Law and Regulation 528.13(d). Petitioner may claim exemption
on such purchases by issuing a properly completed Exempt Use Certificate (Form ST-121) to its
supplier.

DATED: September 29, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau