Can a precast-concrete maker that sells more than half its product already installed claim New York's production exemptions on its machinery and its fuel?

Plain-English summary

Midstate Precast Systems, Inc. produces precast concrete "wideslab." Cement and aggregate are heated, mixed with water, conveyed to heated casting beds, and cured; all the energy is consumed in the batch plant and under the casting beds. Midstate sells the wideslab either installed (installation done by a subcontractor) or uninstalled, and over a four-year test period more than half of it was sold on an installed basis. Midstate asked whether its purchases of machinery, equipment and energy qualify for New York's production exemptions.

The Department held the machinery exemption does not apply, and only part of the fuel is exempt.

• Machinery exemption — denied. Section § 1115(a)(12) exempts machinery or equipment used directly and predominantly in producing tangible personal property for sale. "Predominantly" means over 50% of the machinery's use is directly in production (20 NYCRR 528.13(c)(4)). Because more than 50% of Midstate's wideslab is sold installed — i.e., used to make capital improvements rather than sold as tangible personal property — Midstate is not predominantly manufacturing goods for sale. So the § 1115(a)(12) exemption (and the parallel local exemption under § 1210(a)(1)) does not apply to its machinery and equipment.
• Fuel/energy exemption — partial. Section § 1115(c) exempts fuel, gas, electricity and steam used directly and exclusively in production for sale, and "exclusively" means 100% used in production (20 NYCRR 528.822(c)). Only the portion of Midstate's fuel used to produce the wideslab sold uninstalled is used exclusively in production for sale, so only that portion is exempt.
• How to claim the fuel exemption. Midstate may claim a refund or credit for the tax paid on the exempt portion, or use an Exempt Use Certificate (Form ST-121) (assuming liability for tax on the non-exempt portion, reported as a purchase subject to use tax). It must keep allocation records and, when claiming a refund or credit, support the split with an engineering survey or the formulae used.

What this means for you

Installing what you make can cost you the production exemption. If more than half of your output is sold installed (a capital improvement) rather than sold as tangible personal property, New York treats you as predominantly a contractor — and your production machinery is not exempt under § 1115(a)(12).

"Predominantly" is a hard over-50% test. The machinery exemption turns on whether over 50% of the equipment's use is directly in producing goods for sale. Track the installed-vs-uninstalled split; it drives the whole result.

Fuel gets an even stricter "exclusively" standard. The § 1115(c) energy exemption requires 100% use in production for sale, so you must allocate and exempt only the fuel tied to product you sell uninstalled — and back it up with records and an engineering survey.

Common questions

Q: We manufacture the product ourselves — why isn't our machinery exempt?
A: Because you sell more than half of it installed. That makes you predominantly a maker of capital improvements, not of goods for sale, so § 1115(a)(12) doesn't apply (20 NYCRR 528.13(c)(4)).

Q: Is any of our energy exempt?
A: Only the fuel used to produce the portion you sell uninstalled. The § 1115(c) exemption requires 100% ("exclusively") use in production for sale (20 NYCRR 528.822(c)).

Q: How do we actually claim the fuel exemption?
A: Take a refund or credit for tax paid on the exempt portion, or use Form ST-121 and self-assess use tax on the rest. Keep allocation records and support the split with an engineering survey.

Citations and references

Statutes and regulations:

• 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(c)(4) — "predominantly" means over 50% of use directly in production
• Tax Law § 1210(a)(1) — parallel local production exemption
• Tax Law § 1115(c) — fuel/gas/electricity/steam used directly and exclusively in production for sale
• 20 NYCRR 528.822(c) — "exclusively" means 100%; refund/credit or Form ST-121, allocation records, engineering survey

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_67s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(67)S
Sales Tax
April 6, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810901A

On September 1, 1981, a Petition for Advisory Opinion was received from Midstate Precast
Systems, Inc., P.O. Box 1111, Binghamton, New York 13902.
The issue raised is whether Petitioner's purchases of machinery and equipment, and of energy
used to operate such machinery and equipment, are subject to New York State and local sales taxes.
Petitioner is engaged in the business of producing precast concrete wideslab. The production
of wideslab is accomplished as follows. Cement and aggregate are heated in a batch plant and then
mixed with water. This mixture is conveyed in off-road mixers to casting beds. The casting beds are
also heated. All energy used is consumed in production only, in the batch plant and under the casting
beds.
Petitioner sells the wideslab either on an installed basis or on an uninstalled basis. When sold
on an installed basis, Petitioner arranges to have the installation performed by a sub-contractor, as
Petitioner's employees do not perform installations.
Petitioner indicates that during a four year period selected as a test period by Petitioner it sold
3,781,215 square feet of wideslab on an installed basis and 1,716,966 square feet on an uninstalled
basis. Of this amount, 265,400 square feet of wideslab was sold on an installed basis within New
York and 84,342 square feet was sold on an uninstalled basis within New York.
Section 1105(a) of the Tax Law imposes the State sales tax on the receipts from retail sales
of tangible personal property. However, Section 1115(a)(12) of the Tax Law provides for an
exemption from such tax 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 . . . ." Local sales tax laws are required to provide for an exemption with respect to all
tangible personal property used directly and predominantly in the production of tangible personal
property for sale. Tax Law, §1210(a)(1).
The Sales and Use Tax Regulations elucidate the meaning of the term "predominantly," as
follows: "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).
Inasmuch as more than 50% of the wideslab produced by Petitioner is sold on an installed
basis, Petitioner is not predominantly engaged in manufacturing tangible personal property for sale,
but in performing capital improvements. Accordingly, as the machinery and equipment purchased

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

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

-2­
TSB-A-81(67)S
Sales Tax
April 6, 1982

by Petitioner is not used predominantly in manufacturing wideslab for sale, the sales tax exemptions
provided under Section 1115(a)(12), and pursuant to Section 1210(a)(1), of the Tax Law, are not
applicable.
Section 1115(c) of the Tax Law provides for an exemption, applicable to State and local sales
taxes, with respect to "Fuel, gas, electricity . . . and steam, and gas, electric . . . and steam service of
whatever nature for use or consumption directly and exclusively in the production of tangible
personal property . . . for sale, by manufacturing, processing . . .".
Only that portion of the fuel purchased by Petitioner for use and consumption in producing
the wideslab for sale on an uninstalled basis is "exclusively" used in production for sale. The
exemption contained in Section 1115(c) of the Tax Law is applicable to such portion of the fuel
purchased, in accordance with the following provision of the Sales and Use Tax Regulations:
"(3)(i) "Exclusively" means that the fuel, gas, electricity, refrigeration and steam and like
services are used in total (100%) in the production process.
(ii) Because fuel, gas, electricity, refrigeration and steam when purchased by the user is
normally received in bulk or in a continuous flow and a portion thereof is used for purposes which
would make the exemption inapplicable to such purchases, the user may claim a refund or credit for
the tax paid only on that portion used or consumed directly and exclusively in production.
(iii) In the alternative, an Exempt Use Certificate (Form ST-121) may be used, providing full
liability is assumed for any state and local tax due on any part of purchases used for other than the
exempt purposes described in subdivision (a) of this section. [Subdivision (a) details the nature of
the exemption provided for in Section 1115(c) of the Tax Law.] The taxable portion of these
purchases is to be reported as a "purchase subject to use tax" on a sales and use tax return required
to be filed with the Tax Commission.
(iv) The user must maintain adequate records with respect to the allocation of fuel, gas,
electricity, refrigeration and steam used directly and exclusively in production and for non-exempt
purposes.
(v) For the purpose of substantiating the allocation of fuel, gas, electricity, refrigeration and
steam and like services used directly and exclusively in production from that used for non-exempt
purposes, the user must, when claiming a refund or credit, submit an engineering survey or the
formulae used in arriving at the amounts used in an exempt manner." 20 NYCRR 528.822(c).

DATED: December 9, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau