Is a machine that makes tailpipes exempt production equipment when the tailpipes are installed in customers' cars rather than sold separately?

Plain-English summary

Godfroy's Service Station, Inc., bought an electrical, floor-standing machine (roughly 60" × 30" × 42", with hydraulic rams, shoes, and dies) that holds, measures, and bends straight pipe into tailpipes cut to fit each vehicle. The station uses the machine predominantly to produce tailpipes it installs in customers' cars. It asked whether the machine's purchase is subject to sales tax.

The Department held the machine is taxable — the production exemption does not apply.

• The production exemption requires "for sale." Section § 1115(a)(12) exempts machinery or equipment used directly and predominantly in producing tangible personal property "for sale." (The exemption also covers local taxes but not New York City's § 1107 tax.)
• The tailpipes aren't "sold" — they go into a taxable service. Installing a tailpipe in a car is a taxable service — "maintaining, servicing or repairing tangible personal property" under § 1105(c)(3). When a car is repaired by replacing its tailpipe, the entire charge (including the tailpipe's value) is a charge for the service, not for a sale of goods.
• Two distinct categories. The Tax Law treats (1) sales of property and (2) transfers of property in performing a taxable service as separate. When the station buys the raw pipe, that purchase escapes tax under § 1101(b)(4)(i)(B) — as property transferred in conjunction with a taxable service — not as a purchase for resale under § 1101(b)(4)(i)(A).
• Result. Because the station does not sell the tailpipes, the machine is not used predominantly to produce property "for sale." The exemption fails, and tax was due on the machine's purchase.

What this means for you

"Production for sale" is the heart of the machinery exemption — and installing into a repair breaks it. If what your equipment produces gets consumed in your own taxable repair or service work rather than sold as goods, the § 1115(a)(12) production exemption doesn't apply, even if the machine genuinely manufactures something.

Repair charges are a service, not a sale — including the parts. When you repair a customer's property, the whole charge (parts included) is taxable as a service. The parts aren't separately "sold," which is why your purchase of them rides the taxable-service exclusion, not the resale exclusion.

Know which exclusion you're using. Buying materials that go into a taxable service is tax-free under § 1101(b)(4)(i)(B) — a different provision from the resale exclusion. It matters here because it's the reason the finished item isn't a "sale" that would support the production exemption.

Common questions

Q: I bought a machine to make parts I install in customers' repairs. Is the machine exempt production equipment?
A: No. Because you install the parts as a taxable service rather than selling them, the machine isn't used to produce property "for sale," so the § 1115(a)(12) exemption doesn't apply.

Q: Do I pay tax on the raw material I make the parts from?
A: No, but for a different reason — it's property transferred in performing a taxable service (§ 1101(b)(4)(i)(B)), not a purchase for resale.

Q: What if I actually sold the tailpipes over the counter instead of installing them?
A: Then they'd be produced "for sale," which is the fact pattern the production exemption is built for. The problem here was that the output went into a taxable repair service.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on receipts from retail sales of tangible personal property
• Tax Law § 1115(a)(12) — exemption for machinery/equipment used directly and predominantly in producing tangible personal property for sale (not applicable to the NYC § 1107 tax)
• Tax Law § 1101(b)(4)(i) — retail sale, distinguishing resale (A) from property transferred with a taxable service (B)
• Tax Law § 1105(c)(3) — tax on maintaining, servicing, or repairing tangible personal property

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(28)S
Sales Tax
August 19, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S811008A

On October 8, 1981 a Petition for Advisory Opinion was received from Godfroy's Service
Station, Inc., Box 92, Lebanon Springs, New York 12114.
The issue raised is whether the purchase of a machine used to manufacture tail pipes is
subject to sales tax. Petitioner describes the machine in question as follows: "The machine is
electrical . . . [and] stands on the floor. It is approximately 60" long, 30" wide and 42" high. It
consists of hydraulic rams, shoes and dies. The function of this machine is [to] hold, measure and
bend straight pipe into a specific length and shape to be used as exhaust tailpipe on each type of
vehicle. Each pipe must be made to fit each type of vehicle." The predominant use of the machine
is to produce tailpipes used in installations by Petitioner.
Section 1105(a) of the Tax Law imposes a tax on the receipts from retail sales of tangible
personal property. However, section 1115(a)(12) of the Tax Law provides an exemption from such
sales tax with respect to the purchase of "machinery or equipment for use or consumption directly
and predominantly in the production of tangible personal property . . . for sale, by manufacturing,
processing . . . . " A similar exemption applies with respect to local sales taxes, which are imposed
under the authority of Article 29 of the Tax Law, but not with respect to New York City's sales tax,
which is imposed under section 1107 of the Tax Law.
Assuming arguendo that the operations performed by the machine in question constitute the
"production of tangible personal property," within the meaning and intent of the statutory provision
quoted above, the exemption is nonetheless inapplicable in the present instance because the
predominant use of the machine is not production "for sale". This conclusion derives from the
following considerations.
Section 1101(b)(4)(i) of the Tax Law defines the term "retail sales" to include all sales other
than sales of property (A) for resale or (B) for use by the purchaser "in performing the services
subject to tax under paragraphs (1), (2), (3) and (5) of subdivision (c) of section eleven hundred five
where the property so sold becomes a physical component part of the property upon which the
services are performed or where the property so sold is later actually transferred to the purchaser of
the service in conjunction with the performance of the service subject to tax."
The service of installing a tailpipe in a car is one of the taxable services referred to in the
foregoing, included within the category of "maintaining, servicing or repairing tangible personal
property." Tax Law, §1105(c)(3). Thus, when Petitioner purchases pipes from which the tailpipes
are to be produced, the sale of such pipes to him is not subject to tax as a retail sale not because such

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

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

-2­
TSB-A-82(28)S
Sales Tax
August 19, 1982

sale is a sale for resale, excluded under section 1101(b)(4)(i)(A), but because it is a sale of property
to be transferred in conjunction with a taxable service, excluded under section 1101(b)(4)(i)(B). The
statute thus treats (1) sales of property and (2) transfers of property in conjunction with the
performance of a taxable service as distinct categories. It is clear, thus, that within the contemplation
of the Tax Law, where an automobile is "serviced, maintained or repaired" by having its tailpipe
replaced, the entire charge therefor, including that portion representing the value of the tailpipe, is
a charge for the rendition of the service and not for the sale of goods. It follows that the tailpipes are
not "sold" by Petitioner to its customers and, therefore, that the machine in question is not used
predominantly in the production of tangible personal property "for sale," within the meaning and
intent of the exemption provision here under discussion. It follows that tax was due on the receipts
from Petitioner's purchase of the machine.

DATED: August 3, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau