Can a gas supplier buy cryogenic converters tax-free as production equipment when its customers, not the supplier, use them to make products for sale?

Plain-English summary

AGA Burdox, Inc. manufactures and distributes oxygen, nitrogen, and argon by separating air. For large-volume customers it supplies the gas in liquid form and provides each customer a cryogenic vessel or converter that stores the liquid and converts it to usable vapor at the customer's site. Title to the gas passes to the customer on delivery, but AGA Burdox keeps title to the converters. Those customers use the gas to produce their own products for sale (buying it tax-free with an exempt-use certificate). AGA Burdox asked whether its purchase of the converters qualifies for the production-equipment exemption in § 1115(a)(12).

The Department held the converters can be bought tax-free.

• The production exemption. Section § 1115(a)(12) exempts machinery or equipment used directly and predominantly in producing tangible personal property (including gas) for sale. "Directly" means it acts on the material, has an active causal role, or is used to handle/store/convey or package the product (§ 528.13(c)(1)); "predominantly" means over 50% of its use is in the production phase (§ 528.13(c)(4)).
• The user isn't the owner — but that's allowed. Because title to the gas passes to the customer on delivery, the converters aren't used in AGA Burdox's process. However, § 528.13(c)(5) provides that "machinery or equipment used in production by someone other than its owner is exempt under the same conditions" as other production equipment.
• Result: tax-free purchase. Where a converter is purchased solely to be used directly and predominantly by AGA Burdox's customers in producing goods for sale, AGA Burdox may buy it without paying tax (§ 528.13(c)(2), Ex. 3; Union Carbide Corp., State Tax Commission, June 24, 1977, STH 77-51).
• The caveat. If a converter is predominantly used for some purpose other than production for sale, a use-tax liability arises.

What this means for you

Production equipment can be exempt even when your customer, not you, runs it. The exemption follows the equipment's use in production, not its ownership. If you buy machinery specifically so a customer can use it directly and predominantly to make products for sale, you can buy it tax-free under the same rules that would apply if you used it yourself.

"Directly and predominantly" is the real test. The equipment has to play a direct role in the production phase and be used that way more than half the time. Track how each unit is actually used — if it drifts to mostly non-production use, you owe use tax on it.

Document the intended production use. The exemption here rested on the converters being purchased solely for the customers' production use. Keep the exempt-use paperwork and records showing that's what the equipment does.

Common questions

Q: Can I buy equipment tax-free if my customer uses it in production, not me?
A: Yes. Under § 528.13(c)(5), machinery used in production by someone other than its owner is exempt on the same conditions, so long as it's used directly and predominantly to produce goods for sale.

Q: What does "directly and predominantly" mean?
A: "Directly" means it acts on the material, has an active causal role in production, or handles/stores/conveys or packages the product; "predominantly" means over 50% of its use is in the production phase (§ 528.13(c)(1),(4)).

Q: What if the equipment is mostly used for something else?
A: Then the exemption doesn't hold — if a converter is predominantly used for a non-production purpose, a use-tax liability arises.

Citations and references

Statute and regulations:

• Tax Law § 1115(a)(12) — exemption for machinery/equipment used directly and predominantly in producing tangible personal property (including gas) for sale
• Sales and Use Tax Regulations § 528.13(c)(1) — meaning of "directly"
• Sales and Use Tax Regulations § 528.13(c)(4) — "predominantly" means over 50% of use in the production phase
• Sales and Use Tax Regulations § 528.13(c)(5) — equipment used in production by someone other than its owner is exempt on the same conditions
• Sales and Use Tax Regulations § 528.13(c)(2), Example 3

Authority cited:

• Union Carbide Corp., State Tax Commission (June 24, 1977), STH 77-51

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_52s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(52)S
Sales Tax
December 31, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S811221A

On December 21, 1981 a Petition for Advisory Opinion was received from AGA Burdox,
Inc., 3300 Lakeside Avenue, Cleveland, Ohio 44114.
The issue raised is whether Petitioner's acquisitions of cryogenic converters constitute
acquisitions of manufacturing and production equipment exempt from sales tax pursuant to the
provisions of section 1115(a)(12) of the Tax Law.
The bulk of Petitioner's business centers around the manufacture and distribution of oxygen,
nitrogen and argon. These products are manufactured by separating air into its constituent
components. At an air separation plant air is cooled to a very low temperature until it condenses into
a liquid. Then, by utilizing the relative boiling points of the different elements, the liquid air is
separated into its major components. The end product of the air separation process is liquid oxygen,
liquid nitrogen and liquid argon. These products are then maintained in their liquid form in order to
facilitate storage and handling.
Most of Petitioner's customers are unable to use the oxygen, nitrogen and argon in liquid
form. Consequently, Petitioner warms the liquid product until it vaporizes and then packages the
resultant gases under pressure in heavy steel cylinders. Most of the accounts Petitioner serves receive
their requirements in this manner. However, there are some industrial gas users with gas
consumption requirements which are too high to be effectively and efficiently handled with
compressed gas cylinders. Accordingly, Petitioner services these large volume customers with the
elements in their liquid form, in the following manner.
Petitioner supplies the user with a cryogenic vessel or converter. This unit is used to store the
liquid and to convert it into a useable vapor at the customer's location. Title to the liquid product
passes to the customer upon delivery. Petitioner retains title to the vessels located on the customer's
premises. The customers utilize the gases in question in the production of tangible personal property
for sale, and thus buy the gas without the payment of sales tax, presenting Petitioner with an exempt
use certificate.
Section 1115(a)(12) of the Tax Law provides for an exemption from sales tax with respect
to receipts from the sale of "Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, gas . . . for sale by manufacturing,
processing . . . ". The Sales and Use Tax Regulations define the terms "directly" and "predominantly"
as follows:

ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO , DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-82(52)S
Sales Tax
December 31, 1982

"'Directly' means the machinery or equipment must, during the production phase of a process,
(i) act upon or effect a change in material to form the product to be sold, or
(ii) have an active causal relationship in the production of the product to be sold, or
(iii) be used in the handling, storage, or conveyance of materials or the product to be
sold, or
(iv) be used to place the product to be sold in the package in which it will enter the
stream of commerce.
(2) Usage in activities collateral to the actual production process is not deemed to be use
directly in production." 20 NYCRR 528.13(c)(1)
"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 Petitioner's customers take title to Petitioner's products at the time of delivery,
the converters cannot be said to be used in Petitioner's manufacturing processes. However, section
528.13(c)(5) of the Sales and Use Tax Regulations provides that "Machinery or equipment used in
production by someone other than its owner is exempt under the same conditions as other machinery
and equipment." Accordingly, where a converter purchased by Petitioner is purchased solely to be
used directly and predominantly, by its customers, in the production of tangible personal property
for sale, such converter may be purchased by Petitioner without the payment of tax. 20 NYCRR
528.13(c)(2), Ex.3; Union Carbide Corporation, State Tax Commission, June 24, 1977, STH 77-51.
It may be noted that should a converter be predominantly used for some purpose other than
production for sale, a use tax liability would arise.

DATED: December 22, 1982

s/FRANK J. PUCCIA
Director
Technical Services Bureau