In a manufacturer's audit: are cleaning tools and supplies exempt, are tenant HQ alterations capital improvements, does 'tax included' billing count, and can tax be refunded on property used out of state?

Plain-English summary

Jonathan Logan, Inc. raised four issues arising in an audit; one of its divisions manufactures leather goods.

Issue I — cleaning tools and supplies are not "machinery or equipment," but § 1105-B changed the rate. Naphtha, alcohol and wipers used to clean the leather are "tools" (wipers) and "supplies" (alcohol, naphtha), not machinery or equipment, so the § 1115(a)(12) production exemption does not apply. But under § 1105-B, tools and supplies used directly and predominantly in production carried a reduced 2% State tax from September 1, 1980 through February 28, 1981 and became State-exempt on March 1, 1981. They remained subject to the New York City sales tax, but exempt from other local sales taxes and the ¼% MCTD tax (§§ 1109, 1210).

Issue II — the tenant's HQ alterations appear to be capital improvements. New floor-to-ceiling walls, substantial wiring, plumbing and built-in lighting that cannot be removed without substantial damage, installed by the tenant (who bears the cost, sees the improvements become the landlord's property, and pays added real-estate tax), appear to satisfy the three-part § 1101(b)(9) test. But within the audit, each item must be separately found to meet the criteria.

Issue III — "tax included" is not a separate statement of tax. One invoice said the total price was "including 8% N.Y.C. Sales Tax"; another had no tax notation. § 1132(a) requires tax to be stated, charged and shown separately on the first document given to the customer, and 20 NYCRR § 532.1(b)(3) says "tax included" language does not separately state the tax, so the entire amount is deemed the taxable sales price. That presumption is rebuttable by evidence to the auditor or at a hearing (Matter of Earlecia; cf. RAC Corp. v. Gallman).

Issue IV — tax can be refunded on property used outside New York. Tax is due where delivery occurs in New York (20 NYCRR § 525.2(a)(3)). But § 1119(a) allows a refund or credit for property purchased in bulk, stored and not used in the State, and later re-shipped outside New York for use outside the State. So the taxpayer pays at purchase but may recover the tax on qualifying property.

What this means for you

The production exemption's wording matters — "machinery/equipment" vs. "tools/supplies." Consumables like solvents and wipers were never "machinery or equipment," so they didn't get the § 1115(a)(12) exemption directly. What helped them was the separate § 1105-B relief, and only on the State portion and only after its effective dates — with New York City still taxing them. When you claim a production exemption, match the item to the exact statutory category and watch the dates and the NYC carve-out.

Permanent, damage-on-removal build-outs can be capital improvements even for a tenant. Walls, wiring, plumbing and built-in lighting that can't come out without material damage can qualify under the three-part test — but "appears to qualify" isn't final; on audit each component is tested on its own facts. Keep documentation of permanence and damage-on-removal.

Never bill "tax included." New York requires the tax to be separately stated on the customer's first invoice. "Tax included" or a bare "8% NYC tax" line doesn't count, and the whole charge can be deemed the taxable price. Break the tax out as its own line.

Delivery point drives the tax — but out-of-state use can be recovered. If property is delivered to you in New York, tax applies; but if you bulk-buy, store, and re-ship it for use outside the State, § 1119(a) offers a refund or credit. Keep proof of storage and out-of-state re-shipment.

Common questions

Q: We use solvents and wipers to clean product in manufacturing. Are they exempt?
A: They are "supplies" and "tools," not "machinery or equipment," so § 1115(a)(12) doesn't exempt them. But § 1105-B made them State-exempt from March 1, 1981 (2% from 9/1/80–2/28/81), while the New York City tax still applies.

Q: Can a tenant's build-out be a capital improvement?
A: Yes, if it meets the three-part § 1101(b)(9) test — substantial permanence and material damage on removal. Here the walls, wiring, plumbing and lighting appeared to qualify, subject to item-by-item verification on audit.

Q: Is billing "tax included" acceptable?
A: No. The tax must be separately stated on the first document given to the customer. "Tax included" doesn't count, and the entire amount can be treated as the taxable price — a presumption you can rebut with evidence.

Q: We paid tax on goods delivered here but used out of state. Any relief?
A: Yes. Section 1119(a) allows a refund or credit for bulk-purchased property that is stored, not used in New York, and re-shipped outside the State for use outside the State.

Citations and references

Statutes:

• Tax Law § 1115(a)(12) — production exemption for machinery and equipment
• Tax Law § 1105-B — State-tax reduction then exemption for tools and supplies used in production
• Tax Law § 1101(b)(9) — definition of "capital improvement"
• Tax Law § 1132(a) — tax must be stated, charged and shown separately
• Tax Law § 1119(a) — refund/credit for bulk-purchased property re-shipped for use outside New York
• Tax Law §§ 1109, 1210 — MCTD and local sales taxes

Regulations:

• 20 NYCRR § 532.1(b)(3) — "tax included" is not a separate statement of tax
• 20 NYCRR § 525.2(a)(3) — tax due where delivery occurs in New York

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_22s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(22)S
Sales Tax
May 5, 1983

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

PETITION NO. S820121A

On January 21, 1982 a Petition for Advisory Opinion was received from Jonathan Logan,
Inc., 50 Terminal Road, Secaucus, New Jersey 07094.
Petitioner presents four issues arising within the context of an audit.
I.
One of Petitioner's divisions is engaged in the manufacture of leather goods. As part of its
production processes naphtha, alcohol and wipers are used to clean the leather. Petitioner inquires
as to whether sales tax is due on its purchases of these items.
Section 1115(a)(12) of the Tax Law provides for an exemption from the State sales tax with
respect to purchases of "machinery or equipment for use or consumption directly and predominantly
in the production of tangible personal property . . . for sale . . . by manufacturing . . . . "The items at
issue here constitute not "machinery or equipment" but "tools", in the case of the wipers, and
"supplies," in the case of the alcohol and naphtha. Accordingly, the exemption provided for under
Section 1115(a)(12) of the Tax Law is thus inapplicable to such items. However, the State sales tax
applicable to such tools and supplies so used or consumed directly and predominantly in the
production of tangible personal property for sale by manufacturing was reduced from 4% to 2% with
respect to the period September 1, 1980 through February 28, 1981. As of March 1, 1981 such sales
became exempt from the State sales tax. Tax Law, § l105-B. Such sales were at all times, and
remain, subject to the New York City sales tax, but were and are exempt from locally imposed sales
taxes and the ¼% Metropolitan Commuter Transportation District sales tax. Tax Law § 1109,§ 1210.
II.
Petitioner inquires as to "whether additions to and modifications of . . . [its] divisional
headquarters are capital improvements and, therefore, exempt from sales and use tax." Petitioner's
description of the purported improvements is as follows:
The expenses include new floor to ceiling walls, substantial electrical
wiring, plumbing, and built in lighting systems all of which cannot be
removed without substantial damage to the premises and the items
affixed thereto . . . .

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-83(22)S
Sales Tax
May 5, 1983

The applicant as tenant under lease agreements bears sole financial
responsibility to improve, alter and expand the premises. All
improvements become the property of the owner at the time of
installation. The applicant also bears the financial responsibility of
additional real estate taxes resulting from increases in assessed
valuation. Such increases are a direct result of the improvements.
Section 1101(b)(9) of the Tax Law defines the term "capital improvement" as follows:
An addition or alteration to real property which: (i) Substantially adds
to the value of the real property, or appreciably prolongs the useful
life of the real property; and (ii) Becomes part of the real property or
is permanently affixed to the real property so that removal would
cause material damage to the property or article itself; and (iii) is
intended to become a permanent installation.
The installations described by Petitioner appear to satisfy the above-quoted statutory criteria and
accordingly would constitute capital improvements. Within the context of the audit each item, of
course, must be separately found to in fact satisfy the stated criteria.
III.
Petitioner states that tax is being asserted to be due on two transactions for which invoices
are submitted. The first of these states a total price as "including 8% N.Y.C. Sales Tax", while the
second contains no notation whatever relating to tax. However, appended to the second is a written
estimate showing an estimate for certain services of $5815.00 "Plus 8% City Sales Tax." At the
bottom of the typewritten estimate are handwritten estimates for two additional components of the
proposed service in amounts of $1500 and $2000, respectively. The invoice itself merely states a
total price of $9,315.00.
Section 1132(a) of the Tax Law provides, in relevant part, that "if the customer is given any
sales slip, invoice, receipt or other statement or memorandum of the price . . . paid or payable, the
tax shall be stated, charged and shown separately on the first of such documents given to him." The
Sales and Use Tax Regulations provide, further, that: "The words 'tax included' or words of similar
import, on a sales slip or other document, do not constitute a separate statement of the tax, and the
entire amount charged is deemed the sales price of the property sold or services rendered." 20
NYCRR 532.1(b)(3).
Accordingly, in both instances described above, tax is "deemed" to be due on the entire price
stated. The presumption thus created may be rebutted by an evidentiary showing made either to the
auditor conducting the subject audit or, upon the issuance of an assessment, at a hearing before the
State Tax Commission. Matter of Earlecia, Inc., State Tax Commission, September 25, 1981, TSBH-81(176)S. Cf., RAC Corp. v. Gallman, 39 A.D. 2d 57.

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TSB-A-83(22)S
Sales Tax
May 5, 1983

IV.
Petitioner next inquires as to whether tax is due on purchases of tangible personal property
delivered in New York but thereupon used outside of New York. Sales tax is due on the receipts
from the retail sale of tangible personal property where delivery takes place in New York. 20
NYCRR 525.2(a)(3). However, the Tax Law provides for a refund or credit of such tax based on
proof of certain uses. Thus, section 1119(a) of the Tax Law provides, in relevant part, as follows:
"Subject to the conditions and limitations provided for herein,
a refund or credit shall be allowed for a tax paid pursuant to
subdivision (a) of section eleven hundred five or section eleven
hundred ten . . . (2) on the sale or use of tangible personal property
purchased in bulk, or any portion thereof, which is stored and not
used by the purchaser or user within this state if that property is
subsequently re-shipped by such purchaser or user to a point outside
this state for use outside this state, . . . .
Accordingly, while Petitioner was required to pay tax at the time of purchase, it is entitled to a refund
or credit with respect to property used in accordance with the above-quoted statutory provision.

DATED: April 13, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau