Are charges to modify or repair a customer's foundry patterns taxable, and when can a resale certificate or the manufacturing exemption apply?

Plain-English summary

Sims Matchplate Corp. builds foundry pattern equipment, used mainly by its parent, Sims Casting Corp., to make castings. After a customer buys a pattern (and owns it), Sims Matchplate sometimes modifies it at the customer's request, or repairs and maintains it. It asked whether it must charge sales tax on those modification, repair and maintenance charges — and how things differ when the charge is billed to the customer versus to its parent.

The Department held the modification and repair services are taxable, but a resale certificate or the manufacturing exemption can change the result.

• Modification is a taxable "fabricating or processing" service (§ 1105(c)(2)). Altering a manufactured product without changing its identity is fabrication (20 NYCRR 531.2(d)); changing its nature, shape or form is processing (20 NYCRR 531.2(e)). Modifying a customer's pattern falls within this tax.
• But resale sales are excused with a certificate. Such services are presumed taxable "until the contrary is established" (§ 1132(c)). Where the customer (often a contractor) buys the modification for resale to its own customers, Sims need not collect tax if it takes a properly completed Resale Certificate (Form ST-120) in good faith (Saf-Tee Plumbing v. Tully), or if the customer holds a Direct Payment Permit.
• When the parent orders the work, it's taxable. Where Sims Casting directs both modification (§ 1105(c)(2)) and repair (§ 1105(c)(3)) and folds the cost into the price of the castings it sells, the services are not purchased for resale — what's sold to the ultimate customer is castings, not the service — so both are taxable. (The repair is also not performed on property "held for sale in the regular course of business.")
• Manufacturing exemption for repairs. Under § 1105-B, repair (but not modification) of equipment used directly and predominantly in manufacturing production of goods for sale was rate-reduced from 4% to 2% (Sept. 1, 1980–Feb. 28, 1981) and then exempt from the State 4% tax on and after March 1, 1981. This relief does not apply to locally imposed sales taxes.

What this means for you

Modifying or repairing a customer's property is a taxable service in New York — the question is who's buying it and why. Fabricating/processing (§ 1105(c)(2)) and repair (§ 1105(c)(3)) charges are taxable unless the buyer purchases the service for resale or the work qualifies for the production-machinery exemption.

Resale certificates carry the load. If your customer resells the service (or the improved property) rather than consuming it, take a properly completed resale certificate in good faith and you generally don't collect tax. Absent that certificate (or a direct payment permit), the law presumes the sale is taxable.

Repairs to production machinery get a State-tax break — but not modifications, and not local tax. The § 1105-B relief is narrow: it reaches repairs/maintenance of equipment used directly and predominantly in manufacturing for sale, and only the State rate. Modifications and local taxes stay on the table.

Common questions

Q: I modify equipment my customer owns. Is that taxable?
A: Yes — modifying a customer's tangible personal property is a taxable fabricating/processing service under § 1105(c)(2), unless your customer buys the service for resale and gives you a valid resale certificate (or holds a direct payment permit).

Q: My customer resells the improved item to its own customers. Do I still collect tax?
A: Not if the customer purchases the service for resale and provides a properly completed Resale Certificate (Form ST-120), which you accept in good faith. That shifts the tax question down the chain.

Q: Are repairs to my production machinery taxable?
A: Repairs to equipment used directly and predominantly in manufacturing goods for sale became exempt from the State 4% tax on and after March 1, 1981 under § 1105-B — but the exemption doesn't cover modifications, and it doesn't cover local sales taxes.

Citations and references

Statutes:

• Tax Law § 1105(c)(2) — tax on fabricating and processing services
• Tax Law § 1105(c)(3) — tax on repair/maintenance services to tangible personal property
• Tax Law § 1132(c) — presumption of taxability; resale certificate
• Tax Law § 1105-B — reduced rate then exemption for repairs to production machinery

Regulations:

• 20 NYCRR 531.2(d) — definition of "fabrication"
• 20 NYCRR 531.2(e) — definition of "processing"

Cases and prior guidance:

• Saf-Tee Plumbing v. Tully, 77 A.D.2d 1
• International Heat & Air Conditioning Corporation, TSB-H-80(224)S
• Imperial Wallcovering, Inc., TSB-H-83(49)S
• Grant Hardware Company, TSB-H-81(6)S
• Oberdorfer Foundries, Inc., STH 76-40

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a84_12s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84(12)S
Sales Tax
March 23, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820302B

On March 2, 1982 a Petition for Advisory Opinion was received from Sims Matchplate
Corp., 2176 East Erie Boulevard, Syracuse, New York 13224.
The issues raised in this Petition are (1) whether sales tax should be charged by Petitioner
on customer requested modifications made to patterns owned by the customers, and (2) whether sales
tax should be charged on such modifications, and on the maintenance of such patterns, when the
charge therefor is made to Petitioner's parent company, Sims Casting Corp.
Petitioner, a wholly owned subsidiary, produces foundry pattern equipment for use primarily
in the foundry operated by its parent company, Sims Casting Corp.
In the first described situation, Petitioner's customers submit drawings or blueprints of a part
they wish to have cast. Petitioner then designs and builds pattern equipment necessary to produce
molds used to make the castings. When a pattern is completed it is billed to and paid for by the
customer. At this point the pattern is the property of the customer and cannot be used without its
permission. The pattern may be left with Sims Casting, to be used to produce castings for the
customer.
After a pattern has been produced, customers sometimes find that certain modifications are
necessary and request that Petitioner perform this work. Charges for such modifications are also
billed to the customer. Petitioner states that its customers, most of whom are contractors, purchase
the service of pattern modification for resale to their own customers. Petitioner states that it also
performs such service and, in addition, performs maintenance services, on the customer-owned
patterns, for Sims Casting, which is billed directly for the same. Petitioner states that such purchases
of services are made for resale, in that Sims Castings includes the cost of such modifications and
maintenance in its prices for the castings.
Section 1105(c)(2) of the Tax Law imposes a tax on the receipts from the sale, except for
resale, of the service of fabricating or processing "tangible personal property, performed for a person
who directly or indirectly furnishes the tangible personal property, not purchased by him for resale,
upon which such services are performed." "Fabrication" is defined as "the alteration or modification
of a manufactured product without a change in the identity of the product. Fabrication includes
cutting, perforating, and similar operations." 20 NYCRR 531.2(d). "Processing" is defined as "the
performance of any service on tangible personal property which effects a change in the nature, shape
or form of the property." 20 NYCRR 531.2(e). Where Petitioner's customer finds that pattern
equipment produced according to its original specifications is not what is needed, and accordingly
has Petitioner make modifications to such equipment, Petitioner's service constitutes the service of
fabricating or processing, within the meaning of the statutory provision quoted supra. International
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

-2­
TSB-A-84(12)S
Sales Tax
March 23, 1984

Heat & Air Conditioning Corporation, State Tax Commission, TSB-H-80(224)S; Imperial Wall­
covering, Inc., State Tax Commission, TSB-H-83(49)S; Grant Hardware Company, State Tax
Commission Advisory Opinion, TSB-H-81(6)S; Oberdorfer Foundries, Inc., State Tax Commission,
STH 76-40. The receipts from the sale of such service are subject to tax except where the tangible
personal property has been purchased for resale, and except where the service is itself purchased for
resale. Petitioner states that its service is purchased for resale. It is to be noted that, pursuant to
section 1132(c) of the Tax Law, receipts from sales of the services described in section 1105(c)(2)
of the Tax Law are presumed to be "subject to tax until the contrary is established" by the vendor,
and that "the sale shall be deemed a taxable sale at retail" unless the vendor has taken from its
customer a Resale Certificate (Form ST-120). Accordingly, Petitioner need not collect tax where it
acts in good faith in accepting a properly completed resale certificate from its customers. Saf-Tee
Plumbing v. Tully, 77 A.D.2d 1. In addition, no tax need be collected if the customer presents
Petitioner with a copy of its Direct Payment Permit.
In the second described situation, Sims Castings, while having in its possession the customer­
owned pattern equipment, directs Petitioner to modify the same. In addition, Sims Castings has
Petitioner repair such pattern equipment. The expenses incurred for such modification and repairs
are incorporated, by Sims Castings, into the sale price of the castings. As indicated above, the service
of modification of the patterns is one described in section 1105(c)(2) of the Tax Law. The service
of repair of the patterns is one described in section 1105(c)(3) of the Tax Law, which imposes a tax
on the receipts from the sale of such service, except where purchased for resale, and where the
property repaired is "not held for sale in the regular course of business." In the situation presented
by Petitioner, the services of modification and repair are not purchased for resale because what Sims
Castings sells to its customers are castings, not a modification or repair service. In addition, the
repair service is not being performed on property "held for sale in the regular course of business."
Accordingly, receipts from the sale of the services of modifying and repairing the patterns are subject
to tax. However, section l105-B of the Tax Law provides, among other things, that where such repair
service (but not the service of modification) is performed on equipment used directly and
predominantly in the production of tangible personal property for sale by manufacturing, which
would presumably include the pattern equipment here under discussion, the State rate of tax was
reduced from 4% to 2% for the period commencing September 1, 1980 and ending February 28,
1981, and sales of such service were rendered exempt from the State 4% tax on and after March 1,
1981. Such rate reduction and subsequent exemption were not made applicable to locally imposed
sales taxes. All other conclusions reached above are applicable to locally imposed sales taxes as well
as to the State tax.

DATED: March 6, 1984

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

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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