Which pieces of a computer system that produces NC control tapes for exempt factory machines qualify for New York's production-machinery exemption?

Plain-English summary

Graham Manufacturing Co., Inc. bought a computer system — a computer, disc drive, tape punch unit, plotter, and a terminal with a line printer — used exclusively to produce numerical-control (NC) tapes. Those tapes guide its drills, turret lathes, milling machine, and burning machines, which are themselves exempt production machinery. It asked whether the computer system qualifies for the production exemption under § 1115(a)(12).

The Department held that only the tape punch unit qualifies; the other four machines are taxable.

• The tapes are exempt "parts." The NC tapes guide the exempt factory machines and have no use independent of them, so they are treated as parts for that machinery (20 NYCRR 528.13(e)(1)). Machinery that produces parts for self-use in production can itself be "used directly in production" (528.13(c)(3)).
• But "directly" requires an intimate, integrated nexus. Equipment is used directly in production only if it performs a continuous, synchronized operation necessary and integral to the actual production process (Rochester Independent Packer; International Salt; Niagara Mohawk v. Wanamaker). Being merely essential is not enough (Cole Sand and Gravel).
• The Department walked through the six phases. Phase 1 (keying in data) is preparation, not production; phases 2–3 (error checks, tool-path plotting) are incidental to phase 1; phase 4 (printing operator instructions) merely directs workers (Moog Inc., TSB-H-82(96)S); phase 6 is storage. Only phase 5 — punching the NC tape — is direct production. Activities collateral to production don't count (20 NYCRR 528.13(c)(2)).
• "Predominantly" means over 50%. The tape punch unit is used exclusively in phase 5 → exempt. The computer and disc drive are used in phase 5 but not for over 50% of their time → taxable. The plotter and terminal/line printer are used only in phases 1–4 → never in production → taxable. The exemption applies to state and local taxes but not New York City tax under § 1107.

What this means for you

Buying a "system" doesn't make the whole system exempt — New York tests each machine separately. Even where the end product (here, NC tapes) is an exempt part for exempt factory machines, the exemption reaches only the pieces of equipment that are themselves used directly and predominantly in production.

"Directly" is narrow: it's the actual production step, not the setup around it. Programming, error-checking, tool-path visualization, printing instructions for operators, and data storage are all treated as collateral or preparatory — not production — even though the process couldn't run without them.

Predominant use is a real, 50%-of-time test. A machine that spends most of its time on preparatory phases (like the computer and disc drive) fails even if it does participate in the production step. If you're claiming the exemption for shared computer equipment, be ready to document how its time actually breaks down. This mirrors the same-provision analysis in the 1985 CAD/CAM opinions (e.g., TSB-A-85(13)S Houdaille, 85(18)S Syracuse China).

Common questions

Q: My CNC programming computer makes tapes/files that run exempt factory machines. Is the computer exempt?
A: Only if it's used over 50% directly in the production step. In this ruling the computer and disc drive spent most of their time on data entry, error-checking, and plotting, so they were taxable; only the tape punch unit (used entirely to create the tape) was exempt.

Q: Aren't the tapes themselves exempt as parts?
A: Yes — the NC tapes are treated as exempt parts for the factory machines. But that alone doesn't exempt every machine that helps make them; each machine still must meet the direct-and-predominant-use test.

Q: Does this exemption cover New York City sales tax?
A: No. The opinion notes the exemption doesn't apply to the tax imposed in New York City under § 1107.

Citations and references

Statutes:

• Tax Law § 1115(a)(12) — machinery/equipment used directly and predominantly in production for sale
• Tax Law § 1107 — New York City sales tax (exemption not extended)

Regulations:

• 20 NYCRR 528.13(c)(2) — collateral activities not "directly" in production
• 20 NYCRR 528.13(c)(3) — machinery producing parts for self-use in production
• 20 NYCRR 528.13(c)(4) — "predominantly" means over 50% of use in the production phase
• 20 NYCRR 528.13(e)(1) — definition of "part"

Cases and prior guidance:

• Rochester Independent Packer, Inc. v. Heckelman, 83 Misc. 2d 1064 (1975)
• International Salt Co. v. State Tax Commission, 79 A.D.2d 343 (3d Dept. 1981)
• Niagara Mohawk Power Corp. v. Wanamaker, 286 A.D. 446 (4th Dept. 1955)
• Cole Sand and Gravel Corp., TSB-H-83(44)S; Moog Inc., TSB-H-82(96)S

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_30s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-84(30)S
Sales Tax
October 15, 1984

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

PETITION NO. S820902B

On September 2, 1982 a Petition for Advisory Opinion was received from Graham
Manufacturing Co., Inc., 20 Florence Avenue, Batavia, New York 14020.
The issue raised is whether receipts from the sale of certain equipment qualifies for the
"production exemption" from New York State and local sales and use taxes.
Petitioner, a manufacturer, purchased equipment consisting of a computer, disc drive, tape
punch unit, plotter and a terminal, the latter including a line printer. This system is used to produce
punched NC tapes used in the guidance of manufacturing equipment including Moline and other
drills, turret latches, a milling machine and burning machines. These machines are, in turn, used
directly and predominantly in the production of tangible personal property for sale in such a manner
as to render their purchase and use exempt from sales and use taxes.
The following chart indicates the various phases of this system's use, and the approximate
number of minutes of use on each phase, in producing an NC tape. The system is used exclusively
for the production of such tapes, in the manner shown below.

Phase
1.

Computer

Tape
Disc Punch
Drive Unit Plotter

Terminal/
Line
Printer

Minutes
of
Use

Key code sheet
information into
computer

X

X

X

20

Perform checks for
format errors

X

X

X

10

3.

Plot tool path

X

X

4.

Print out of special
instructions for
production machine
operators

X

X

5.

Punch NC tape

X

X

6.

Storage of information
for possible future
duplication of job

X

X

2.

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

X

30

X
X

30
30

15

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

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TSB-A-84(30)S
Sales Tax
October 15, 1984
Phase 1.
computer.

Information from a previously prepared code sheet is keyed directly into the

Phase 2.
Petitioner runs checks for errors in format. This phase is devoted primarily to
correcting errors in the program to be encoded on the NC tape. Most of the time taken up by this
phase is spent in program correction.
Phase 3.
Based on the information previously keyed into the computer, the computer
directs the plotter in plotting the tool path. This provides a visual display of the product which will
be produced by using the NC tape, and the motion the tool must take to reach and operate on this
part. The plot is then checked for errors and adjusted appropriately.
Phase 4.
The computer and line printer produce a printout of special instructions for use
by the production machine operators in setting up the production machinery. The computer and line
printer also produce a printout, during this phase, indicating at which stage in production certain
equipment, such as drill spindles, should be replaced.
Phase 5.

The computer directs the tape punch unit in the punching of the NC tapes.

Phase 6.
Information from a particular job is stored on a floppy disk for retrieval in the
event of a production duplication at a later date.
Section 1115(a)(12) of the Tax Law provides for an exemption from sales and use taxes with
respect to:
"Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, gas,
electricity, refrigeration or steam for sale, by manufacturing,
processing, generating, assembling, refining, mining or extracting, .
..."
Section 528.13(c)(3) of the Sales and Use Tax Regulations provides as follows:
"Machinery used to produce other machinery or equipmentor
parts for self use in production is considered to be used directly in
production."
Section 528.13(e)(1) of the Sales and Use Tax Regulations provides, in part, as follows:
"(i)
The term 'part' means a replacement for any portion of
a machine or piece of equipment, and any device actually attached to
the machinery or equipment and used in connection with the
performance of its function.
(ii)
A part cannot accomplish the work for which it was
designed independent of the machine for which it is intended to be a
component.

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TSB-A-84(30)S
Sales Tax
October 15, 1984
The NC tapes are used to guide the Petitioner's exempt manufacturing equipment; they have
no utility beyond or independent of this function. Thus, the NC tapes themselves serve as parts for
Petitioner's exempt manufacturing equipment, 20 NYCRR 528.13(e)(1), and any machinery used
directly and predominantly in the production of the NC tapes would itself be considered to be used
directly and predominantly in production for purposes of the production exemption described supra.
20 NYCRR 528.13(c)(3).
For equipment to be used directly in production there must exist an intimate nexus with the
actual production operation; that is, there must be a bond or union between production and the
equipment such that the equipment performs a necessary and essential function in the course of the
actual production process. Rochester Independent Packer, Inc. v Heckelman, 83 Misc. 2d 1064
(1975). However, the fact that equipment is essential to production is not itself determinative of
whether such equipment qualifies for the exemption provided for in Section 1115(a)(12) of the Tax
Law. Cole Sand and Gravel Corp, State Tax Commission Decision, January 10, 1983, TSB-H­
83(44)S. The equipment must perform a continuous, synchronized operation that is necessary and
integral to the production process. (emphasis added). International Salt Co. v New York State Tax
Commission, 79 A.D.2d 343 (3d Dept. 1981); Niagara Mohawk Power Corp. v Wanamaker, 286
A.D. 446 (4th Dept. 1955). In the latter case, coal and ash handling equipment was exempt from
sales and use taxes not only because it was essential to the production process, but also because it
was used during the course of a harmonious and integrated system to produce electricity.
In the present case, although phase (1) may be necessary to the production of the NC tapes,
it is not an integral part of the continuous and vital production process (viz., the creation of NC tapes
by the tape punch unit). Niagara Mohawk Power Corp. v. Wanamaker, 286 A.D. 446 (4th Dept.
1955). That is, phase (1) constitutes a function which, while admittedly essential, is part of the
preparation for production, rather than occurring during and in necessary connection with the
creation of the NC tapes themselves. Similarly, phases (2) and (3) are merely incidental to phase (1);
their main function is to provide information or direction to the workers to enable verification of the
initial input. The Sales and Use Tax Regulations specifically provide that, "[u]sage in activities
collateral to the actual production process is not deemed to be used directly in production." 20
NYCRR 528.13(c)(2). Accordingly, the equipment used during phases (1) through (3) is not being
used, during such phase, directly in production. Phase (4) does not represent direct use in production,
as its function is merely to provide direction to workers, Moog Inc., State Tax Commission Decision,
June 2, 1982, TSB-H-82(96)S, while phase (6) represents merely the storage of information.
Section 1115(a)(12) of the Tax Law provides an exemption only for machinery used directly
and predominantly in production (emphasis added). The Sales and Use Tax Regulations further
provide that "[m]achinery or equipment is used predominantly in production if over 50 percent of
its use is directly in the production phase of a process." 20 NYCRR 528.13(c)(4).
Since phase (5) is the only phase in which the equipment is used directly in the production
process, the computer and disc drive are not used predominantly in production because their use in
phase (5) alone does not represent more than 50 percent of the computer and disc drive's usage.
Further, the plotter and terminal/line printer are employed only during phases (1) through (4) and are,
therefore, not used directly in production at all. Accordingly, the computer, disc drive, plotter, and

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TSB-A-84(30)S
Sales Tax
October 15, 1984
terminal/line printer are subject to the applicable sales and use taxes. The tape punch unit, however,
is used exclusively in phase (5); that is, it is used both directly and predominantly in production.
Accordingly, the tape punch unit is exempt from New York State sales and use taxes pursuant to
Section 1115(a)(12) of the Tax Law. Similar exemptions apply with respect to all other State and
locally imposed Sales and use taxes except for those imposed in New York City under Section 1107
of the Tax Law.

DATED: July 10, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.