Is the electricity that powers a deli's coolers exempt as used in production, when the food is both sliced for sale and made into ready-to-eat items?

Plain-English summary

The Southland Corporation uses "transit" and "deli" coolers to hold cold cuts, cheeses and salads before sale. Some of that food is sliced and sold by weight; some is used to make ready-to-eat sandwiches and salads. It asked whether the electricity powering the coolers is exempt from sales tax.

The Department held the electricity is exempt only in part — for food destined to be sold as tangible personal property, not for food made into taxable prepared items.

• The production exemption. Electricity used directly and exclusively in producing tangible personal property for sale is exempt (§ 1115(c)).
• Ready-to-eat food doesn't count. Ready-to-eat sandwiches and salads are taxed as prepared food under § 1105(d) — that's not a sale of tangible personal property (Burger King v. State Tax Commission). So electricity used to cool the ingredients for those items doesn't qualify.
• Sliced-and-sold-by-weight food does count. When meat and cheese are sliced and sold by weight, that's a sale of tangible personal property, and the electricity used to cool it before slicing is used directly in production — so that portion is exempt.
• You must allocate. Because electricity is delivered in bulk, the user can claim a refund or credit (or use an Exempt Use Certificate, Form ST-121) only for the exempt portion, and must keep adequate records and support the allocation with an engineering survey (20 NYCRR 528.22(c)).

What this means for you

"Production" for the electricity exemption means making tangible goods for sale — not preparing taxable meals. For a deli or grocery, the same cooler can serve both purposes, and only the production side qualifies. Cooling ingredients for ready-to-eat food is not exempt; cooling product that's later sliced and sold by weight is.

Mixed use means you allocate and prove it. Utilities bought in bulk that serve both exempt and non-exempt uses aren't all-or-nothing. You claim the exempt fraction by refund/credit or an ST-121, and you carry the burden of substantiating the split — typically with metering records and an engineering survey.

The food-vs-goods line drives a lot of grocery tax questions. Ready-to-eat, prepared, and heated food is generally taxed as food service; unprepared items sold by weight or package are typically tangible personal property. That distinction decides whether the production exemption reaches your utilities.

Common questions

Q: Is the electricity running my deli cases exempt?
A: Only partly. The portion cooling food you'll slice and sell by weight (a sale of tangible personal property) qualifies for the production exemption. The portion cooling ingredients for ready-to-eat sandwiches and salads does not, because those are taxed as prepared food.

Q: How do I actually claim the exempt portion?
A: Since electricity comes in bulk, you allocate. You can pay tax and claim a refund/credit for the production portion, or use an Exempt Use Certificate (Form ST-121) and assume liability for any non-exempt use — supported by records and an engineering survey.

Q: Why are ready-to-eat sandwiches treated differently?
A: They're taxed as prepared food or drink under § 1105(d), not as a sale of tangible personal property, so electricity used to make them isn't "used in production" for the § 1115(c) exemption (Burger King v. State Tax Commission).

Citations and references

Statutes:

• Tax Law § 1115(c) — exemption for electricity used directly and exclusively in production
• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1105(d) — tax on food and drink sold by restaurants and other establishments

Regulations:

• 20 NYCRR 528.13 — machinery, equipment and utilities used in production (including 528.13(b)(1) and 528.13(c)(2) Ex. 6)
• 20 NYCRR 528.22(c) — allocation and refund/credit for utilities used directly and exclusively in production

Cases and prior guidance:

• Burger King v. State Tax Commission, 51 N.Y.2d 614

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_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84(9)S
Sales Tax
March 13, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820930D

On September 30, 1982 a Petition for Advisory Opinion was received from The Southland
Corporation, 425 Cherry Street, Bedford Hills, New York 10507.
The issue raised herein is whether the electricity used to power transit and deli coolers is
exempt from sales tax.
Petitioner states that the transit and deli coolers are used to hold cold cuts, cheeses and other
deli products prior to sales. These include meat and cheese in bulk form, to be sold in slices by
weight. The meat and cheese is also used to prepare sandwiches for off-premises consumption. The
coolers are also used to store potato salad, cole slaw, macaroni salad, as well as other salads in a
ready to eat format. "Deli-coolers" are used for display as well as the cooling of foods. "Transit
coolers" are coolers which are built into the building and used solely for the cooling of foods.
Section 1115(c) of the Tax Law provides, in part, that: ". . . electricity for use or consumption
directly and exclusively in the production of tangible personal property . . . for sale . . . shall be
exempt from the taxes imposed under subdivisions (a) and (b) of section eleven hundred five and
the compensating use tax imposed under section eleven hundred ten." (emphasis added)
The sale of sandwiches and salads in a ready to eat format is subject to the tax imposed under
section 1105(d), and thus does not constitute the sale of tangible personal property within the
meaning of the Article 28 of the Tax Law. Burger King v. State Tax Commission, 51 N.Y. 2d 614.
Accordingly, electricity used in the cooling of the foods used in sandwiches and of ready to eat
salads is not used in the production of tangible personal property, and thus does not qualify for the
exemption. Where, however, meat, cheese and the like is sliced and sold by weight, such sales are
of tangible personal property. The electricity used, prior to slicing or preparation in ready to eat form,
of such food is used directly in production. 20 NYCRR 528.13(c)(2) Ex. 6; 20 NYCRR
528.13(b)(1); 528.22(c)(1)(ii). Accordingly, the electricity used exclusively with respect to the latter
process would not be subject to tax. The following provisions of the Sales and Use Tax Regulations
apply to the situation under discussion:
ii) Because fuel, gas, electricity, refrigeration and steam when
purchased by the user is normally received in bulk or in a continuous
flow and a portion thereof is used for purposes which would make the
exemption inapplicable to such purchases, the user may claim a
refund or credit for the tax paid only on that portion used or
consumed directly and exclusively in production.

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

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

-2­
TSB-A-84(9)S
Sales Tax
March 13, 1984

(iii) In the alternative, an Exempt Use Certificate (Form ST­
121) may be used, providing full liability is assumed for any state and
local tax due on any part of purchases used for other than the exempt
purposes described in subdivision (a) of this section. The taxable
portion of these purchases is to be reported as a "purchase subject to
use tax" on a sales and use tax return required to be filed with the Tax
Commission.
(iv) The user must maintain adequate records with respect to
the allocation of fuel, gas, electricity, refrigeration and steam used
directly and exclusively in production and for non-exempt purposes.
(v) For the purpose of substantiating the allocation of fuel,
gas, electricity, refrigeration and steam and like services used directly
and exclusively in production from that used for non-exempt
purposes, the user must, when claiming a refund or credit, submit an
engineering survey or the formulae used in arriving at the amounts
used in an exempt manner. 20 NYCRR 528.22(c)(3).

DATED: February 27, 1984

s/FRANK A. PUCCIA
Director
Technical Services Bureau