Is energy used to heat 'make-up air' — outside air brought in to replace exhausted contaminated air in a plant ventilation system — exempt from sales tax as used directly in production?

Plain-English summary

Weber-Knapp Company runs a mechanical ventilation system in its plant. Many industrial processes need such systems to pull toxic, flammable, or explosive vapors out of the employees' work area. The system has two parts: an exhaust subsystem that removes contaminated air, and a make-up air subsystem that brings in outside air to replace it — heating that incoming air during the heating season. Weber-Knapp asked whether the energy used to heat the make-up air is exempt from sales tax.

The Department held the energy is taxable — it is not used directly in production.

• Energy exemption requires "directly and exclusively" in production. Tax Law § 1115(c) exempts gas and electricity used directly and exclusively in producing tangible personal property for sale by manufacturing.
• The ventilation system isn't "direct" production use. Production machinery can qualify (§ 1115(a)(12)), and pollution-control equipment counts as used directly in production — but only where it "actually treats, buries, or stores waste materials from a production process" (20 NYCRR 528.13(d)). Weber-Knapp's system merely removes contaminants from the work area; it does not treat, bury, or store them. So it is not used directly and predominantly in production, and the energy running it is not used directly in production.
• Heating make-up air heats the plant. Independently, energy used to heat the incoming make-up air is heating the plant area, which is not "directly and exclusively" in production within § 1115(c) — citing Fancher Chair Co., Inc., State Tax Commission Advisory Opinion, TSB-A-83(11)S.
• Result: the energy to heat make-up air is subject to both State and local sales tax.

What this means for you

Environmental and safety systems usually aren't "production" for the energy exemption. New York's energy exemption is strict — the fuel or electricity must be used directly and exclusively in making the product. Ventilation that protects workers by clearing fumes is essential, but it acts on the air, not on the product, so the energy that runs it is taxable.

Pollution-control equipment has a narrow special rule. Equipment that treats, buries, or stores production waste can be treated as direct production use. Equipment that only moves contaminants out of the room does not meet that rule.

Space heating is a red flag. Any energy that ends up heating the plant or work area — even indirectly, like warming incoming ventilation air — is generally taxable, because comfort/space heating is not exclusively part of production. Compare TSB-A-83(11)S (Fancher Chair). If you claim the energy exemption, separate out and document only the energy truly consumed in the production process itself.

Common questions

Q: We heat outside air to replace fumes exhausted from our shop. Is that energy exempt?
A: No. Heating make-up air heats the plant area and the ventilation system doesn't treat, bury, or store waste — so the energy isn't used directly and exclusively in production. It's taxable.

Q: Isn't our ventilation system pollution-control equipment, which is exempt?
A: Only if it actually treats, buries, or stores the waste. A system that merely removes contaminants from the work area doesn't meet 20 NYCRR 528.13(d).

Q: What energy would qualify?
A: Gas or electricity used directly and exclusively in the production process itself. Energy used for space/comfort heating of the plant is taxable even when it's tied to a ventilation system.

Citations and references

Statutes:

• Tax Law § 1115(c) — exemption for gas and electricity used directly and exclusively in the production of tangible personal property for sale by manufacturing
• Tax Law § 1115(a)(12) — exemption for machinery and equipment used directly and predominantly in production

Regulation:

• 20 NYCRR 528.13(d) — pollution-control machinery is deemed used directly and predominantly in production only if it is used predominantly to actually treat, bury, or store waste materials from a production process

Departmental opinion cited:

• Fancher Chair Co., Inc., State Tax Commission Advisory Opinion, TSB-A-83(11)S — energy used to heat the plant area is not used directly and exclusively in production

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(15)S
Sales Tax
May 29, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840123A

On January 23, 1984, a Petition for Advisory Opinion was received from Weber-Knapp
Company, 441 Chandler Street, Jamestown, New York 14701.
The issue raised is whether the purchase of energy which is used to heat "make-up air"
(outside air which replaces exhausted contaminated air) is subject to or exempt from state and local
sales tax.
Petitioner contends that many industrial processes require mechanical ventilating systems to
remove toxic, flammable and/or explosive vapors from employees' working environment.
Mechanical ventilating systems consist of two major subsystems: (1) exhaust air and (2)
make-up air. An exhaust air subsystem generally consists of exhaust collection ductwork, an exhaust
fan and an exit point from the building. A mechanical make-up air system generally consists of a
supply fan, distribution ductwork and a means of heating the air during the heating season.
Section 1115(c) of the Tax Law provides for an exemption from sales tax for purchases of
"...gas [and] electricity. . . for use or consumption directly and exclusively in the production of
tangible personal property. . . for sale,. . . by manufacturing. . . ."
Section 1115(a)(12) of the Tax Law provides for an exemption from sales tax with respect
to machinery or equipment purchased". . . for use or consumption directly and predominantly in the
production of tangible personal property. . . for sale, by manufacturing, . . .". The Sales and Use Tax
Regulations provide that machinery and equipment. . . used for disposing of industrial waste, as a
part of a process for preventing water or air pollution, will be considered as being used directly and
predominantly in production. . . if (i) the machinery and equipment is purchased by a manufacturer
and used predominantly to actually treat, bury, or store waste materials from a production process.
. . ." 20 NYCRR 528.13(d).
Since Petitioners ventilating system is not used to actually treat, bury, or store waste
materials, but merely to remove it from the work area, it does not constitute machinery or equipment
used directly and predominantly in production. Accordingly, the energy used to operate the
ventilating system, including energy used to heat make-up air, is not used directly in production.

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

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

-2­
TSB-A-85(15)S
Sales Tax
May 29, 1985

Additionally, energy used to heat make-up air is being used to heat the plant area. Such use
is not deemed to be directly and exclusively in production within the meaning and intent of section
1105(c) of the Tax Law. (See Fancher Chair Co., Inc., State Tax Commission Advisory Opinion,
TSB-A-83(11)S.
Petitioner's purchase of energy to heat "make-up air" is therefore subject to both State and
local sales tax.

DATED: May 14, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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