Do a plant's energy-management system, machine-signaling/reporting system, and finished-goods conveyor qualify as production machinery exempt from sales tax under section 1115(a)(12)?

Plain-English summary

Syracuse China Corporation bought three plant systems and asked whether each was machinery or equipment used "directly and predominantly" in production, which would exempt it from sales tax under Tax Law § 1115(a)(12):

• a Markman Energy Management (MEM) System, wired to all major electrically powered equipment, that monitors the flow of electricity to production machinery, lighting, ventilation and heating to achieve the most economical use of energy (turning equipment on and off);
• a Datacom System, connected to every major machine, that lets an operator signal a central control to call for raw materials, the foreman or technicians, and that generates print-outs of production reports; and
• a Rapistan Conveyor System that transports finished, packaged product from the packaging machine into the finished-goods storage area.

The Department held that none of the three qualifies — all are taxable.

• MEM System — energy monitoring is collateral, not direct production. Under 20 NYCRR 528.13(c), "directly" means acting on the material, having an active causal relationship in production, handling/storing/conveying the product, or packaging it; use "collateral to the actual production process" is not direct use. The MEM System was acquired to ensure the most efficient use of electrical power plant-wide. That it turns machinery on or off "does not establish its predominant use in the production operation."
• Datacom System — administration and communication, not production. Preparing production reports is an aid to management and therefore administrative; acting as a signaling device to communicate with other workers and supervisors is not direct use in production (citing Moog Inc., State Tax Commission Decision, June 2, 1982, TSB-H-82(96)S).
• Rapistan Conveyor — distribution, not production. Production runs from raw-material handling "through the last step of production where the product is finished and packaged for sale" (528.13(b)(1)(ii)). The product is ready for sale when it leaves the boxing department; subsequent transport and inspection occur in the distribution phase. That a "fractional quantity" may be repackaged in storage doesn't convert the conveyor to direct and predominant production use.

What this means for you

"Supports the plant" is not the same as "used directly in production." New York's manufacturing exemption is narrow. Equipment that manages energy, moves messages, or generates reports keeps the factory running efficiently, but it doesn't act on the product — so it's taxable even though every machine on the floor depends on it.

Where production ends matters for conveyors and material handling. Once the product is finished and packaged, it has left the production line. A conveyor that carries packaged goods to storage or shipping is operating in distribution, which is not exempt — even if it physically starts at the packaging machine.

Occasional "production-like" use doesn't flip the result. A little repackaging in the storage area, or the fact that an energy system happens to switch machines on, isn't enough. The test is predominant (over 50%) direct use in production, judged by the equipment's real, primary function.

Common questions

Q: Our energy-management system controls the production machines. Isn't it part of production?
A: Not under this opinion. Monitoring and optimizing plant-wide energy use is collateral to production. Switching machinery on and off doesn't make the system itself "used directly and predominantly" in production, so it's taxable.

Q: What about a system that generates production reports and lets operators call for materials?
A: Reporting is administrative and signaling is communication — neither is direct production use. The purchase is taxable.

Q: Is our finished-goods conveyor exempt because it connects to the packaging machine?
A: No. Packaging is the last step of production; carrying already-packaged product to storage is distribution, which the exemption doesn't cover.

Citations and references

Statute:

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

Regulations:

• 20 NYCRR 528.13(b)(1) — divides manufacturing into administration, production, and distribution; production runs through the last step where the product is finished and packaged for sale
• 20 NYCRR 528.13(c) — "directly" (act on material, active causal relationship, handling/storage/conveyance, or packaging); collateral use is not direct; "predominantly" means over 50% of use is directly in production

Departmental decision cited:

• Moog Inc., State Tax Commission Decision, June 2, 1982, TSB-H-82(96)S — signaling/communication use is not direct use 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_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(18)S
Sales Tax
June 12, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840206A

On February 6, 1984 a Petition for Advisory Opinion from Syracuse China Corporation, P.O.
Box 4820, Syracuse, New York 13221 was received.
The issue raised is whether the Petitioner's acquisitions of a Markman Energy Management
System, a Datacom System, and a Rapistan Conveyor System, constitute purchases of machinery and
equipment for use or consumption directly and predominantly in the production of tangible personal
property for sale by manufacturing and, therefore, qualify for the exemption from sales tax pursuant
to section 1115(a)(12) of the Tax Law.
Petitioner submits the following descriptions of the function of each of the aforementioned
systems:
The Markman Energy Management (MEM) System is connected to all major electrically
powered equipment in the plant area. Its purpose is to monitor the flow of electricity to production
machinery, lighting, ventilation and heating for the purpose of achieving the most economical use
of energy. Petitioner explains that the system is instrumental in turning equipment on and off "not
only as a function of efficient utilization of electrical energy but also to initiate the production
process". Petitioner contends this activity constitutes direct and predominant use of the MEM System
in the operation of manufacturing equipment.
The Datacom System is connected to every piece of major equipment in the manufacturing
plant. It is a signaling device that allows the operator, through a central control, to call for raw
materials, the foreman, technicians etc. In addition, the Datacom System monitors the machines for
the purpose of generating print-outs of production reports. Petitioner takes the position that the
system, although purchased separately, must be considered and integral part of every piece of
production equipment. Petitioner states: "If this device were part of the machine itself, there would
clearly be no question".
The Rapistan Conveyor System transports the product from the packaging machine into the
finished goods storage area. Petitioner contends that the product is not ready to be sold until the
packaging has passed inspection at the end of the conveyor.
Section 1115(a)(12) of the Tax Law provides an exemption from the Sales Tax for machinery
or equipment for use or consumption directly and predominantly in the production of tangible
personal property . . . for sale, by manufacturing . . . .

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

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

-2­
TSB-A-85(18)S
Sales Tax
June 12, 1985

Regulations Section 528.13(b)(1) of the Tax Law classifies the steps of the manufacturing
process as "administration, production or distribution", and reads in part as follows:
(i) "Administration includes activities . . . such as preparation of
work, production and time records.
(ii) Production includes the production line of the plant starting
with the handling and storage of raw materials at the plant side and
continuing through the last step of the production where the product
is finished and packaged for sale.
(iii) Distribution includes all operations subsequent to production,
such as storing . . . finished products."
Paragraph (c) of this same Regulations section defines the terms directly and predominantly:
(1) "Directly means the machinery or equipment must, during the
production phase of a process:
(i) act upon or effect a change in material to form the product to be
sold, or
(ii) have an active causal relationship in the production of the
product to be sold, or
(iii) be used in the handling, storage, or conveyance of materials or
the product to be sold, or
(iv) be used to place the product to be sold in the package in which
it will enter the stream of commerce.
(2) Usage in activities collateral to the actual production process is
not deemed to be used directly in production.
(4) Machinery or equipment is used predominantly in production,
if over 50 percent of its use is directly in the production phase of a process."
(Emphasis Added)
The MEM System was acquired for the purpose of insuring the most efficient
use of electrical power in the entire plant area. In its monitoring phase, the system
is not used directly in the production process within the meaning and intent of
Regulations Section 528.13(c)(1) of the Tax Law. The fact that in fulfilling its
functions the MEM System turns machinery on or off does not establish its
predominant use in the production operation.

-3­
TSB-A-85(18)S
Sales Tax
June 12, 1985

The Datacom System prepares production reports, an activity which is an aid to management
and, therefore, administrative in nature. In a larger capacity this system acts as a signaling device
which enables operators to communicate with other workers and with supervisory personnel. Such
use of the Datacom System does not constitute direct use in production, as defined in Regulations
Section 528.13, see: Moog Inc., State Tax Commission Decision, June 2, 1982, TSB-H-82(96)S.
The Rapistan Conveyor System extends from the packaging machine into the finished goods
storage area. Regulations Section 528.13(b)(ii) terms the packaging operation the last step in the
production process. Petitioners product is ready for sale when it leaves the boxing department.
Subsequent transportation and inspection of the packaging and the marking are activities occurring
in the distribution phase of the manufacturing operation. The fact that a fractional quantity of the
product may be repackaged in the storage area does not change the conveyor's operation to direct and
predominant use in production.
Accordingly, since none of the systems under consideration is employed directly and
predominantly in the production phase of the manufacturing process, the Petitioner's purchase of
these systems is subject to the applicable sales and use taxes.

DATED: May 14, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

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