Does the production exemption cover the equipment and supplies a company uses to demolish railroad bridges and cut up the resulting scrap for sale?

Plain-English summary

Sheldon Construction Co., Inc. buys old railroad bridges and rail at nominal cost, demolishes them at the bridge site, and cuts up the scrap to saleable lengths (up to about two by five feet) to sell to scrap customers. It keeps no plant or yard and no inventory — all work happens at the job site using cranes, bulldozers, acetylene torches, and other cutting equipment. It sought to buy or rent that equipment and supplies exempt under New York's production exemptions.

The Department held that the production exemptions do not apply — the equipment isn't used predominantly in production, so it's all taxable.

• The three exemptions all require production use. Tax Law 1115(a)(12) (machinery/equipment), 1105-B (parts, tools, supplies, after March 1, 1981), and 1210(a)(1) (local) each exempt property used directly and predominantly in the production of tangible personal property for sale by manufacturing or processing.
• Demolition is not production. Sheldon's principal service is demolition. Using machinery, equipment, and supplies for demolition does not qualify as producing tangible personal property for sale.
• Cutting the scrap is processing — but not the predominant use. Processing (cutting up) the scrap does qualify as production of tangible personal property for sale. But to earn the exemption, the property must be used predominantly in that production, and the information showed the machinery, equipment, and supplies were not used predominantly in production.
• Result. Because the predominant-use requirement isn't met, Sheldon does not qualify under 1115(a)(12), 1105-B, or 1210(a)(1) and must pay State and all applicable local sales tax on the purchases and rentals.

What this means for you

A little qualifying activity doesn't exempt equipment used mostly for something else. The production exemptions turn on predominant use. Even though cutting scrap for sale is "processing," a demolition contractor whose equipment mainly demolishes doesn't clear that bar.

Demolition, on its own, is not manufacturing or processing. Tearing a structure down is a service, not the production of goods for sale. Only the step that actually transforms material into a saleable product counts toward the exemption — and it has to dominate the equipment's use.

Document how each item is actually used. Because the test is quantitative (more than half of the use in production), a taxpayer claiming the exemption needs facts showing the machinery is predominantly in the qualifying step, not spread across non-qualifying demolition work.

Common questions

Q: I demolish structures and sell the scrap. Is my equipment exempt as production machinery?
A: Not if the equipment is used predominantly for the demolition itself. Demolition isn't production, and the exemptions require the machinery to be used directly and predominantly in producing goods for sale by manufacturing or processing.

Q: Cutting the scrap to size is processing — doesn't that qualify?
A: Cutting scrap for sale does count as processing, but the exemption still requires that the equipment be used predominantly in that production. If most of its use is demolition, the exemption fails.

Q: Does it matter that I sell everything and keep no inventory?
A: No. Selling the output doesn't change the analysis. The question is whether the equipment is used predominantly in the qualifying production step, and here it wasn't.

Citations and references

Tax Law:

• 1115(a)(12) — exemption for machinery/equipment used directly and predominantly in production of tangible personal property for sale by manufacturing or processing
• 1105-B — exemption for parts, tools, and supplies so used, on and after March 1, 1981
• 1210(a)(1) — local exemption for property so used

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_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (30)S
Sales Tax
July 26, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840827B

On August 27, 1984 a Petition for Advisory Opinion was received from Sheldon
Construction Co., Inc., 3475 Route 78, South Wales, New York 14139.
The issue raised is whether Petitioner is required to pay sales tax on its purchase or rental of
equipment and supplies used in demolishing railroad bridges and processing the resultant scrap.
Petitioner sells scrap products processed from the demolition of old railroad bridges and rail.
The bridges are purchased at a nominal cost prior to commencing processing. Petitioner does not
maintain a plant or yard in which to store or process the scrap; the entire process is performed at the
bridge site. All of the required equipment is transported to the job site.
Petitioner's process begins by cutting out webbings and other bridge components which are
lifted out by crane or pulled down off the structure with a bulldozer. Cranes are then utilized to lift
the main bridge structure (or pieces of it) and place it in a nearby open area where it can be further
cut up into small pieces. Acetylene torches and other cutting equipment are used in the process.
The adjacent railroad track is similarly processed. The track is lifted out of the ground (using
bulldozers and cranes) and cut to saleable lengths.
Petitioner states that the maximum saleable length (due to industry specifications) is two feet
by five feet. Once cut to saleable lengths, all available scrap is loaded onto trucks or railroad cars by
use of a crane and is sent off to customers. Petitioner states further that the scrap is extremely
marketable and it never maintains an inventory.
While not so stated in the Petition, it is presumed that Petitioner proposes exemption from
tax as follows:
(1)
Exemption from State sales and use tax under section 1115(a)(12) of the Tax
Law for "[m]achinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property . . . for sale, by
manufacturing [or] processing . . . "
(2)
Exemption from State sales and use tax under section 1105-B of the Tax Law,
for the period after March 1, 1981, for. . .parts. . ., tools and supplies for use or
consumption directly and predominantly in the production of tangible personal
property . . . for sale by manufacturing [or] processing . . . "

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

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

-2­
TSB-A-85 (30)S
Sales Tax
July 26, 1985

(3)
Exemption from local sales and use tax under section 1210(a)(1) of the Tax Law for
". . . all . . . tangible personal property for use or consumption directly and predominantly in
the production of tangible personal property . . . for sale, by manufacturing [or] processing
..."
It should be noted that under each of the above provisions there is the requirement that the
item of property to be exempted must be used or consumed" . . . directly and predominantly in the
production of tangible personal property. . . for sale by manufacturing [or] processing . . ."
The principal service provided by Petitioner is that of demolition. The use of machinery,
equipment and supplies for such demolition does not qualify as production of tangible personal
property for sale by manufacturing or processing. The processing (cutting up) of the scrap resulting
from the demolition of bridges qualifies as the production of tangible personal property for sale by
processing. However, in order to qualify for exemption pursuant to the provisions of sections
1115(a)(12), 1105-B and 1210(a)(1) of the Tax Law, the machinery, equipment and supplies must
be used predominantly in production of tangible personal property for sale by manufacturing or
processing. All available information indicates that the machinery equipment and supplies are not
used predominantly in the production of tangible personal property.
Accordingly, Petitioner does not qualify for exemption pursuant to the provisions of sections
1115(a)(12), 1105-B and 1210(a)(1) of the Tax Law and must, therefore, pay state and all applicable
local sales tax on all such purchases.

DATED: July 3, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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