Is machinery a scrap-metal recycler buys to process scrap into resalable material exempt from sales tax?

Plain-English summary

C & H Salvage Corp. processes scrap metals and materials for recycling. It asked whether the machinery it buys used strictly in that recycling is subject to sales tax.

The Department held the production machinery is exempt, but machinery for loading in or shipping out is taxable.

• Scrap processing is "processing." Section 1115(a)(12) exempts machinery or equipment used or consumed directly and predominantly in the production of tangible personal property for sale by manufacturing or processing. Processing scrap metal for sale falls within that.
• What "directly" means. Under 20 NYCRR 528.13(c)(1), machinery is used "directly" if, during the production phase, it acts on or changes the material, has an active causal role in producing the product, handles/stores/conveys the materials or product, or packages the product for sale.
• Qualifying equipment. The Department identified hydraulic guillotines, alligator shears, baling presses, turnings crushers, and special devices for breaking scrap — the machines that change scrap "from unusable to usable materials for remelting" — as used directly and predominantly in production.
• Non-qualifying equipment. Production runs from handling raw materials at the plant through the finished, packaged product; administration and distribution are outside it (528.13(b)). So a crane that unloads scrap from a truck into storage is not directly used in production, and machinery that moves a finished bale to a truck for delivery to the customer is distribution — both are taxable.

What this means for you

The production-machinery exemption is real for recyclers and processors — but it's line-specific. The equipment that actually transforms your raw input into the product you sell (cutting, shearing, baling, crushing) can be bought exempt. The exemption follows the production phase, not your whole operation.

The edges of the line are taxable. Machinery that brings raw material in before processing starts (unloading cranes) or that moves finished product out to customers (loading conveyors) is receiving or distribution, not production, and stays taxable. When you buy mixed-use or handling equipment, be ready to show it operates within the production phase.

Keep the "directly and predominantly" standard in view. Qualifying equipment must be used directly in production and predominantly (more than half) for that purpose. Document how each machine is used.

Common questions

Q: I run a scrap-metal yard. Is my processing equipment exempt?
A: Yes for machines used directly and predominantly to process the scrap for sale — shears, balers, crushers, breaking devices. Those change the material into a resalable product.

Q: What about the crane that unloads incoming scrap?
A: Taxable. Unloading raw material into storage is receiving, not production, so it is not "directly used" in production.

Q: And the conveyor that loads finished bales onto trucks?
A: Taxable. Moving finished product out to customers is distribution, which is outside the production phase.

Citations and references

Statute and regulations:

• Tax Law § 1105(a) — taxes retail sales of tangible personal property
• Tax Law § 1115(a)(12) — exempts machinery used directly and predominantly in production for sale by manufacturing or processing
• 20 NYCRR 528.13(c)(1) — defines when machinery is used "directly" in production
• 20 NYCRR 528.13(b) — distinguishes production from administration and distribution

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a87_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87(28)S
Sales Tax
August 31, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S870403A

On April 3, 1987, a Petition for Advisory Opinion was received from C & H Salvage Corp.,
Route 207, Campbell Hall, New York 10916.
The issue raised is whether the purchase of machinery used strictly in the recycling of scrap
metals and materials is taxable.
Section 1105(a) of the Tax Law imposes a sales tax upon "[t]he receipts from every sale of
tangible personal property, except as otherwise provided in this article."
Section 1115(a)(12) of the Tax Law exempts "[m]achinery or equipment for use or
consumption directly and predominantly in the production of tangible personal property, . . . for sale
. . . by manufacturing, processing. . . ." (Emphasis supplied).
Regulation section 528.13(c)(1) provides that:
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.

Additionally, regulation section 528.13(b) provides that the section 1115(a)(12) exemption
applies only to machinery and equipment used directly and predominantly in the production phase.
Machinery and equipment predominantly used in administration or distribution does not qualify for
exemption. Regulation section 528.13(b) provides:
(i)

Administration includes activities such as sales promotion, general office work,
credit and collection, purchasing, maintenance, transporting, receiving and testing of
raw materials and clerical work in production such as preparation of work,
production and time records.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-87(28)S
Sales Tax
August 31, 1987

(ii)

Production includes the production line of the plant starting with the handling and
storage of raw materials at the plant site and continuing through the last step of
production where the product is finished and packaged for sale.

(iii)

Distribution includes all operations subsequent to production, such as storing,
displaying, selling, loading and shipping finished products.

A person engaged in the processing of scrap metal for sale is engaged in "processing" within
the meaning of section 1115(a)(12) of the Tax Law. Hydraulic guillotines, alligator sheers, baling
presses, turnings crushers and special devices for breaking scrap to change its condition from
unusable to usable materials for remelting purposes qualify as being used directly and predominantly
in production.
However, not all machinery purchased by a scrap metal processor qualify as machinery used
directly in processing. For example, machinery such as cranes used to unload scrap from a truck and
to place such scrap into storage is not considered directly used in production. Also, machinery used
to convey a finished bale of scrap metal from the point where its production is completed to a truck
for transportation to the customer is not considered as being used directly in production.

DATED: August 31, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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