Can a franchisor that buys the gas and electricity for its franchisee-operated stores get a sales tax refund for the portion the franchisees use in an exempt, production manner?

Plain-English summary

The Southland Corporation operates the 7-Eleven chain. Most of its New York stores are Southland-owned but franchisee-operated, and Southland buys the fuel, gas, and electricity for those stores (its franchise agreement says 7-Eleven pays for utilities). A portion of that power is used directly and exclusively in producing tangible personal property for sale (for example, food preparation). Southland asked whether it can get a refund of sales tax for the exempt portion, even though the exempt use happens at franchisee stores.

The Department held Southland can claim the refund — unless it's actually reselling the utilities.

• The exemption and the companion rule. Tax Law § 1105(b) taxes sales of gas and electricity, but § 1115(c) exempts utilities used directly and exclusively in production. 20 NYCRR § 528.22(c)(1) defines "directly," and § 528.13(c)(5) says machinery used in production by someone other than its owner is exempt on the same conditions. Because the machinery and utility exemptions are companion exemptions, and the machinery needn't be used by its owner to be exempt, the gas/electricity powering it needn't be used by its purchaser to be exempt either.
• Southland's refund. To the extent Southland paid tax on utilities used in an exempt manner (even by its franchisees), Southland is entitled to a refund or credit (filed under Part 534).
• But not the franchisee's own purchases. If a franchisee itself buys utilities and pays tax, the franchisee — not Southland — gets the refund.
• And watch resale. To the extent Southland buys utilities and resells them to franchisees, Southland is the vendor: it may buy tax-free, but it must collect sales and use tax on those sales to the franchisees.

What this means for you

Who uses the utility for production doesn't have to be who bought it. New York's production exemption for gas and electricity is a companion to the production-machinery exemption, and neither requires the exempt user to be the owner/purchaser. So a franchisor that pays the utility bills for franchisee-operated stores can recover tax on the portion used directly and exclusively in production.

Match the refund to who actually paid the tax. If the franchisor paid the tax, the franchisor claims the refund; if a franchisee bought the utilities and paid the tax, that franchisee claims it. Don't cross the lines.

If you resell utilities, you become a vendor. Buying power and passing it through to franchisees as a sale flips you into a reseller: buy it tax-free, but collect and remit tax on what you sell them. Structure and document the arrangement so it's clear whether you're the consumer claiming an exemption or a reseller collecting tax.

Common questions

Q: We're a franchisor and pay the utility bills for franchisee-run stores. Can we recover tax on the production portion?
A: Yes. Because the exemption doesn't require the exempt user to be the purchaser, you can claim a refund or credit for the tax you paid on utilities used directly and exclusively in production at those stores.

Q: Our franchisee buys some utilities directly and pays tax. Who gets that refund?
A: The franchisee, not you. The refund follows whoever actually paid the tax.

Q: What if we buy the utilities and bill them through to the franchisee as a sale?
A: Then you're the vendor. You may buy tax-free, but you must collect sales and use tax on your sales of the utilities to the franchisees.

Citations and references

Statute and regulation:

• Tax Law § 1105(b) — imposes sales tax on receipts from sales (other than for resale) of gas, electricity, refrigeration, and steam and related service
• Tax Law § 1115(c) — exempts fuel, gas, electricity, refrigeration, and steam used or consumed directly and exclusively in producing tangible personal property for sale by manufacturing/processing
• 20 NYCRR § 528.22(c)(1) — "directly" means operating exempt production machinery, creating conditions necessary for production, or performing an actual part of the production process
• 20 NYCRR § 528.13(c)(5) — machinery or equipment used in production by someone other than its owner is exempt under the same conditions; refund applications filed under Part 534

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (15)S
Sales Tax
February 22, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870804A

On August 4, 1987, a Petition for Advisory Opinion was received from the Southland
Corporation, 2828 North Haskell Avenue, Dallas, Texas 75221-0719.
The issue raised is whether Petitioner, as the purchaser of fuel, gas or electricity used in the
production of tangible personal property for sale, is entitled to a refund of sales tax when such fuel,
gas or electricity is used in an exempt manner by its franchisees.
Petitioner operates the nationwide 7-Eleven retail chain of convenience food stores. Of the
stores located in New York, a minority are owned and operated by Petitioner. The majority are
owned by Petitioner but operated by franchisees. Petitioner states that, in the operation of all 7Eleven convenience stores, a portion of the fuel, gas and/or electricity is used or consumed directly
and exclusively in the production of tangible personal property for sale.
Petitioner states that it purchases the fuel, gas and electricity used in the franchisee operated
stores. The issue raised relates to such purchases.
Petitioner's Store Franchise Agreement contains the following provision.

18. Maintenance and Utilities . . . 7-Eleven shall, when it deems
    necessary: (vi) pay for sewer, water, gas heating, oil, and electricity
    for operation of the Store . . .
    For purposes of this advisory opinion, Petitioner does not ask and no opinion is rendered
    regarding what portion of Petitioner's purchases are gas and electricity used in production of tangible
    personal property.
    Section 1105(b) of the Tax Law imposes a sales tax upon "[t]he receipts from every sale,
    other than sales for resale, of gas, electricity, refrigeration and steam, and gas, electric, refrigeration
    and steam service of whatever nature "However, section 1115(c) of the Tax Law provides that:
    Fuel, gas, electricity, refrigeration and steam, and gas, electric,
    refrigeration and steam service of whatever nature for use or
    consumption directly and exclusively in the production of tangible
    personal property...for sale by manufacturing, processing...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.

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

-2­
TSB-A-88 (15)S
Sales Tax
February 22, 1988
Section 528.22 (c)(1) of the sales tax regulations states that:
(1) Directly means the fuel, gas, electricity, refrigeration and steam and like services, and
must during the production phase of a process, either:
(i)
(ii)
(iii)

operate exempt production machinery or equipment, or
create conditions necessary for production, or
perform an actual part of the production process.

Section 528.13(c)(5) states that "Machinery or equipment used in production by someone
other than its owner is exempt under the same conditions as other machinery and equipment."
The exemptions allowed for machinery and equipment and fuel, gas, electricity, refrigeration
and steam are companion exemptions. In order to qualify for exemption, the regulations require that
the electricity etc. must be used to power exempt machinery. If machinery and equipment need not
be used by its owner to enjoy the exemption (20 NYCRR 528.13(c)(5)) then it must follow that
neither would the gas, electricity, refrigeration and steam used to power such machinery or
equipment.
To the extent that Petitioner paid sales tax on any of its purchases of fuel, gas or electricity,
it is entitled to a refund or credit of the sales tax paid on that portion of such fuel, gas or electricity
used in an exempt manner. However, if Petitioner's franchisees make any purchases of fuel, gas or
electricity and pay sales tax thereon, the franchisee and not Petitioner is entitled to a refund. Such
application for refund must be filed in accordance with the provisions of Part 534 of the sales and
use tax regulations.
However, to the extent that Petitioner purchases fuel, gas or electricity and resells it to
Petitioner's franchisees, Petitioner is deemed to be the vendor of such fuel, gas or electricity. Under
such circumstances, Petitioner may purchase such fuel, gas or electricity tax free but must collect
sales and use tax on such sales to Petitioner's franchisees.

DATED: February 22, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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