Can a warranty-repair company buy its equipment tax-exempt as production machinery, when it reconditions defective units and ships them back to the manufacturer for resale?

Plain-English summary

United Radio, Inc. does warranty work for more than 35 manufacturers. When a customer brings in a vehicle with a defective covered unit (or a home-electronics item), United Radio installs a new unit/part, then repairs or reconditions the removed defective one and ships it back to the manufacturer to be resold. United Radio calls this "remanufacturing" and argued its equipment should be exempt production machinery under Tax Law § 1115(a)(12) — as it would be for the manufacturer.

The Department disagreed on the equipment, but gave United Radio a break on its service billings.

• Reconditioning is repair, not production → equipment taxable. The work is not "production" or "producing": there's no production line, no product created from raw materials, and no change in the nature, shape, or form of the item. Reconditioning happens after production is complete (Matter of Sandy Hill Corp.). It is maintaining, servicing, or repairing tangible personal property under § 1105(c)(3). So United Radio's equipment purchases don't qualify for the § 1115(a)(12) exemption and are taxable — and the result would be the same even if the manufacturer did the repairs.
• But the repair service is sold for resale → not taxable to the manufacturer. Because the manufacturer buys United Radio's repair service for the purpose of reselling the reconditioned item (property held for sale, § 527.5(b)(2)), United Radio's charge to the manufacturer is not subject to sales tax — provided the manufacturer furnishes a properly completed Resale Certificate (Form ST-120).

What this means for you

"Remanufacturing" a used item is usually taxable repair, not exempt production. New York's production-machinery exemption is for making new products from raw materials on a production line. Restoring, reconditioning, or repairing an already-manufactured item — even to like-new condition for resale — is treated as repair under § 1105(c)(3), so the tools and equipment you buy to do it are taxable.

The exemption wouldn't help even if the manufacturer did it. The Department was explicit: a manufacturer's own equipment used predominantly to repair/recondition warranty returns also wouldn't qualify under § 1115(a)(12). Being the OEM doesn't turn repair into production.

Your repair service can still be a sale for resale. When your customer (here, the manufacturer) is buying your repair service in order to resell the repaired property, your charge is a service for resale and isn't taxable — as long as you hold a properly completed Resale Certificate (Form ST-120).

Common questions

Q: We recondition warranty returns and send them back to be resold. Is our equipment exempt production machinery?
A: No. Reconditioning is repair under § 1105(c)(3), not production, so your equipment doesn't qualify for the § 1115(a)(12) exemption and is taxable.

Q: Would it be exempt if the manufacturer bought the same equipment?
A: No. The Department said the manufacturer's equipment used predominantly for such repairs also wouldn't qualify under § 1115(a)(12).

Q: Do we charge the manufacturer sales tax on our repair work?
A: No, if the manufacturer is buying the service to resell the repaired item. Get a properly completed Resale Certificate (Form ST-120) to support the exempt-for-resale treatment.

Citations and references

Statute and regulation:

• Tax Law § 1115(a)(12) — exempts machinery/equipment used directly and predominantly in producing tangible personal property for sale by manufacturing or processing
• Tax Law § 1105(c)(3) — taxes the service of maintaining, servicing, or repairing tangible personal property, except for resale
• 20 NYCRR § 528.13 — production-machinery exemption; "production" is the production line from raw-material handling through finishing/packaging for sale
• 20 NYCRR § 527.4 — "producing" (making a product from raw materials) and "processing" (a service changing the nature, shape, or form of the owner's property)
• 20 NYCRR § 527.5 — maintaining/servicing/repairing tangible personal property; not taxable when the property is held for sale in the regular course of business (§ 527.5(b)(2))
• Form referenced: ST-120 (Resale Certificate)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (2)S
Sales Tax
January 17, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880722A

On July 22, 1988, a Petition for Advisory Opinion was received from United Radio, Inc.,
2949 Erie Boulevard East, Syracuse, New York 13224.
Petitioner raises the following two issues:
1.

Whether the purchase of equipment by Petitioner's automotive department qualifies
for the exemption provided under Section 1115(a)(12) of the Tax Law when such
equipment is used to repair "defective" or "damaged" units which have been returned
by retail customers for replacement with new units in accordance with a
manufacturer's warranty and which "defective" or "damaged" units upon being
repaired are forwarded to the manufacturer for the purpose of being resold.

2.

Whether the purchase of equipment by Petitioner's consumer department qualifies for
the exemption provided under Section 1115(a)(12) of the Tax Law when such
equipment is used to repair "defective" or "damaged" parts or components taken from
items which retail customers have brought in for the purpose of being repaired in
accordance with a manufacturer's warranty and which "defective" or "damaged" parts
or components upon being repaired are forwarded to the manufacturer for the purpose
of being resold.

Petitioner provides electronic repair services for over 1500 dealers. A significant portion of
Petitioner's business consist of warranty work for manufacturers. Petitioner currently has contracts
with more than 35 manufacturers. Petitioner acts as agent for the manufacturer and "re­
manufacturers" new equipment, and parts or components of new equipment, which are under
warranty. This work is performed by Petitioner's automotive department and consumer department.
Petitioner maintains that it takes the place of the manufacturer.
Petitioner's automotive department maintains an inventory of new units on consignment from
the manufacturer. When a consumer brings in a vehicle with a damaged or defective unit which is
to be replaced in accordance with the terms of the manufacturer's warranty, Petitioner removes the
damaged or defective unit from the vehicle and installs a new unit from inventory.
The defective unit is repaired or reconditioned by Petitioner and then shipped to the
manufacturer for the purpose of being resold as a repaired, reconditioned or remanufactured unit.
Petitioner's consumer department maintains an inventory of replacement parts and
components for home electronic products. When a customer brings in an item which is to be repaired
in accordance with the terms of the manufacturer's warranty, Petitioner removes the damaged or
defective part or component and inserts a new part or component into the item.

TP-9 (9/88)

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The repaired item is then returned to the customer.
Petitioner then repairs the damaged or defective part or component, if possible, and, ships,
it to the manufacturer, for the purpose of being resold.
Petitioner contends that inasmuch as its automotive and consumer departments act as agent
for the manufacturer when repairing or "re-manufacturing" the damaged or defective units, parts or
components which will be resold by the manufacturer, Petitioner's purchases of equipment for use
in repairing or "re-manufacturing" such items qualify for the sales tax exemption provided under
Section 1115(a)(12) of the Tax Law. It is also Petitioner's contention that the exemption would be
granted to the manufacturer if the manufacturer was repairing or "re-manufacturing" such items.
Section l105(a) of the Tax Law imposes sales tax on "the receipts from every retail sale of
tangible personal property .... "
Section 1110 of the Tax Law imposes a use tax on the use within the state "of any tangible
personal property purchased at retail" upon which the sales tax has not been paid.
Section 1115(a)(12) of the Tax Law exempts from the tax on retail sales imposed under
section l105(a), "[m]achinery or equipment for use or consumption directly and predominantly in
the production of tangible personal property.., for sale by manufacturing, processing .... "
Section 528.13 of the Sales and Use Tax Regulations states:
Machinery and equipment used in production;... ­
(Tax Law S 1115 [a][12])
(a) Exemption.
(1) An exemption is allowed from the tax imposed under section l105(a) of the Tax Law, and
from the compensating use tax imposed under section 1110 of the Tax Law, for receipts from
sales of:
(i) machinery or equipment used or consumed directly and predominantly in the
production for sale of tangible personal property...by manufacturing, processing .....
*

*

*

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(b)

Production.
(1) (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.
Section 527.4 of the Sales and Use Tax Regulations provides as follows:
Sale of services of producing...processing

(Tax Law, S 1105[c][2]).

(a)

Imposition

(1)

Section 1105(c)(2) of the Tax Law imposes a tax on the receipts from
services of producing...processing...tangible personal property, performed for
a person who directly or indirectly furnishes the property.

(2)

The enumerated services are not taxable when:
(i)
(ii)

(b)

purchased for resale, or
performed on property intended for resale.

*
*
*
Producing.
Producing means the manufacture of a product from raw
materials and any process in which raw material loses its identity when the
production process is completed.
*

(d)

*

*

Processing.
Processing is the performance of any service on tangible
personal property for the owner which effects a change in the nature, shape
or form of the property.

While Petitioner terms its services "remanufacturing", an analysis of Petitioners activities
finds that Petitioner's services do not fall within the meaning of production as defined under Section
528.13(b)(1)(ii) of the Sales and Use Tax Regulations nor within the meaning of producing as
defined under Section 527.4 of the Sales and Use Tax Regulations. Petitioner's services do not occur
on a production line, are not an extension of the manufacturer's production process, nor do they
involve the creation of a product from raw materials. Rather, Petitioner's services are simply the
repairing or reconditioning of a previously manufactured unit, or part or component of a previously
manufactured unit, which was sold at retail and returned due to being either damaged or defective.
Moreover, Petitioner's services do not fall within the meaning of processing as defined under

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Section 527.4(d) of the Sales and Use Tax Regulations as the services performed do not effect a
change in the nature, shape or form of such unit, part or component.
Reconditioning is not production..,..Reconditioning occurs after the completion of the
productive process. Matter of the Application of Sandy Hill Corporation, State Tax Commission,
February 10, 1976, STH 76-9.
Section 1105(c)(3) of the Tax Law imposes sales tax on the receipts from every sale, except
for resale, of the services of maintaining, servicing or repairing tangible personal property.
Section 527.5(a) (3) of the Sales and Use Tax Regulations defines maintaining, servicing and
repairing as "terms used to cover all activities that relate to keeping tangible personal property in a
condition of fitness, efficiency, readiness or safety or restoring it to such condition".
Section 527.5(b)(2) of the Sales and Use Tax Regulations states:
Maintaining, servicing or repairing tangible personal property is not taxable if the property
maintained, serviced or repaired is held for sale in the regular course of business.
Example 1:

A repair shop charges a boat dealer for reconditioning
boat motors which the dealer will resell. The
reconditioning of the motors is not taxable because
the motors are for resale.

Accordingly, as Petitioner's services are not considered to be the production of tangible
personal property for sale, but rather, the maintaining, servicing or repairing of tangible personal
property, Petitioner's purchases o£ equipment for use in performing such services do not qualify for
the exemption provided under Section 1115(a)(12) of the Tax Law and are subject to state and local
sales or use tax.
It is noted that if a manufacturer were to repair or recondition damaged or defective units,
parts or components returned under its warranty, the manufacturer's purchase of equipment for
predominant (more than 50%) use in making such repairs would not qualify for the exemption
provided under Section 1115(a)(12) of the Tax Law, but would be subject to state and local sales or
use tax.

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It is also noted that inasmuch as the manufacturer is purchasing Petitioner's services for the
purpose of being resold, Petitioner's charge to the manufacturer for performing such services will
not be subject to state or local sales tax provided the manufacturer furnishes Petitioner a properly
completed Resale Certificate, (Form ST-120).

DATED: January 17, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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