Are cranes and equipment a contractor buys to install a gas pipeline and electric distribution grid for a utility exempt from New York sales tax as production machinery?

Plain-English summary

Bancker Construction Corp. had a contract to help Long Island Lighting Company (LILCO) install a gas pipeline and an electrical distribution grid in LILCO's service area (Queens, Nassau, and Suffolk). To do the work, Bancker had to buy heavy cranes to set the pipe. It asked whether those purchases were exempt under § 1115(a)(12), the exemption for machinery and equipment used directly and predominantly in production of things like gas and electricity for sale.

The Department said no exemption applies, for three separate reasons:

• LILCO doesn't produce the gas. The § 1115(a)(12) exemption for gas production runs only up to the point of the first sale to the first commercial purchaser. The gas here comes from Canada; LILCO merely reconditions and distributes it. Because LILCO isn't the producer, neither it nor its subcontractors get a production exemption.
• Distributing electricity isn't producing it. Only equipment used in the generation of electricity can qualify. Equipment used to distribute electricity does not (20 NYCRR § 528.13(b)(2)), which limits the exemption to the production phase and excludes administration and distribution.
• Installation equipment never qualifies anyway. Machinery and equipment used to install gas and electrical systems "does not qualify for any exemption from sales tax regardless of the tax status of the systems being installed."

So Bancker's cranes and equipment are fully taxable.

What this means for you

The production exemption is about making the product, not delivering it

New York's § 1115(a)(12) exemption is narrow: it covers machinery used directly and predominantly in production. A utility's transmission and distribution network — the pipes and wires that move gas and power to customers — is the distribution phase, which the regulation (§ 528.13(b)(2)) specifically excludes.

"First commercial purchaser" caps the gas exemption

Even a genuine gas producer only gets the exemption up to the first commercial sale. A company that buys already-produced gas (here, from Canada) and reconditions and distributes it is past that point, so its equipment isn't production machinery.

Equipment used to build or install a system is separate from the system

Whether or not the finished pipeline or grid might have some exempt character, the tools used to construct and install it are treated on their own — and installation equipment is taxable regardless. Contractors on utility projects should not assume a utility's exemptions flow through to their construction equipment.

Common questions

Q: Why didn't LILCO's utility status make the cranes exempt?
A: The exemption is for production machinery, and LILCO's project was distribution, not production. LILCO doesn't produce the Canadian gas, and distributing electricity is outside the exemption.

Q: Could any equipment on this project have qualified?
A: Only equipment used directly and predominantly in generating electricity — and only up to the first commercial sale for gas. Installation equipment like the cranes never qualifies.

Q: Does it matter whether the pipeline itself is taxable or exempt?
A: No. The Department said installation machinery is taxable "regardless of the tax status of the systems being installed."

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) — exemption for machinery/equipment used directly and predominantly in producing gas, electricity, etc. for sale, limited (for oil/gas/solution mining) to the point of sale to the first commercial purchaser
• 20 NYCRR § 528.13(b)(2) — exemption limited to the production phase; administration and distribution do not qualify

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_24s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (24)S
Sales Tax
March 7, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S901121G

On November 21, 1990 a Petition for Advisory Opinion was received from Bancker
Construction Corp., 218 Blydenburgh Road, P.O. Box N, Central Islip, N.Y. 11722.
The issue raised by Petitioner, Bancker Construction Corp., is whether certain machinery and
equipment purchased by Petitioner and used in constructing and installing a gas pipeline system and
an electrical distribution system for a utility qualifies for exemption from sales tax pursuant to
Section 1115(a)(12) of the Tax Law.
Petitioner has a contract to assist Long Island Lighting Company (LILCO) in supplying
machinery, equipment and labor in order to install a gas pipeline and an electrical distribution grid
in LILCO'S service area. The gas in this pipeline will be coming from Canada and will be
reconditioned and distributed by LILCO to consumers in Queens, Nassau and Suffolk Counties. In
order to perform the work specified in the contract with LILCO, Petitioner was required to purchase
heavy cranes to set the pipe in place for the gas and electrical transmission systems.
Section 1115 of the Tax Law states, in part:
(a) Receipts from the following shall be exempt from the tax on retail sales imposed
under subdivision (a) of section eleven hundred five and the compensating use tax
imposed under section eleven hundred ten: (12) Machinery or equipment for use or
consumption directly and predominantly in the production of tangible personal
property, gas. . .for sale by manufacturing, processing. . .refining, mining or
extracting. . . . This exemption shall include all pipe, pipeline, drilling rigs, service
rigs, vehicles and associated equipment used in the drilling, production and operation
of oil, gas and solution mining activities to the point of sale to the first commercial
purchaser. . . . (Emphasis supplied)
Section 528.13(b)(2) of the Sales and Use Tax Regulations states that,
The exemption applies only to machinery and equipment used directly and
predominantly in the production phase. Machinery and equipment partly used in the
administration and distribution phases does not qualify for the exemption, unless it
is used directly and predominantly in the production phase.

-2­
TSB-A-91 (24)S
Sales Tax
March 7, 1991

The exemption provided for the production of oil, gas and solution mining activities is
limited to the point of sale to the first commercial purchaser in accordance with Section 1115(a)(12)
of the Tax Law. Thus, any exemption allowed to LILCO or its subcontractors would be limited to
any equipment used by the extractor of the gas etc., up to the point at which his first sale occurs.
LILCO does not produce gas. Therefore, neither it or its subcontractors are entitled to any exemption
for its production pursuant to said Section.
Further, only equipment used in the generation of electricity may qualify for the exemption
provided under Section 1115(a)(12) of the Tax Law. Equipment used by LILCO to distribute
electricity does not qualify for the exemption pursuant to Section 528.13(b)(2) of the Sales and Use
Tax Regulations. Machinery and equipment used to install gas and electrical systems does not
qualify for any exemption from sales tax regardless of the tax status of the systems being installed.
Accordingly, Petitioner is not entitled to any sales tax exemption on the purchase of
equipment that will be used to construct and install a gas pipeline system and an electrical
distribution system for LILCO.

DATED: March 7, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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