Does a machine used to rebuild torque converters qualify for the sales tax production exemption and the Article 9-A investment tax credit?

Plain-English summary

Professional Transmission & Truck Service operates a transmission repair shop and bought a torque converter production machine. It asked whether the machine qualifies for (1) the sales tax exemption under Tax Law section 1115(a)(12) for machinery used directly in production, and (2) the Article 9-A investment tax credit under section 210.12.

Rebuilding torque converters is manufacturing -- so the machine can qualify for both. The shop cuts open a worn torque converter, replaces the worn internal parts, and reassembles, welds, and tests a finished converter. The old converter is the raw material; the process gives it new quality and a renewed working condition, which is the production of goods by manufacturing or processing. The opinion follows prior determinations that the disassembling, reconditioning, and reassembling of telephone sets, and the rebuilding of starters and alternators (going beyond mere repair), qualify as manufacturing.

Because the activity is production:
- Sales tax: the machine, if used directly and predominantly in production, is exempt under section 1115(a)(12).
- Investment tax credit: the machine, if principally used (more than 50 percent) in production and meeting section 210.12's other tests, qualifies for the Article 9-A credit.

The key distinction is rebuilding versus mere repair: routine repair of a customer's own unit is not manufacturing, but taking a core unit and producing a rebuilt product is.

What this means for you

Rebuilding a core into a finished product is manufacturing

When you take a worn unit as raw material and produce a rebuilt, sellable product, that is production -- not mere repair -- for both the sales tax exemption and the ITC.

One activity, two benefits

Production machinery can qualify both for the section 1115(a)(12) sales tax exemption and for the section 210.12 investment tax credit, though each has its own use threshold.

Use thresholds still apply

The sales tax exemption requires machinery used directly and predominantly in production; the ITC requires property principally used (more than 50 percent) in production.

Common questions

Q: Is rebuilding torque converters manufacturing?
A: Yes. Taking a worn converter as raw material and producing a rebuilt unit gives it new quality -- that is production by manufacturing or processing.

Q: Can the same machine get both the sales tax exemption and the ITC?
A: Yes, if it meets each provision's use test -- directly and predominantly in production for the sales tax exemption, and principally used in production for the ITC.

Q: What about ordinary repairs?
A: Mere repair of a customer's own unit is not manufacturing; the benefit turns on producing a rebuilt product, as with reconditioned telephone sets and rebuilt starters and alternators.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1115(a)(12) (sales tax exemption for machinery used directly in production)
- Tax Law section 210.12 (Article 9-A investment tax credit; meaning of manufacturing)
- 20 NYCRR 5-2.2 (definition of qualified property)
- 20 NYCRR 5-2.4(c) (principally used means more than 50 percent)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a93_11s_6c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (11) S
Sales Tax
TSB-A-93 (6) C
Corporation Tax
February 4, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z920828A

On August 28, 1992 a Petition for Advisory Opinion was received from Professional
Transmission & Truck Service, East Broad Street, Frankfort, NY 13340.
The issue raised by Petitioner, Professional Transmission & Truck Service, is whether the
purchase of a torque converter production machine qualifies for the exemption from sales tax under
Section 1115(a)(12) of the Tax Law and the investment tax credit under Section 210.12 of Article
9-A of the Tax Law.
Petitioner owns and operates a transmission repair shop. All types of transmissions both
manual and automatic are repaired for the automotive, trucking and construction industries.
Automatic transmissions represent about 80% of all work performed by Petitioner. As part of
rebuilding an automatic transmission a major component piece replaced is the torque converter. The
torque converter acts as the link between the vehicle engine and transmission. Petitioner currently
purchases these converters from an outside supplier.
Due to the cost of torque converters, Petitioner has explored ways to find lower cost
alternatives to purchasing them. Petitioner has contacted a specialized machinery manufacturer in
order to purchase a torque converter production machine. This machine is capable of producing a
torque converter by assembling internal parts such as clutches, bearings and washers. The machine
then welds the outer casings together and balances the unit.
Petitioner will use the machinery to produce new torque converters by using new outer
casings and new internal parts. Petitioner will also use old outer casings and new internal parts to
produce torque converters. Petitioner estimates that the torque converter production machine will
be used 75% of the time to manufacture new converters. It is important to note that there are no
differences between old and new casings. In both situations, new internal parts are used in the
manufacture of the torque converter. The assembly process of welding, alignment and balancing is
identical.
Petitioner plans to sell the torque converters to other transmission shops and suppliers as well
as use the torque converters in Petitioner's own business.
Section 1115 of the Tax Law states, in part:
Exemptions from sales and use taxes.--(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:
TP-9 (9/88)

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TSB-A-93 (11) S
Sales Tax
TSB-A-93 (6) C
Corporation Tax
February 4, 1993

(12) Machinery or equipment for use or consumption directly and predominantly in
the production of tangible personal property ... for sale by manufacturing, processing
... assembling ....
Section 528.13 of the New York State Sales and Use Tax Regulations states,' in part:
Machinery and equipment used in production; telephone and telegraph
equipment; parts, tools and supplies. [Tax Law, §1115(a)(12)] (a) Exemption.
(1) Exemption from statewide tax. An exemption is allowed from the tax
imposed under subdivision (a) and (c) of section 1[1]05 of the Tax Law, and from the
compensating use tax imposed under section 1110 of the Tax Law, for receipts from
sales of the following:
(i) Machinery or equipment (including parts with a useful life
of more than one year) used or consumed directly and predominantly
in the production for sale of tangible personal property ... by
manufacturing, processing .... assembling ....
...
(iii)(a) Parts with a useful life of one year or less, tools or supplies for
use or consumption directly and predominantly in the production of
tangible personal property, ... for sale by manufacturing, processing
.... assembling ....
...
(2) Exemption from taxes imposed by localities other than New York City.
(i) There is an exemption from all sales and use taxes, other than the taxes
imposed in New York City, for all sales and uses of:
(a) tangible personal property used or consumed directly and
predominantly in the production for sale of tangible personal property
by manufacturing, processing, ... assembling ....
...
(3) Exemption from New York City local tax. (i) There is an exemptionfrom the
sales and usa tax imposed in New York City under section 1107 of the Tax Law for
sales and uses of the following:

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TSB-A-93 (11) S
Sales Tax
TSB-A-93 (6) C
Corporation Tax
February 4, 1993

(a) Machinery or equipment, including parts with a useful life
of more than one year, used or consumed directly and predominantly
in the production for sale of tangible personal property, ... by
manufacturing, processing, ... assembling ....
(b) Production. (1) The activities listed in paragraph (a)(1) of this
section are classified as administration, production or distribution.
(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.
(2) The exemption applies only to machinery and equipment used directly
and predominantly in the production phase.
. . .
(c) Directly and predominantly. (1) 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) to 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.
. . .
(4) Machinery or equipment is used predominantly in production, if over 50
percent of its use is directly in the production phase of a process.
. . .

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TSB-A-93 (11) S
Sales Tax
TSB-A-93 (6) C
Corporation Tax
February 4, 1993

Example 13:

A company purchases a machine to produce new paper machine rolls and to
recondition old paper machine rolls for its customers. The machine is to be
used for production 70 percent of the time and for reconditioning 30 percent
of the time. Reconditioning is a repair service to tangible' personal property.
However, as the machine in this example will be used directly in production
over 50 percent of the time, it qualifies for exemption.

In the instant case, the torque converter production machine will be used by Petitioner to
produce torque converters by means of a process in which the machine will be used to assemble
internal parts such as clutches, bearings and washers, weld the outer casings together and balance
the unit. The activities of the torque converter production machine will fall within the description
of production as provided under Section 528.13(b)(1)(ii) of the Sales and Use Tax Ragulations.
Petitioner's purchase of the torque converter production machine will qualify for the
exemption from sales and use tax under Section 1115(a)(12) of the Tax Law and Section 528.13 of
the Sales and Use Tax Regulations provided it is used directly and predominantly, as defined in
Section 528.13(c) of the Regulations, to produce torque converters for sale. (Also, see illustration
in Section 528.13(c)(4), Example 13 of the Regulations.)
It is noted that when Petitioner is repairing or rebuilding a torque converter for a customer's
vehicle and Petitioner uses the torque converter production machine for such purpose, that particular
use will not be considered to be for exempt production purposes.
If Petitioner uses the torque converter production machine directly and predominantly to
produce torque converter's for sale rather than predominantly to repair or rebuild customers' existing
torque converters, Petitioner's purchase will qualify for the exemption provided under Section
1115(a)(12) of the Tax Law and Section 528.13 of the Regulations. If Petitioner's purchase qualifies
for the exemption from Sales Tax, Petitioner should give the seller of the torque converter
production machine a properly completed form ST-121, Exempt Use Certificate, in order to
substantiate that the transaction is not subject to sales tax.
For taxable years beginning after 1990, section 210.12 of the Tax Law allows an investment
tax credit against the tax imposed under Article 9-A of the Tax Law equal to five percent with
respect to the first $350 million of the investment credit base. The investment credit base is the cost
or other basis for federal income tax purposes of qualified tangible personal property and other
tangible property, including buildings and structural components of buildings.
Section 5-2.1 of the Business Corporation Franchise Tax Regulations (hereinafter
"Corporation Regulations") provides that the taxpayer must claim the investment tax credit for the
first taxable year in which the property becomes qualified property.

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TSB-A-93 (11) S
Sales Tax
TSB-A-93 (6) C
Corporation Tax
February 4, 1993

The term "qualified property" means tangible personal property and other tangible property,
including buildings and structural components of buildings, which:
(1)

are acquired, constructed, reconstructed or erected after 1990;

(2)

are depreciable pursuant to section 167 of the Internal Revenue Code;

(3)

have a useful life of four years or more;

(4)

are acquired by purchase as defined in section 179(d) of the Internal Revenue Code;

(5)

have a situs in New York State, and

(6)

are principally used by the taxpayer in the production of goods by manufacturing,
processing, assembling, refining, mining, extracting, farming, agriculture,
horticulture, floriculture, viticulture or commercial fishing.

Section 210.12(b)(ii)(A) of the Tax Law provides that the term "manufacturing" shall mean
"the process of working raw materials into wares suitable for use or which gives new shapes, new
quality or new combinations to matter which already has gone through some artificial process by the
use of machinery, tools, appliances and other similar equipment." Additionally, section
210.12(b)(ii)(A) provides that "[p]roperty used in the production of goods shall include machinery,
equipment or other tangible property which is principally used in the repair and service of other
machinery, equipment or other tangible property used principally in the production of goods and
shall include all facilities used in the production operation, including storage of material to be used
in production and of the products that are produced." Section 5-2.4(c) of the Corporation
Regulations provides that the term "principally used" means more than 50 percent.
In deciding whether Petitioner's activities of producing new torque converters and rebuilding
old torque converters constitutes manufacturing, consideration must be given to the extensiveness
of the activities performed on the articles and whether the end products are equivalent in usefulness
and treated as freshly and newly produced articles. The court in United States v. J Leslie Morris Co.,
124 F2d 371 (9th Cir 1941), with respect to the Federal manufacturers excise tax, observed:
"[T]he question whether the process is essentially one of production or merely of
repair is to be resolved by an over-all view of taxpayer's activities, beginning with its
acquisition of discarded parts and ending when a useful article of commerce emerges
... ". Id. at 372.

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TSB-A-93 (11) S
Sales Tax
TSB-A-93 (6) C
Corporation Tax
February 4, 1993

In Western Electric Co., Inc., Dec St Tx Comm, November 6, 1981, TSB-H-81(60)C, the
disassembling, reconditioning and reassembling of telephone sets qualified as manufacturing for
purposes of the investment tax credit under section 210.12 of the Tax Law.
In addition, section 606(a) of Article 22 of the Tax Law is substantially similar to section
210.12 of the Tax Law. In John Panos, Adv Op Comm T & F, April 29, 1991, TSB-A-91(6)I it was
held that under section 606(a), the extensive activities performed on old non-working starters and
alternators went beyond mere repair and qualified as manufacturing, where the old starter or
alternator was dismantled, all defective components were removed and replaced and the set was
reassembled with some of its original parts and some brand new parts.
In the instant case in accordance with consideration of the factors, decisions and opinions
discussed above and the language of section 210.12(b)(ii) of the Tax Law, the extensive activities
performed by Petitioner on the old torque converters as well as the production of new torque
converters qualifies as manufacturing for purposes of the investment tax credit. The old torque
converters are given new quality and Petitioner's activities go beyond mere repair: the old torque
converter is dismantled, all defective components are removed and replaced and the set is
reassembled with some of its original parts and some brand new parts.
Accordingly, both processes of Petitioner's operations constitute manufacturing for purposes
of section 210.12(b)(ii) of the Tax Law. If Petitioner's equipment is principally used in such
manufacturing and the equipment meets all of the other requirements contained in section 210.12
of the Tax Law, Petitioner will be allowed an investment tax credit for such property for the taxable
year during which such property became qualifying property.

DATED: February 4, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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