Is a research firm's government-funded pilot plant, built to test a new pollution-control process at a power station, exempt from sales and use tax as research equipment, government property, production machinery, or a capital improvement?

Subject

Whether Petitioner's purchases of tangible personal property are exempt from sales and use taxes (1) as experimental/laboratory research and development, (2) because the project is government-funded with title passing to the Federal government, (3) as production machinery for gas, electricity, refrigeration, or steam for sale, and (4) because the shelter structure built for the project is intended to be retained as a capital improvement.

What this means for you

A research firm invented a new process to remove sulfur dioxide from the gas generated when a power station burns fuel to make electricity, and both New York State and the federal Department of Energy funded a pilot plant at Niagara Mohawk's Dunkirk Power Station to test it as a "proof-of-concept" demonstration -- it could succeed or fail. Under the federal funding contract, title to any property the firm buys and gets reimbursed for passes to the Federal government upon delivery. The pilot equipment sits inside a newly built shelter (walls, ceiling using an existing precipitator, lighting, heat, safety showers) that Niagara Mohawk intends to keep permanently even after the test equipment itself is later dismantled and removed.

New York exempts property bought for use directly and predominantly in genuine experimental or laboratory research and development, and this pollution-control demonstration project qualifies -- so the firm's research-purpose purchases are exempt (though that exemption doesn't cover installation/repair SERVICES on that property). Separately, installing property that becomes a permanent capital improvement to real property (like the shelter) is an exempt installation service, though the underlying materials purchase itself (by whoever buys them -- the firm or its contractor) remains taxable; only the installation labor for a genuine capital improvement escapes tax. But two other exemption theories failed: the research equipment doesn't count as tax-exempt "production machinery," because that exemption requires the PETITIONER itself to be producing gas, electricity, refrigeration, or steam for sale -- and the firm here is testing a pollution-control add-on, not generating power for sale. And even though the Federal government will eventually own the property under the funding contract, the firm doesn't qualify as a tax-exempt government purchasing agent, because its contracts don't establish the kind of controlled, consent-based agency relationship (the government directing and controlling the firm's actions as its fiduciary) that the government exemption requires.

Q&A

Q: We're buying equipment for a genuine experimental or laboratory research project -- is that purchase exempt from New York sales and use tax?
A: Yes, per this opinion, under Tax Law § 1115(a)(10) -- but the exemption doesn't extend to installation or repair SERVICES performed on that equipment.

Q: We're building a permanent structure as part of a research project that will be kept after the test equipment is removed -- is installing that structure exempt as a capital improvement?
A: Yes, per this opinion, if it meets the capital-improvement definition (substantially adds value, becomes a permanent part of the property, intended to be permanent) -- the installation labor is exempt, though the purchase of the construction materials themselves remains taxable to whoever buys them.

Q: Our research equipment will eventually be used in a plant that generates electricity for sale -- does that make our equipment purchases exempt as "production machinery"?
A: Not under this opinion -- that exemption requires the PETITIONER to be the one producing gas, electricity, refrigeration, or steam for sale; a research firm developing a pollution-control add-on for someone else's power plant doesn't qualify.

Q: Title to our equipment passes to the federal government under our funding contract -- does that make our purchases tax-exempt as government property?
A: Not automatically, per this opinion -- an eventual transfer of title isn't the same as an AGENCY relationship; the government must actually direct and control the contractor's actions as its authorized fiduciary, which this opinion found wasn't established here.

Q: Can another government-funded research contractor rely on this opinion?
A: No. This advisory opinion binds the Department only as to the petitioner and the facts described here; another taxpayer cannot rely on it.

Citations

• Tax Law § 1115(a)(10) -- exempts tangible personal property purchased for use or consumption directly and predominantly in experimental or laboratory research and development.
• Tax Law § 1115(a)(12) -- exempts machinery or equipment used directly and predominantly in the production for sale of tangible personal property, gas, electricity, refrigeration, or steam.
• Tax Law § 1101(b)(9)(i) -- defines "capital improvement" as an addition/alteration substantially adding value or prolonging useful life, becoming a permanent part of the real property with removal causing material damage, and intended as permanent.
• Tax Law § 1105(c)(3) -- imposes tax on installing tangible personal property, excluding installation that constitutes a capital improvement.
• Tax Law § 1116(a)(1) and (2) -- exempts the State of New York and the United States (and their agencies/instrumentalities) as purchaser, user, or consumer.
• Sales and Use Tax Regulations §§ 528.11, 528.13 -- define the research-and-development exemption and the production-machinery exemption, including the "directly and predominantly" test.
• In the Matter of MGK Constructors, Dec. Tax App. Trib., March 5, 1992 -- held a contractor acting as a genuine agent of an exempt government entity is likewise not subject to sales tax, but the agency relationship must be established under general agency principles.
• Hooper Holmes, Inc. v. Wetzler, 152 A.D.2d 871 -- articulated the test for an agency relationship: a manifestation that the purported agent consented to act on behalf of the principal, subject to the principal's control, with the principal authorizing a fiduciary relationship.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_50s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (50)S
Sales Tax
October 4, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930310A

On March 10, 1993, a Petition for Advisory Opinion was received from Raycon Research
and Development, Inc., 91 Blake Road, Brookline, MA 02146.
The issues raised by Petitioner, Raycon Research and Development, Inc., are:
1.

Whether Petitioner's purchases of tangible personal property are exempt from
sales and use taxes since they are used in connection with experimental or
laboratory research and development.

2.

Whether Petitioner's purchases of tangible personal property are exempt from
sales and use taxes since the project is being done for both the New York
State and Federal Governments, and title to all such tangible personal
property will belong to the Federal Government.

3.

Whether Petitioner's purchases of tangible personal property are exempt from
sales and use taxes as machinery or equipment used in the production of
tangible personal property, gas, electricity, refrigeration or steam for sale.

4.

Whether Petitioner's purchases of tangible personal property are exempt from
sales and use taxes since the structure and some installation associated with
the structure constructed by Petitioner in connection with the project are
intended to be retained as a capital improvement when the testing has been
completed and the equipment has been dismantled and removed.

Petitioner has invented a novel Flue Gas Desulfuization Process. This process is of interest
to both the New York State and Federal Governments. At the request of both the New York State
and Federal Governments, Petitioner has been asked to further develop the process so that it can be
used by the general public.
The project is being funded by the United States Department of Energy (hereinafter the
"DOE"), the New York State Energy Research and Development Authority (the "NYSERDA"), the
Empire State Electrical Energy Research Corporation (the "ESEERCO"), Niagara Mohawk Power
Corporation, and by Petitioner.
With government funds, Petitioner is building an experimental pilot plant at Niagara
Mohawk Power Corporation's Dunkirk Power Station at Dunkirk, New York which removes the
sulfur dioxide from the gas generated in the production of electricity for sale. It is strictly a pollution

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control process. DOE defines the project as a proof-of-concept demonstration program. As a
research and development project, the demonstration can be a resounding success or a failure.
Petitioner has a cost reimbursement subcontract with the United Engineer and Contractors
of Denver, Colorado (the "UE&C") to design and install the pilot plant and subsequently, execute
the test program. UE&C has a subcontract with Quackenbush Corporation of Buffalo, New York
to complete the structure and install the equipment.
Accordingly to the contract between Petitioner and DOE, the title of all property purchased
by the contractor for which the contractor is entitled to be reimbursed as a direct item of cost under
the contract shall pass to and vest with the Federal government upon the vendor's delivery of such
property.
The experimental equipment will be installed underneath an existing electrical precipitator
which provides the ceiling. Side walls, with doors, will be newly installed. These walls, together
with ceiling provided by the precipitator will result in a large room providing shelter for installed
equipment. Lights, space heating and safety showers will also be installed. It is contemplated that
this room and its related improvements will be retained permanently by the Niagara Mohawk Power
Corporation since dismantling the room will cause material damage to the existing structure.
However, upon completion of the test, experimental equipment will be dismantled and removed.
Petitioner, as part of its Petition for Advisory Opinion, has furnished copies of all the
contracts it has with agencies and organizations providing funding.
Section 1105(c) of the Tax Law imposes sales tax on the receipts from every sale, except for
resale, of the following services:
*

*

*

(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile
home, not held for sale in the regular course of business, whether or not the services
are performed directly or by means of coin-operated equipment or by any other
means, and whether or not any tangible personal property is transferred in
conjunction therewith, except:
*

*

*

(iii) for installing property which, when installed, will constitute an addition
or capital improvement to real property, property or land, as the terms real property,
property or land are defined in the real property tax law as such term capital
improvement is defined in paragraph nine of subdivision (b) of section eleven
hundred one of this chapter, and ...

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Section 1101(b)(9)(i) of the Tax Law provides as follows:
(9) Capital improvement. (i) An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or
article itself; and
(C) Is intended to become a permanent installation.
Section 1115 of the Tax Law provides, in part, as follows:
Section 1115. 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:
*

*

*

(10) Tangible personal property purchased for use or consumption
directly and predominantly in research and development in the
experimental or laboratory sense. Such research and development
shall not be deemed to include the ordinary testing or inspection of
materials or products for quality control, efficiency surveys,
management studies, consumer surveys, advertising, promotions or
research in connection with literary, historical or similar projects.
*

*

*

(12) Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, gas,
electricity, refrigeration or steam for sale, by manufacturing,
processing, generating, assembling, 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.
Section 528.11 of the Sales and Use Tax Regulations provides, in part, as follows:
Reg. Sec. 528.11 Research and development .-- (Tax Law,
Sec.1115(a)(10) and Sec. 1115(b)(ii)). (a) Exemptions (1) The sale

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of tangible personal property purchased for use or consumption
directly and predominantly in research and development in the
experimental or laboratory sense is exempt from the sales and use tax.
(2) The exemption does not extend to installation and repair services
for such property.
*

*

*

(b) Research and development, (l) Research and development in the
experimental or laboratory sense means research which has as its
ultimate goal:
ii) basic research in a scientific or technical field of
endeavor;
(ii) advancing the technology in a scientific or
technical field of endeavor;
(iii) the development of new products;
(iv) the improvement of existing products;
(v) the development of new uses for existing
products.
*

*

*

Example 4: An aircraft manufacturer assembles two airplanes, which
it uses for function and reliability tests prior to manufacturing this
type of airplane for sale. The parts, equipment instrumentation and
fuel used on the airplanes during the testing phase are exempt as they
are used directly and predominantly in research and development.
Section 528.13 of the Sales and Use Tax Regulations provides, in pertinent part, as follows:
Reg. Sec. 528.13. Machinery and equipment used in production; telephone and
telegraph equipment; parts, tools and supplies - - (Tax Law, Sec. 1115(a)(12)). (a)
Exemption. (1) Exemption from statewide tax. An exemption is allowed from the tax
imposed under subdivisions (a) and (c) of section 1105 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, gas, electricity,

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refrigeration or steam, by manufacturing, processing, generating,
assembling, refining, mining or extracting. (This exemption includes
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.
*

*

*

(b) Production. (1) The activities listed in paragraph (1) of subdivision (a) of this
section are classified as administration, production or distribution.
(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.
(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.
(2) 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.
(3) The determination of when production begins is dependent upon the procedure
used in a plant. If on receiving raw materials, the purchaser weighs, inspects,
measures, or tests the material prior to placement into storage, production begins with
placement into storage, and the prior activities are administrative. If the materials are
unloaded and placed in storage for production without such activities, the unloading
is the beginning of production.
*

*

*

(c) Directly and predominantly. (1) Directly means the machinery or equipment
must, during the production phase of a process,

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(i) act upon or effect a change in material to form the product to be
sold, or
(ii) have an active casual 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.
(2) Usage in activities collateral to the actual production process is not deemed to
be used directly in production.
Section 1116(a) of the Tax Law provides, in part, as follows:
Sec. 1116. Exempt organizations - - (a) Except as otherwise provided in this
section, any sale or amusement charge by or to any of the following or any use or
occupancy by any of the following shall not be subject to the sales and compensating
use taxes imposed under this article:
(1) The state of New York, or any of its agencies, instrumentalities, public
corporations (including a public corporation created pursuant to agreement or
compact with another state or Canada) or political subdivision where it is the
purchaser, user or consumer, or where it is a vendor of services or property of a kind
not ordinarily sold by private persons;
(2) The United States of America, and any of its agencies and
instrumentalities, insofar as it is immune from taxation where it is the purchaser, user
or consumer, or where it sells services or property of a kind not ordinarily sold by
private persons; ...
In the Matter of MGK Constructors, Dec Tax App Trib, March 5, 1992, the Tribunal held
that when acting as a purchaser, user or consumer, the City of New York is not subject to sales tax
pursuant to Section 1116(a)(1) of the Tax Law. Moreover, a contractor acting as an agent of the City
would likewise not be subject to sales tax in accordance with Sections 541.2(c) and 529.2(b) of the
Sales and Use Tax Regulations.
The Tribunal further held that the criteria set out in Section 541.3(d)(4) of the Sales and Use
Tax Regulations for establishing whether an agency relationship exists is applicable only to exempt
organizations identified under Sections 1116(a)(3) - (6) of the Tax Law, and as New York City is
an exempt organization pursuant to Section 1116(a)(1) of the Tax Law, it was not subject to such
criteria.

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Thus, the Tribunal held that since no regulation sets forth a criteria for establishing whether
an agency relationship exists an exempt organization identified in Sections 1116(a)(1) and (2) of the
Law, that the general principle of agency as cited in the Matter of Hooper Holmes, Ic. v. Wetzler,
152 AD2d 871, 544 NYS2d 233, 235, lv denied 75 NY2d 706, 552 NYS2d 929, must be applied.
In Hooper Holmes, Inc. v. Wetzler, supra, the court stated: "To establish an agency or representative
relationship must be a manifestation that petitioners consented to act on behalf of clients, subject to
the latter's control and that the clients authorized fiduciary relationship."
In the instant case, Petitioner's study and development of a process to remove sulfur dioxide
from gas generated in the production of electricity for sale falls within the meaning of research and
development in the experimental or laboratory sense as defined in Section 528.11 of the Sales and
Use Tax Regulations. Therefore, pursuant to Section 1115(a)(10) of the Tax Law, Petitioner's
purchases of tangible personal property purchased for use or consumption directly and predominantly
in the research and development project are not subject to sales and use taxes. It is noted, however,
that pursuant to Section 528.11 of the Sales and Use Tax Regulations that such exemption does not
extend to installation and repair services of such tangible personal property.
Moreover, pursuant to Sections 1101(b)(9) and 1105(c)(3) of the Tax Law, the installation
of tangible personal property which when installed will constitute an addition or capital improvement
to the real property will be exempt from sales and use taxes. Therefore, if a contractor hired by
Petitioner is making the purchases of the tangible personal property used in the construction of the
structure, its purchases of such tangible personal property would be subject to sales and use taxes.
However, the contractor's charges to Petitioner for performing the capital improvement would be
exempt from sales and use taxes. If Petitioner purchases the tangible personal property used in the
construction of the structure, Petitioner's purchase would be subject to sales and use taxes. However,
the charges for installing the structure and any other equipment which is'intended to be a permanent
installation would be exempt from sales and use taxes.
Further, pursuant to Section 1115(a)(12) of Tax Law and Section 528.13 of the Sales and Use
Tax Regulations machinery and equipment purchased for use in the production for sale of tangible
personal property, gas, electricity, refrigeration or steam qualify for exemption from and use taxes
imposed by Section 1105 of the Tax Law. Since Petitioner is not producing gas, electricity,
refrigeration or steam for sale, the purchases by Petitioner of such machinery and equipment does
not qualify for exemption under Section 1115(a)(12) of the Tax Law and Section 528.13 of the Sales
and Use Tax Regulations.
In addition, contracts and agreements furnished by Petitioner do not establish that an agency
relationship exists between Petitioner and the Federal and New York State governments. Therefore,
since it cannot be manifested that Petitioner is acting on behalf of the Federal and New York State
governments, subject to their control and that the Federal and New York State government have
authorized this fiduciary relationship, pursuant to MGK Constructors, supra, Petitioner does not

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qualify for exemption from sales and use taxes on purchases of tangible personal property on the
basis that it is acting as an agent for an entity exempt under Sections 1116(a)(1) or (2) of the Tax
Law.
It should be noted that an Exempt Use Certificate (Form ST-121) is used to makes purchases
of tangible personal property for use or consumption directly or predominately in research and
development without the payment of sales tax. A Certificate of Capital Improvement (Form ST-124)
must be executed where the installation of tangible personal property will result in the performance
of a capital improvement.

DATED: October 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.