Does machinery and equipment used to remediate groundwater already contaminated by decades-old waste disposal qualify for the manufacturing waste-treatment exemption from sales and use tax?

Subject

Whether Petitioner's purchase of machinery and equipment used for the treatment of groundwater through a wastewater treatment plant will be subject to sales and use taxes.

What this means for you

From 1948 to 1984, a manufacturer disposed of chlorinated solvents, rocket fuels, and other hazardous byproducts in an unlined surface pond at its plant. Over the decades, those dense chemicals migrated through the soil and bedrock, forming an underground contamination plume that has since spread into the surrounding groundwater. Now required by a New York State Department of Environmental Conservation permit, the company is building a roughly $1.3 million treatment plant to pump out the contaminated groundwater, separate and destroy the volatile chemical components, and discharge purified water to the sanitary sewer.

New York exempts manufacturing waste-treatment equipment, but only when it's purchased by a manufacturer and used predominantly to actually treat, bury, or store waste materials generated BY its production process -- functioning as pollution PREVENTION tied to that ongoing manufacturing activity (the regulations' own examples cover pumping stations sending fresh effluent to a sewage plant, or scrubbers treating gas emitted during production). This situation is different: the company isn't preventing pollution during an active manufacturing process -- it's cleaning up groundwater that was ALREADY contaminated decades ago, well after the pollution occurred, and unconnected to any current production run. Because the equipment doesn't treat waste as part of preventing water pollution during production, it falls outside the exemption entirely and remains fully taxable.

Q&A

Q: We're building equipment to treat effluent generated by our current manufacturing operations before it's released -- is that exempt?
A: Per this opinion (and the regulation's own examples), yes -- equipment that treats waste materials as part of preventing pollution DURING an active production process, where over half the waste treated comes from that process, qualifies for the exemption.

Q: We're instead building a system to remediate groundwater that was contaminated by disposal practices decades ago -- does the same exemption cover that?
A: No, per this opinion -- remediating already-existing historical contamination isn't "preventing" pollution during a current production process, so this kind of environmental cleanup equipment doesn't qualify for the manufacturing waste-treatment exemption, even though it may be legally required by an environmental permit.

Q: Does it matter that we're required by a state environmental permit to build this treatment plant?
A: No, per this opinion -- the exemption analysis turns on whether the equipment prevents pollution as part of an active manufacturing process, not on whether the remediation work is legally mandated.

Citations

• Tax Law § 1115(a)(12) -- exempts machinery and equipment used directly and predominantly in production, including certain waste-treatment equipment tied to that production.
• 20 NYCRR § 528.13(d) -- limits the waste-treatment exemption to equipment used predominantly to treat, bury, or store waste materials from a manufacturer's own production process (over 50% of what's treated must come from that process), with examples distinguishing exempt production-linked pollution prevention from non-exempt remediation of real property (e.g., Example 6, concrete waste-treatment buildings/tanks are real property, not exempt machinery).

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_11s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-94 (11)S
Sales Tax
March 18, 1994

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940127A

On January 27, 1994, a Petition for Advisory Opinion was received from Bell Aerospace
Textron, P.O. Box One, Buffalo, New York 14240-0001.
The issue raised by Petitioner, Bell Aerospace Textron, is whether Petitioner's purchase of
machinery and equipment used for the treatment of groundwater through a wastewater treatment
plant will be subject to sales and use taxes.
Petitioner is in the process of constructing a wastewater treatment plant on its property
located in Wheatfield, New York. This facility will consist of a 2,800 sq. ft. building, at an
estimated cost of $100,000. In addition to the building, equipment will be installed to treat
groundwater. The estimated cost of this equipment is $1,200,000. This facility will be used solely
for the purpose of groundwater treatment.
During the period from 1948 to 1984, Petitioner used an unlined surface impoundment as a
depository for chlorinated solvents, rocket fuels and various other hazardous materials used in its
manufacturing process. The high specific gravity of the materials deposited in the pond caused them
to migrate through various layers of soil and fractured bedrock, finally coming to rest in a mitten
shaped plume of dense non-aqueous phase liquid (hereinafter "DNAPL"). Groundwater coming in
contact with the DNAPL plume has created a larger, elliptical plume contaminated with aqueous
(dissolved) phase organic compounds.
After years of study and as mandated under permit by the New York State Department of
Environmental Conservation, Petitioner has designed a treatment plant to pump and treat
contaminated water from the aqueous phase plume and control the DNAPL plume through hydraulic
containment.
As part of the treatment project, pumping wells will be drilled to extract and transfer
contaminated groundwater via an underground pipeline network to the treatment building. The
treatment equipment will separate recovered DNAPL from the contaminated water and process the
water through various treatment stations that filter the water, pass it through a series of air strippers
where volatile components are separated from the water and destroyed in a thermal oxidizer and,
finally, the water will be polished in carbon filters. The treated water will then be discharged to the
sanitary sewer for further treatment.
Section 1115 of the Tax Law provides, in part, as follows:
Sec. 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:
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TSB-A-94 (11)S
Sales Tax
March 18, 1994
(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, or telephone central office equipment or station
apparatus or comparable telegraph equipment for use directly and predominantly in
receiving at destination or initiating and switching telephone or telegraph
communication, but not including parts with a useful life of one year or less or tools
or supplies used in connection with such machinery, equipment or apparatus. 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 528.13(d) of the Sales and Use Tax Regulations provides, in part, as follows:
(d) Waste treatment equipment. (1) Machinery and equipment used
for disposing of industrial waste, as a part of a process for preventing
water or air pollution, will be considered as being used directly and
predominantly in production by manufacturing, processing,
generating, assembling, refining, mining or extracting, if
(i) the machinery and equipment is purchased by a
manufacturer and used predominantly to actually treat, bury, or store
waste materials from a production process, and
(ii) over 50 percent of the waste treated, buried or stored
results from the production process.
Example 1:

A manufacturing plant has a pumping
station to transmit effluent from an
industrial process to a municipal
sewage treatment system.
The
equipment at the pumping station is
exempt.

Example 2:

A manufacturing plant has a treatment
plant at which it treats effluent from
an industrial process and sanitary
waste. Eighty percent of the waste
treated is industrial effluent. The
equipment at the treatment plant is
exempt as it is used directly and
predominantly in production.

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TSB-A-94 (11)S
Sales Tax
March 18, 1994
Example 4:

A company uses a scrubber and
ventilation system which places a
gaseous mixture, generated in a
manufacturing process, in contact with
water. This converts the gaseous
chemicals into a dilute solution. The
scrubber and ventilation system is
machinery or equipment used directly
in production, as it treats industrial
waste, and purchase thereof is exempt
from tax.
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(2) Building materials, which become part of a capital
improvement used as a waste treatment facility are not eligible for the
exemption.
Example 6:

A company builds a concrete waste
treatment center that has equipment to
treat effluent from a manufacturing
process. The concrete building and
tanks are real property and are not
machinery and equipment. They are
not exempt although the machinery
and equipment contained therein may
be exempt. (emphasis added)

Pursuant to Section 528.13(d) of the Sales and Use Tax Regulations machinery and
equipment used for disposing of industrial waste, as a part of a process for preventing water
pollution, is exempt from sales and use taxes where it is used directly and predominantly in
production of tangible personal property. In the instant case, Petitioner during the period 1948 to
1984 deposited hazardous materials used in its then manufacturing process in an unlined surface
impoundment which, in turn, contaminated surrounding groundwater. Petitioner, as mandated under
permit by the New York State Department of Environmental Conservation, has now designed a
process which will extract the contaminated groundwater to treat and purify the groundwater of
contaminates. Therefore, Petitioner will not be preventing water pollution by such process, but will
be extracting water which has already been polluted. Moreover, Petitioner will not be treating the
waste material during the manufacturing process but will subsequently treat the contaminated
groundwater to purify the groundwater of the contaminates. Accordingly, since Petitioner will not
actually be treating the waste material to prevent water pollution during the manufacturing process,
pursuant to Section 528.13(d) of the Sales and Use Tax Regulations the machinery

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TSB-A-94 (11)S
Sales Tax
March 18, 1994
and equipment in the wastewater treatment plant is not exempt from sales and use taxes under
Section 1115(a)(12) of the Tax Law as machinery and equipment used or consumed directly and
predominantly in the production of tangible personal property.

DATED: March 18, 1994

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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