Is a software-duplication company's disc-copying machinery exempt production equipment, and is the electricity powering it exempt production electricity?

Subject

Issue raised by Petitioner, Formats Unlimited, is whether its purchase of certain machinery and equipment which it uses to perform duplicating services, qualifies for exemption from sales tax under Section 1115(a)(12) of the Tax Law, and whether utilities used to power such equipment qualifies for exemption under Section 1115 (c) of the Tax Law.

What this means for you

A disc-duplication company receives a customer's master disc (containing pre-written computer software), then runs an assembly-line process: loading blank discs it supplies, duplicating the master's data onto them, checking for errors, and labeling/packaging the finished software for the customer to resell. It asked whether its duplicating equipment and the electricity powering it are exempt from sales tax.

New York treats pre-written computer software as tangible personal property. Because the petitioner is producing copies of that tangible personal property for its customer to resell -- much like a film or recording producer duplicating masters -- the Department found the duplicating machinery is exempt production equipment under the manufacturing exemption, as long as it's used more than 50% of the time ("predominantly") for that duplication.

Electricity gets a stricter test. New York separately exempts electricity used directly and exclusively (100%, not just predominantly) in producing tangible personal property for sale. Electricity that also powers general office heating, cooling, or lighting -- or non-exempt equipment -- doesn't qualify for that portion. Since utility purchases are usually billed in bulk with mixed uses, the exemption works through a refund or credit mechanism: the business pays tax on the full bill, then claims a refund/credit for the portion of electricity actually used exclusively to run the exempt production machinery.

Q&A

Q: We duplicate discs/media from a customer's master for resale -- is our copying equipment exempt?
A: Yes, as long as it's used more than 50% of the time directly to duplicate the master onto blank media that will be resold. That's the same "over 50%" predominantly-in-production test used for other manufacturing equipment.

Q: Is the electricity that runs our production equipment automatically exempt too?
A: Only the portion used 100% exclusively for production. If the same electrical circuit or bill also covers office lighting, heating, or cooling, that mixed-use portion is taxable -- you'd need to separately document and claim a refund/credit for just the production-exclusive share.

Q: How do we actually claim the electricity exemption if our bill isn't broken out that way?
A: Since bulk electricity purchases mix taxable and exempt uses, the standard approach is to pay tax on the full bill as billed, then file for a refund or credit on the portion demonstrably used exclusively to operate the exempt production equipment.

Citations

• Tax Law § 1115(a)(12) -- exempts machinery/equipment used directly and predominantly in producing tangible personal property for sale.
• Tax Law § 1115(c) -- exempts electricity used directly and exclusively in producing tangible personal property for sale.
• Tax Law § 1101(b)(6) -- defines tangible personal property, including prewritten computer software.
• 20 NYCRR 528.13(c)(1), (2), (4) -- defines "directly," excludes collateral-activity equipment, and defines "predominantly" (over 50%).
• 20 NYCRR 528.22(c) -- defines "directly" and "exclusively" (100%) for the electricity production exemption.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (19)S
Sales Tax
June 12, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S941228B

On December 28, 1994, a Petition for Advisory Opinion was received from Formats
Unlimited, Inc., 121 Toledo Street, E. Farmingdale, New York 11735.
The issue raised by Petitioner, Formats Unlimited, is whether its purchase of certain
machinery and equipment which it uses to perform duplicating services, qualifies for exemption from
sales tax under Section 1115(a)(12) of the Tax Law, and whether utilities used to power such
equipment qualifies for exemption under Section 1115 (c) of the Tax Law.
Petitioner performs duplication service for the computer industry. It receives a master disc,
which contains pre-written computer software, from its customer to duplicate. Petitioner supplies
the blank discs, the packaging and the labels. The operation is run on an assembly-line basis. The
blank discs are loaded into the equipment. The master disc is used to duplicate the information onto
the blank disc. The discs are checked for errors before being labeled and packaged. The finished
software package is then sent to Petitioner's customer who will resell it.
Section 1101(b)(6) of the Tax Law defines tangible personal property as, "Corporeal personal
property of any nature. . . . Such term shall include pre-written computer software, whether sold as
part of a package, as a separate component, or otherwise, and regardless of the medium by means
of which such software is conveyed to a purchaser."
Section 1115(a)(12) of the Tax Law exempts from sales taxes "[m]achinery or equipment for
use or consumption directly and predominantly in the manufacture of tangible personal property. .
. .for sale by manufacturing, processing. . . ."
Section 528.13(c)(1) of the Sales and Use Tax Regulations defines the term "directly" to
mean the machinery and equipment must, during the production process (i) act upon or effect a
change in the 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) 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. Under Section 528.13(c)(2) of the Sales and Use Tax
Regulations machinery and equipment used in activities collateral to the production process is not
deemed to be used directly in production.
Section 528.13(c)(4) of the Sales and Use Tax Regulation provides that machinery and
equipment is used "predominantly" in the production of tangible personal property if it is so
employed over 50% of the time. 20 NYCRR 528.13(c) (1), (2), (4).

-2­
TSB-A-95 (19)S
Sales Tax
June 12, 1995
Pursuant to section 1115(c) of the Tax Law, electricity for use or consumption directly and
exclusively in the production of tangible personal property for sale is not subject to sales or use tax.
Section 528.22(c) of the Sales and Use Tax Regulations explains that "directly" means the
electricity must either operate exempt production machinery, or create conditions necessary for
production, or perform a part of the production process. "Exclusively" means electric power is used
100% in the production process. However, utility purchases are subject to tax when the commodity
is used to power equipment not entitled to the manufacturer's exemption and for general heating,
cooling or lighting of offices and plant areas.
Because electricity when purchased by the user is normally received in bulk or in a
continuous flow and a portion thereof is used for purposes which would make the exemption
inapplicable to such purchases, the user may claim a refund or credit for the tax paid on the portion
used or consumed directly and exclusively in the operation of exempt production equipment.
Petitioner is using its customer's master disc in much the same way that film producers and
recording producers would use their customer's master to produce copies. Consequently, since pre­
written software is considered to be tangible personal property and since Petitioner is producing
copies of such tangible personal property for sale, the purchase of the machinery and equipment used
by Petitioner for such purposes is exempt from sales tax in accordance with Section 1115(a)(12) of
the Tax Law provided it is used more than 50% of the time in this manner. Electricity used to power
machinery which is being used in production is also exempt from sales tax in accordance with
Section 1115(c) of the Tax Law.

DATED: June 12, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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