New York Advisory Opinion TSB-A-96(20)S: Does an industrial gas company's cryogenic converter, which turns refrigerated liquid gas into gaseous form for sale to customers, qualify for the sales tax exemption for production machinery used directly and predominantly in manufacturing/processing?

Plain-English summary

Empire Airgas, Inc. manufactures and sells industrial and medical gases -- oxygen, argon, helium, carbon dioxide, hydrogen, and nitrogen -- which it purchases in a refrigerated, liquefied form and stores at extremely low temperatures (down to about -452°F for helium) in large vacuum-jacketed bulk tanks. Empire Airgas rarely sells the gas in liquid form; for the vast majority of customers, it has to convert the liquid into a gaseous product and "repackage" it into steel cylinders with different valves and equipment before it can enter the market. The equipment that does this conversion is a cryogenic converter: a cryogenic pump moves the liquid product from storage through an ambient-air vaporization system, where it picks up heat from the atmosphere and boils into gas, which is then routed to cylinder fill manifolds and packaged in steel cylinders sized to customer specifications (some products also require additional purity-control or gas-mixing equipment for medical gases or specialty blends). The converter is used 100% of the time in this process.

The Department ruled that the cryogenic converter qualifies for the sales-tax exemption for production machinery under Tax Law § 1115(a)(12), which exempts machinery or equipment used directly and predominantly in the production of gas for sale by "processing." The regulations define "processing" as any service performed on tangible personal property that changes its nature, shape, or form, and "directly" as (among other things) acting upon or causing a change in the material that becomes the product sold. Because the converter physically transforms the liquid gas into the gaseous form that customers actually purchase -- and is used exclusively for that purpose -- it falls squarely within the exemption, following the Department's earlier AGA Burdox opinion and the Tax Appeals Tribunal's National Fuel Gas Distribution decision addressing the same kind of conversion equipment.

What this means for you

Industrial and medical gas producers

Equipment that converts your product from the storage form (liquid) into the sellable form (gas) -- and is used substantially for that purpose -- should qualify as exempt production machinery under § 1115(a)(12), the same as other manufacturing equipment that changes a product's physical state or form as part of getting it ready for sale.

Manufacturers more generally

The "directly and predominantly in production" exemption isn't limited to equipment that shapes solid materials -- it also covers equipment that changes a product's physical state (liquid to gas) when that transformation is a genuine step in the production process leading to a sale, distinct from mere storage or handling.

Common questions

Q: Does it matter that the steel cylinders used to package the gas aren't included in the exemption?
A: Yes -- the ruling explicitly notes the storage cylinders are "not part of the cryogenic conversion equipment at issue" and aren't addressed by this opinion. Only the conversion equipment itself (the pump and vaporization system) was ruled exempt here.

Q: Would the exemption still apply if the converter were used for something else part of the time?
A: The ruling emphasizes that the converter here is used 100% of the time in the exempt conversion process. The regulations only require over 50% direct production use to qualify as "predominant," but this opinion's facts involved exclusive production use.

Q: Does additional processing for medical or specialty gases change the analysis?
A: No -- the ruling notes that some products require extra equipment for purity control or gas mixing to hit specific tolerances, but treats this as part of the same exempt processing activity, not a separate non-qualifying step.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) (production machinery/equipment exemption)
• 20 NYCRR 528.13(b) (definition of production)
• 20 NYCRR 528.13(c) (directly and predominantly)
• 20 NYCRR 531.2(e) (definition of processing)

Prior rulings and cases referenced:

• Matter of AGA Burdox, Advisory Opinion, Commissioner of Taxation and Finance, December 22, 1982, TSB-A-82(52)S
• Matter of National Fuel Gas Distribution Corporation, Decision, Tax Appeals Tribunal, March 14, 1991, TSB-D-91(15)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_20s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (20)S
Sales Tax
March 22, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S951113B

On November 13, 1995, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Empire Airgas, Inc., 1200 Sullivan Street, Elmira, New York 14901.
The issue raised by Petitioner, Empire Airgas, Inc., is whether Petitioner's purchases of
cryogenic converters constitute purchases of machinery or equipment exempt from tax pursuant to
Section 1115(a)(12) of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is in the business of manufacturing and selling industrial and medical gases. The
gas commodities listed below are purchased by Petitioner in a refrigerated, liquefied form and stored
in vacuum jacketed bulk tanks. Most tanks hold approximately 10,000 gallons of liquefied gas.
Gas Commodity
Oxygen
Argon
Helium
Carbon Dioxide
Hydrogen
Nitrogen

Storage Temperature (Degrees Fahrenheit)
-297.3
-302.6
-452.1
-109.4
-432.0
-320.4

These gases are not normally consumed by Petitioner's customers in liquid form. Petitioner
rarely sells liquefied gas. For the vast majority of its customers, Petitioner must convert the liquid
product it receives into a gaseous product before the product can enter the market. In addition, the
gas must be "repackaged" because the steel cylinders, valves and other equipment required to hold
and distribute the gaseous form of the product are significantly different from those used for the
liquid form.
The equipment that is the subject of this Advisory Opinion is a cryogenic converter. The
cryogenic converter operates as follows.

1. Liquid gas is stored in a special vacuum jacketed tank. The liquid gas is introduced into
   a cryogenic pump which moves the liquid product from the storage vessel through the conversion
   process. Since the saturated vapor pressure of the product in the tank varies, the cryogenic pump is
   designed to operate at very low Net Positive Suction Head (NPSH).
2. The cryogenic pump moves the liquid product into an ambient air vaporization system
   where the liquid begins to boil as the temperature is increased. The liquid gas is pumped at high
   pressure through the ambient vaporizers. Here the liquid picks up sufficient heat from the
   atmosphere to transform the liquid into gas.

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March 22, 1996

3. The end result of the vaporization is a gaseous form of the product which the customer
   can consume. The gas is directed to the cylinder fill manifolds that are equipped with individual
   filling hoses for each cylinder. The pump automatically shuts off when the cylinders are filled. The
   gas is packaged in large steel cylinders which are of a size, dimension and pressure rating that meets
   the customer's specifications. (These steel cylinders are not part of the cryogenic conversion
   equipment at issue.) The repackaging cannot be accomplished by any other means.
   This basic process may be modified by a number of steps. For example, medical gases,
   breathing air and rare gases require a considerably greater degree of processing and control than
   standard industrial gases because specific tolerances are required for specific mixes. Some gases are
   required to be 99.999999 percent pure. Additional equipment must be added to the cryogenic system
   to ensure that the purity of the product is maintained and can be certified as required. Other products
   may involve a mixture of several gases to tolerances of specific parts-per-million (PPM). Again,
   specific equipment must be added to the process to ensure the proper mixture of gases to produce
   the final product for market.
   The cryogenic converter is used 100 percent of the time in the foregoing process.
   Applicable Law and Regulations
   Section 1115(a)(12) of the Tax Law provides an exemption from the sales and compensating
   use taxes for:
   (12) Machinery or equipment for use or consumption directly and
   predominantly in the production of ... gas ... for sale, by ... processing ....
   Section 528.13 of the Sales and Use Tax Regulations defines the following terms:
   (b) Production.
   *
   *
   *
   (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.
   *
   *
   *
   (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

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(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.
*
*
*
(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.
Section 531.2(e) of the Regulations provides:
(e) Processing. "Processing" is the performance of any service on tangible
personal property which effects a change in the nature, shape or form of the property.
Opinion
Petitioner's purchases of cryogenic conversion equipment fall within the exemption from tax
provided by Section 1115(a)(12) of the Tax Law. This equipment is used by Petitioner directly
and predominantly in the production of industrial and medical gases, for sale to customers, by
processing the gases from a liquid state to a gaseous state. (See, Matter of AGA Burdox, Adv Op
Comm T&F, December 22, 1982, TSB-A-82(52)S; Matter of National Fuel Gas Distribution
Corporation, Dec Tax App Trib, March 14, 1991, TSB-D-91(15)S.)

DATED: March 22, 1996

/s/
Doris S. Bauman
Director
Technical Services Bureau

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