Is the electricity a paper mill uses to run dedicated air conditioning for rooms housing its production equipment's electrical controls exempt from New York sales tax?

Plain-English summary

Finch, Pruyn & Co. runs a fully integrated fine-paper mill: logs are debarked, chipped, cooked under pressure and chemicals in a digester to produce fiber, bleached, mixed with chemicals, and dried into paper. Throughout the process, the manufacturing equipment runs hot (80 to 115 degrees Fahrenheit, with high humidity) -- conditions that would fry the equipment's electrical control components (switches, relays, starters) if left exposed. To prevent that, the mill houses these components in separate, windowless "Motor Control Centers" (MCCs) -- rooms built solely to hold the electrical components, restricted to employees only for maintenance or safety shutdowns, and kept cool (70-75°F) and dehumidified by dedicated air conditioning that runs continuously and is metered separately from the rest of the facility's electricity. Without the MCCs' controlled environment, the components would short-circuit, corrode, shut down production, and create fire hazards -- a risk serious enough that local fire code mandates the temperature control. Petitioner asked whether the electricity powering these dedicated HVAC systems is tax-exempt.

New York exempts machinery and equipment used directly and predominantly in producing tangible personal property for sale (§ 1115(a)(12)), and separately exempts fuel, gas, and electricity used "directly and exclusively" (100% of the time) in that same production (§ 1115(c)), where "directly" includes creating conditions necessary for production. The Department applied its own prior Leprino Foods precedent: electrical components wired directly to exempt manufacturing equipment, and rooms built SOLELY to house those components, are treated as "assuming the identity" of the machinery and equipment itself -- meaning they inherit the same exemption. Since the MCCs' only function is protecting the production line's electrical components from environmental failure, and the dedicated HVAC systems run continuously and exclusively for that purpose (separately metered from all other facility electricity), the electricity powering them qualifies for the § 1115(c) production-electricity exemption -- so long as the underlying manufacturing equipment itself is used directly and predominantly to produce paper for sale.

What this means for you

Manufacturers with dedicated equipment-protection climate control

If you maintain separate rooms or enclosures built SOLELY to protect your production equipment's electrical components from environmental failure -- with dedicated, separately metered HVAC serving no other purpose -- this opinion supports treating that electricity as exempt production electricity, under the "assumes the identity of the machinery" theory the Department applied here (drawing on its Leprino Foods precedent). Keep the HVAC's use genuinely exclusive (100%) to that protective function and separately metered to support the exemption claim.

Manufacturers with mixed-use or general-facility climate control

This opinion doesn't cover general building HVAC or climate control serving multiple purposes (employee comfort, non-production areas, etc.) -- the exemption here depended specifically on the "directly and exclusively" (100%) production-only use and the equipment-protection rooms being restricted-access and single-purpose.

Common questions

Q: Does the electricity need to physically touch the production equipment to qualify?
A: No -- the Department's theory is that a purpose-built enclosure and its dedicated climate-control system can "assume the identity" of the exempt machinery it protects, extending the exemption even though the electricity technically powers air conditioning units rather than the production machinery directly.

Q: What does "directly and exclusively" require for the electricity exemption specifically?
A: "Directly" means the electricity operates exempt equipment, creates conditions necessary for production, or performs an actual part of the production process; "exclusively" means the electricity is used 100% for that purpose -- any mixed use would jeopardize the exemption for that portion.

Q: Does separate metering matter to this analysis?
A: The opinion notes the dedicated HVAC electricity usage IS metered separately, which supports demonstrating the required "exclusively" (100%) production-only use -- though the opinion doesn't say separate metering is strictly mandatory.

Q: Can another manufacturer rely on this exact result?
A: No. This advisory opinion binds the Department only as to Finch, Pruyn & Co., Inc. and the specific facts described; another manufacturer should confirm its own equipment-protection enclosures and HVAC usage meet the same exclusivity and purpose-built requirements.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• Tax Law § 1115(c) (production fuel/gas/electricity exemption)
• 20 NYCRR § 528.22(c) ("directly and exclusively" definitions)

Prior rulings and cases referenced:

• Leprino Foods Company, Advisory Opinion, Commissioner of Taxation and Finance, April 28, 1994, TSB-A-94(17)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_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (51)S
Sales Tax
September 4, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S951113D

On November 13, 1995, a Petition for Advisory Opinion was received from Finch, Pruyn &
Co., Inc., 1 Glen Street, Glens Falls, New York 12801.
The issue raised is whether electricity consumed directly and exclusively for maintaining a
continuously controlled environment necessary to prevent electrical component failure in
manufacturing equipment is exempt from sales tax.
Petitioner presents the following facts.
Petitioner operates a fully integrated paper mill which manufactures fine paper. The
manufacturing process for fine paper begins with the debarking of logs. The logs are then reduced
into wood chips, which are then fed into a digester. The digester cooks the chips under high pressure
and chemical processing to produce fiber which is then bleached. The fiber is then mixed with
certain chemicals and dried on a machine to produce paper. Throughout the paper manufacturing
process a controlled environment must exist in each of the various stages of production. This is
achieved through the use of steam heat and water.
In order to maintain the operation of the manufacturing equipment, which is subject to high
temperatures (80 to 115 degrees Fahrenheit) and humidity, Motor Control Centers (MCCs) are
utilized throughout the manufacturing facility. These MCCs are separated individual windowless
control rooms built solely to house the electrical components of the manufacturing production line
equipment including switches, relays and starters. Within the MCCs these electrical components are
kept in a cool low humidity controlled environment in order to function. If these electrical
components were not properly housed in the MCCs they would be subject to high heat and humidity
which would cause the components to short circuit and corrode resulting in a shut down of
production. Employee access or use of the rooms is restricted to maintenance and service functions
only.
The MCCs are kept cool (approx. 70 to 75 degrees Fahrenheit) and humidity free by air
conditioners that operate continuously during the manufacturing process. The MCCs only functional
purpose is to maintain a controlled environment, as prescribed by the equipment manufacturer and
mandated by local jurisdiction fire code, in order to prevent electrical component failure for the
manufacturing process to operate and to avoid any fire hazards. The MCCs are controlled
environments only accessible to employees during maintenance of the electric components or as a
safety measure to disrupt power to production line equipment during service.
The MCCs have dedicated heating, ventilation, and air conditioning systems (HVAC). These
dedicated HVAC are controlled and monitored separately in order to maintain

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TSB-A-96 (51)S
Sales Tax
September 4, 1996
the necessary controlled environment conducive for the manufacturing machinery to operate.
Similarly, the electricity usage for HVAC operations is metered separately.
Section ll15(a) 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:
*

*

*

(12) Machinery or equipment for use or consumption directly and predominantly in
the production of tangible personal property...for sale by manufacturing, processing,
generating,...,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 ....
Section 1115(c) of the Tax Law exempts from taxation purchases of "fuel, gas,
electricity...for use or consumption directly and exclusively in the production of tangible personal
property...for sale".
Section 528.22 of the Sales and Use Tax Regulations elaborate on the statutory exemption
provision above, as follows:
(c) Directly and exclusively. (1) "Directly" means the fuel, gas,
electricity...must during the production phase of a process, either:
(i) operate exempt machinery or equipment; or
(ii) create conditions necessary for production; or
(iii) perform an actual part of the production process.
(3)(i) "Exclusively" means that
in total (100%) in the production process.

the

fuel,

gas, electricity...are used

In this case, Petitioner's dedicated heating, ventilating and air conditioning systems (HVAC)
are necessary to maintain specific environmental conditions within the MCCs for the protection of
various electrical components of the manufacturing production line equipment including switches,
relays and starters. The electrical components of manufacturing equipment which are directly wired
to such equipment, and the MCCs which are designed solely to house these electrical components,
are considered to assume the identity of the machinery and equipment and are entitled to the same
exemption afforded the machinery and equipment. (See Leprino Foods Company, Adv. Op. Comm.
of Taxation and Finance, April 28, 1994, TSB-A-94(17)S.)

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TSB-A-96 (51)S
Sales Tax
September 4, 1996
Accordingly, where the machinery and equipment are used directly and predominantly in
producing tangible personal property for sale, Petitioner's purchases of electrical energy used directly
and exclusively to run the dedicated HVAC systems within the MCCs will qualify for the exemption
from tax provided under Section 1115(c) of the Tax Law and Section 528.22 of the Sales and Use
Tax Regulations.

DATED: September 4, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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