Is equipment used to make both soft-serve and prepackaged ice cream exempt from New York sales tax as production machinery?

Plain-English summary

Snyder's Roast Beef & Frozen Custard bought five pieces of equipment when it opened: four items that use raw ingredients to produce soft-serve ice cream, and a hardening cabinet that freezes part of that product into prepackaged ice cream for sale. It paid sales tax on all five items at purchase and later asked the Department whether any of that equipment qualifies for New York's production-machinery exemption.

New York taxes soft-serve ice cream as restaurant food under Tax Law § 1105(d) -- the same category as meals served in restaurants, taverns, and similar establishments -- because a customer buys and consumes it as an already-prepared food item, not as a discrete piece of tangible personal property. Prepackaged ice cream, by contrast, is an ordinary sale of tangible personal property. New York's production-equipment exemption (§ 1115(a)(12)) only covers machinery used more than 50% of the time directly in producing tangible personal property for sale -- so it can cover the hardening cabinet (which turns the product into prepackaged ice cream) but never the soft-serve dispensing equipment, since soft-serve isn't tangible personal property for sale in the first place, no matter how much of the machine's time goes toward it.

Because Petitioner already paid sales tax on this equipment when it bought it, the Department's opinion doesn't automatically confer an exemption prospectively -- it tells Petitioner how to seek a refund or credit (Form AU-11) for tax it can substantiate was overpaid on equipment (and the electricity powering it) that in fact was used more than half the time producing prepackaged ice cream, within the three-year filing window under Tax Law § 1139.

What this means for you

Ice cream shops, frozen dessert stands, and similar food-and-drink retailers

Equipment that both prepares a restaurant-style item (like soft-serve) and packages a separate for-sale product (like pints of ice cream) isn't automatically exempt or automatically taxable -- what matters is how much of the equipment's actual use goes toward producing the tangible, for-sale product versus the taxable prepared-food item.

Businesses that already paid sales tax on equipment later found production-exempt

If you can substantiate (with real usage records) that machinery was used more than 50% of the time directly producing tangible personal property for sale, you may be able to file for a refund or credit of the sales tax you already paid -- but the claim must be filed within three years of when the tax was payable, and you carry the burden of proving the usage split.

Accountants and tax professionals

This is a straightforward application of the "directly and predominantly" production-equipment test (20 NYCRR § 528.13) to a mixed-use scenario -- the same equipment can be exempt for one output stream and taxable for another, and the exemption turns entirely on actual measured usage, not on the equipment's design or capability.

Common questions

Q: Is soft-serve ice cream taxed differently from packaged ice cream in New York?
A: Yes. Soft-serve sold for immediate consumption is taxed as restaurant food under Tax Law § 1105(d), while prepackaged ice cream sold to go is an ordinary (and often exempt-eligible-equipment) sale of tangible personal property.

Q: Can a business get a refund for sales tax paid on equipment if it turns out to qualify for an exemption?
A: Yes, if the business can substantiate the required usage percentage and files Form AU-11 within three years of when the tax was payable.

Q: Does this ruling mean all ice cream equipment is exempt?
A: No -- only equipment used more than 50% of the time directly producing tangible personal property for sale (like prepackaged ice cream) qualifies; equipment dispensing soft-serve for on-site sale never qualifies, regardless of usage percentage.

Q: Does this ruling apply to my ice cream shop's equipment?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your equipment's actual usage split would need its own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_74s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(74)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
PETITION NO.S970806D

ADVISORY OPINION

On August 6, 1997, a Petition for Advisory Opinion was received from
Snyder's Roast Beef & Frozen Custard, 5742 McKinley Parkway, Hamburg, New York
14075.
The issue raised by Petitioner, Snyder's Roast Beef & Frozen Custard, is
whether equipment used to manufacture soft serve ice cream and prepackaged ice
cream that is later sold to customers is exempt from sales tax.
Petitioner submits the following facts.
Petitioner purchased five pieces of equipment for use in its business.
Four of these items use raw material to produce soft serve ice cream. The other
item, a hardening cabinet, is used to freeze and harden a portion of the product,
to be sold as prepackaged ice cream. The rest of the product is sold as soft
serve ice cream. Petitioner purchased this equipment when the operation began
and paid the sales tax at that time on all of the equipment.
Applicable Law and Regulations
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen
hundred seventy-one, there is hereby imposed and there shall be paid
a tax of four percent upon:
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(d) The receipts from every sale of beer, wine or other alcoholic
beverages or any other drink of any nature, or from every sale of
food and drink of any nature or of food alone, when sold in or by
restaurants, taverns or other establishments in this state, or by
caterers, including in the amount of such receipts any cover,
minimum, entertainment or other charge made to patrons or customers
(except those receipts taxed pursuant to subdivision (f) of this
section):
(1) in all instances where the sale is for consumption on the
premises where sold;
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(3) in those instances where the sale is ... for consumption off
the premises of the vendor,
except where food (other than
sandwiches) or drink or both are (A) sold in an unheated state and,

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Sales Tax

(B) are of a type commonly sold for consumption off the premises
and in the same form and condition, quantities and packaging, in
establishments which are food stores other than those principally
engaged in selling foods prepared and ready to be eaten.
Section 1115 of the Tax Law provides, 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: (Emphasis added)
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(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, . . . 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. . . . (Emphasis added)
Section 527.8 of the Sales and Use Tax Regulations provides, in part:
Sale of food and drink. (Tax Law,§ 1105(d)) (a) Imposition.
Sales tax is imposed on the receipts, including any cover, minimum,
entertainment or other charge, from every sale of beer, wine or
other alcoholic beverages and food or drink of any nature sold in or
by restaurants, taverns or other establishments in this State or by
caterers: . . . (emphasis added)
(b) Establishments. The following establishments, as well as other
establishments engaged in the sale of food or drink for consumption
on or off premises are required to collect the tax: Automats . . .
Hamburg and Hot Dog Stands ...Restaurants . . .Ice Cream Stands . .
. . (emphasis added)
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
Machinery and equipment used in production;. . .(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, refrigeration or steam, by manufacturing, processing,
. . . .(Emphasis added)
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Sales Tax

(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
(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.
(2) Usage in activities collateral to the actual production process
is not deemed to be used directly in production.
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Example 6: Machines to grind meat, make hamburg patties, cube
steaks, or, slice meat; power saws and scales when used by
slaughterhouses, wholesale meat houses and supermarkets, are used
directly in processing tangible personal property for sale, and are
exempt. However, similar machinery and equipment used by restaurants
in the preparation of food and drink taxed under section 1105(d) of
the Tax law, are taxable as they are not used in the processing of
tangible personal property for sale. (Emphasis added)
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(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. (emphasis added)
Opinion
In this case, Petitioner is producing both soft serve ice cream and
prepackaged ice cream.
The soft serve ice cream is not considered tangible
personal property but is a restaurant food item, and Petitioner's sales of soft
serve ice cream are taxable under Section 1105(d) of the Tax Law. See James F.
Farrell D/B/A North Country Coldelite, Dec St Tx Comm, July 9, 1984, TSB-H­
84(81)S; and Section 527.8(b) of the Sales and Use Tax Regulations.
The
prepackaged ice cream is considered nontaxable tangible personal property. See
James F. Farrell D/B/A North Country Coldelite, supra. The machinery purchased
by Petitioner must be used over 50 percent of the time directly in the production
of tangible personal property for sale, to qualify for exemption from the sales
and use tax under Section 1115(a)(12) of the Tax Law. Petitioner, therefore,
must establish that the equipment is used over 50 percent of the time directly
in producing prepackaged ice cream in order for the equipment to qualify for
exemption under Section 1115(a)(12) of the Tax Law.

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Sales Tax

Petitioner's hardening cabinet, which is used to harden soft serve ice
cream into a product suitable for sale as prepackaged ice cream, is used directly
in the production of tangible personal property for sale. Petitioner must be
able to substantiate that the equipment in this case was used more than 50
percent of the time in producing prepackaged ice cream for sale to be entitled
to a refund or credit of sales and use tax.
In general, equipment dispensing soft serve ice cream does not qualify for
exemption under Section 1115(a)(12) of the Tax Law. The receipts from the sale
of soft serve ice cream are taxed under Section 1105(d) of the Tax Law, and there
is no exemption from sales and use tax for equipment used by restaurants or other
food establishments in dispensing restaurant food subject to tax under Section
1105(d). (See Matter of Burger King v. State Tax Comm., 51 NY2d 614; and Section
527.8, Example 6 of the Sales and Use Tax Regulations) However, Petitioner would
be entitled to a refund or credit of sales and use tax paid on this equipment if
Petitioner could substantiate that the equipment was used directly and
predominantly in producing prepackaged ice cream for sale.
In addition, electricity used directly and exclusively in the production
of tangible personal property for sale is exempt from sales tax under Section
1115(c) of the Tax Law. Petitioner may be entitled to a refund or credit of
sales tax on the portion of electricity used directly and exclusively in the
production of prepackaged ice cream. Again this credit or refund must be
substantiated by Petitioner.
(See Determining Electricity
Used In The
Production of Tangible Personal Property For Sale, Technical Services Bureau
Memorandum, September 7, 1982, TSB-M-82(25)S)
To claim a refund or credit for tax erroneously paid, a person must file
an application for refund or credit (Form AU-11) with the Department of Taxation
and Finance.
Where the tax was paid by the applicant to a vendor, the
application must be filed within three years after the date when the tax was
payable to the Department of Taxation and Finance by the vendor. See Section
1139 of the Tax Law and Section 534.2 of the Sales and Use Tax Regulations.

DATED: December 4, 1997

NOTE:

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

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