Are cardboard compactors that a waste-removal company places at shopping centers to collect and crush cardboard for recycling exempt from sales tax as production equipment?

Plain-English summary

Jet Sanitation Service Corp. is a waste-removal contractor that collects cardboard from customers and sells it to an affiliated recycling company. To do this, it purchased five mechanized compactors and installed them permanently (concrete pad, electrical hookup for a hydraulic system) at various shopping centers. The compactors crush and densify the cardboard using a hydraulic ram, and once installed, they can't be accessed from outside except for their collection function. Jet Sanitation asked whether these compactors qualify for New York's sales tax exemption for machinery and equipment used in manufacturing or processing goods for sale.

The exemption requires that more than 50% of the equipment's use be directly in an actual production process -- acting on the material to change it into the product being sold, or otherwise playing an active causal role in production. The Department found that Jet Sanitation's compactors function as collection devices: their job is to gather and store cardboard at the shopping centers until Jet Sanitation picks it up for delivery to the recycler. The crushing function is incidental to that collection and storage role rather than being Jet Sanitation's own production process. Because the compactors aren't used directly in production within the meaning of the exemption, their purchase is fully subject to New York sales and use tax.

What this means for you

Waste haulers, recyclers, and businesses using compactors for collection

A compactor used mainly to gather and store material before it's hauled away for sale or processing elsewhere doesn't qualify as exempt production equipment, even if it physically crushes or compacts the material -- what matters is whether the crushing is genuinely a step in your own manufacturing/production process, not just a way to make collection and transport more efficient.

Recycling companies evaluating equipment purchases for exemption eligibility

If your equipment's primary function is collecting, storing, or transporting material rather than transforming it into a finished product you're selling, expect the production exemption to be unavailable regardless of how sophisticated or automated the equipment is.

Accountants and tax professionals

The controlling test is 20 NYCRR § 528.13(c) and (b): equipment must be used "directly and predominantly" (over 50% of use) in the production phase -- handling raw materials at the plant site through the last step of finishing and packaging -- as opposed to administration (which includes transporting and receiving raw materials) or mere collection incidental to a waste-removal or hauling business.

Common questions

Q: Does compacting or crushing recyclable material automatically qualify equipment for the production exemption?
A: No. The equipment must be used directly and predominantly in an actual production process for a product being sold; using it mainly to collect and store material for later pickup is a collection function, not production.

Q: Would the answer differ if the recycler itself (rather than a waste-removal contractor) owned and operated the compactors as part of its own manufacturing process?
A: Potentially -- the analysis depends on whether the compacting is directly part of producing a product for sale by the purchaser, which is a fact-specific determination not addressed by this ruling's facts.

Q: Does this ruling apply to my recycling or waste-collection 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. Whether your equipment's use is "directly and predominantly" production depends on your own operations.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(19)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
PETITION NO. S970811B

ADVISORY OPINION

On August 11, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Jet Sanitation Service Corp., 228 Blydenburgh
Road, Central Islip, NY 11722-5006.
The issue raised by Petitioner, Jet Sanitation Service Corp., is whether
compactors purchased for the exclusive use of collecting and crushing cardboard
for recycling are exempt from sales and compensating use taxes.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a waste removal contractor. It contracts with customers to
remove cardboard which it sells to an affiliated company for recycling.
Petitioner purchased five mechanized compactors for the exclusive use of the
collection of cardboard to be recycled. Petitioner placed the compactors at
various shopping center locations. Each compactor required the placement of a
concrete pad and installation of electrical service to run a hydraulic system.
Once installed, the compactor cannot be accessed from the outside and its use is
restricted to the collection and crushing of cardboard for recycling.
The
compactors crush and densify the cardboard material through the use of a
hydraulic ram system run by an electric motor.
Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes a tax on the receipts from every
retail sale of tangible personal property, except as otherwise provided.
Section 1115 (a) of the Tax Law provides, in part:
(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, assembling,
refining, mining, or extracting...

-2­
TSB-A-98(19)S
Sales Tax

Section 528.13 of the New York State Sales and Use Tax Regulations
provides, in part:
(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 the
sale of the following:
(i) Machinery or equipment ... used or consumed directly and
predominantly in the production for sale of tangible personal
property....
*

*

*

(b) Production. (1) The activities listed in paragraph (a)(1)
of this section are classified as administration, production or
distribution.
(i) Administration includes activities such as sales
promotion, general office work, credit and collection, purchasing,
maintenance, transporting, receiving and testing of raw materials
and clerical work in production such as preparation of work,
production and time records.
(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
being 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.
*

*

*

-3­
TSB-A-98(19)S
Sales Tax

(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.
Opinion
Petitioner is a waste removal contractor. It contracts with customers to
remove cardboard which it sells to recyclers.
The cardboard is stored in
compactors which are then used to crush the material. Petitioner then transports
the cardboard to the recycler. To qualify for exemption as production equipment
under Section 1115(a)(12) of the Tax Law, more than 50% of the compactors' use
must be directly in production. Petitioner’s compactors are used as collection
devices. The compactor function is incidental to the compactors’ use in the
collection and storage of the cardboard until Petitioner picks it up. As such,
the compactors are not used directly in production for purposes of Section
1115(a)(12). Therefore, the purchase of the compactors by Petitioner is subject
to sales and compensating use tax.

DATED: March 23, 1998

NOTE:

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

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