Are parts purchased in New York to build production equipment exempt from sales tax when the finished equipment is shipped to an out-of-state manufacturing plant?

Plain-English summary

Ernst & Young LLP asked on behalf of a New York-headquartered manufacturing client whether parts bought (from New York and out-of-state vendors) and assembled at the client's New York headquarters into production equipment are subject to sales or use tax, given that the finished equipment is then shipped to the same legal entity's manufacturing facility in Mexico for use in producing goods for sale.

New York exempts machinery and equipment used directly and predominantly (over 50% of the time) in manufacturing tangible personal property for sale, and that exemption extends to parts, tools, and supplies used in connection with qualifying equipment. The Department confirmed a company doesn't lose this exemption just because it builds its own production equipment rather than buying finished machinery -- parts used to assemble self-made equipment are treated the same as parts sold as replacement components for purchased equipment, as long as the finished equipment itself is used directly and predominantly in production. Critically, the Department also confirmed that where the finished equipment is ultimately used -- in New York or, as here, at an out-of-state (even foreign) plant -- doesn't affect the exemption on the New York parts purchases; the test is about the equipment's production use, not its final location. Separately, the Department flagged that the client may also be eligible for a distinct refund or credit on tax it did pay on the parts, since the parts were used only to fabricate/assemble the equipment and the finished product (the equipment) was then shipped outside New York for use outside the state -- as long as that shipment happens within three years of when the tax was paid.

What this means for you

Manufacturers who build their own production equipment in New York

Building your own machinery in-house from purchased parts doesn't disqualify those parts from New York's production exemption -- what matters is whether the resulting equipment is used over 50% of the time to make tangible personal property for sale, not whether you bought the equipment ready-made or built it yourself, and not where the equipment ends up operating.

Multi-location or multinational manufacturers centralizing equipment assembly in New York

If you build equipment in New York for use at out-of-state or foreign plants within the same legal entity, this ruling confirms the exemption travels with the equipment's production function, not its physical location -- and it flags a separate refund/credit path (Tax Law § 1119(a)(4)) for any tax already paid on the parts, as long as you ship the finished equipment out of state within three years of paying the tax.

Accountants and tax professionals

This opinion is a clean two-layer analysis worth citing together: the production-equipment exemption under § 1115(a)(12) (which applies regardless of location of use), plus the separate fabrication/export refund mechanism under § 1119(a)(4) and 20 NYCRR § 534.3(e) for tax actually paid before the equipment leaves the state -- two independent routes to the same tax-free result, useful when a client missed claiming the exemption at purchase.

Common questions

Q: Does the production exemption require the equipment to stay and operate in New York?
A: No -- the ruling states explicitly that whether the equipment is used in or outside New York is immaterial to the exemption under Tax Law § 1115(a)(12).

Q: Does building your own equipment instead of buying it change the exemption analysis?
A: No -- parts used to assemble self-made equipment qualify the same way as parts used to service or replace components of purchased equipment, as long as the finished equipment meets the "directly and predominantly" production-use test.

Q: What if a company already paid sales tax on the parts before realizing the exemption applied?
A: A separate refund or credit may be available under Tax Law § 1119(a)(4) if the parts' use was restricted to fabricating/assembling the equipment and the finished equipment was shipped outside New York for use outside the state within three years of when the tax was paid.

Citations and references

Statutes and regulations:

• Tax Law § 1105-B (reduced-rate/exemption history for production parts, tools, and supplies)
• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• Tax Law § 1119(a)(4) (refund/credit for property fabricated in NY and shipped out of state)
• Tax Law § 1210(a)(1) (local tax exclusion for production property)
• 20 NYCRR § 527.4 (fabricating, processing, printing, imprinting definitions)
• 20 NYCRR § 528.13(c) (directly and predominantly)
• 20 NYCRR § 534.3(e) (refund/credit for property restricted to fabricating, shipped out of state)

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_90s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(90)S
Sales Tax
December 30, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980724A

On July 24, 1998, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Ernst & Young LLP, 1400 Key Tower, 50 Fountain Plaza, Buffalo, New York 14202.
The issue raised by Petitioner, Ernst & Young LLP, is whether sales or use tax must be paid
on parts that are assembled in New York into equipment which is subsequently shipped to a
manufacturing facility out of state for use in the production of goods for sale.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner’s client, headquartered in New York, purchases parts for the assembly of
equipment to be used in a manufacturing process at its Mexico location. Petitioner’s client purchases
parts from vendors located throughout the United States, including New York State. These parts are
incorporated into the equipment, which is built at the client’s headquarters in New York. Upon
completion, the equipment is sent to the client’s Mexico location. The Mexico location is part of
the same legal entity as the New York location. After shipment to Mexico, Petitioner’s client retains
title to the equipment. Petitioner states that the equipment is used in manufacturing or producing
goods for sale.
Applicable Law & Regulations
Section 1105-B of the Tax Law provides, in part:
(a) Notwithstanding any other provisions of this article, but not for purposes
of the taxes imposed by section eleven hundred seven or eleven hundred eight or
authorized pursuant to the authority of article twenty-nine of this chapter, the taxes
imposed by subdivision (a) of section eleven hundred five on the receipts from the
retail sales of parts with a useful life of one year or less, tools or supplies for use or
consumption directly and predominantly in the production of tangible personal
property, gas, electricity, refrigeration or steam for sale by manufacturing . . . shall
be paid at the rate of two percent for the period commencing September first,
nineteen hundred eighty and ending February twenty-eighth, nineteen hundred
eighty-one, and such retail sales shall be exempt from such tax on and after March
first, nineteen hundred eighty-one.
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(d) Notwithstanding any other provisions of this section or this article to the
contrary, on and after September first, nineteen hundred ninety-six, the exemptions
provided by subdivisions (a), (b) and (c) of this section shall apply for purposes of
the sales and compensating use taxes imposed by section eleven hundred seven of
this article.
Section 1115(a)(12) of the Tax Law provides an exemption from sales and use tax for:
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, generating, assembling, refining, mining or
extracting, or telephone central office equipment or station apparatus or comparable
telegraph equipment for use directly and predominantly in receiving at destination
or initiating and switching telephone or telegraph communication, 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. This exemption shall include all pipe,
pipeline, drilling rigs, service rigs, vehicles and associated equipment used in the
drilling, production and operation of oil, gas, and solution mining activities to the
point of sale to the first commercial purchaser.
Section 1119(a) of the Tax Law provides, in part:
Subject to the conditions and limitations provided for herein, a refund or
credit shall be allowed for a tax paid pursuant to subdivision (a) of section eleven
hundred five or section eleven hundred ten . . . (4) on the sale or use within this state
of tangible personal property, not purchased for resale, if the use of such property in
this state is restricted to fabricating such property (including incorporating it into or
assembling it with other tangible personal property) processing, printing or
imprinting property and such property is then shipped to a point outside this state for
use outside this state, . . . Where the tax on the sale or use of such tangible personal
property has been paid to the vendor, to qualify for such refund or credit, such
tangible personal property must be incorporated into real property as required in
clause (1) above, reshipped as required in clause (2) above, used in the manner
described in clauses (3), (4), (5) and (6) above within three years after the date such
tax was payable to the tax commission by the vendor pursuant to section eleven
hundred thirty-seven. . . . Where an application for a credit has been filed, the
applicant may immediately take such credit on the return which is due coincident
with or immediately subsequent to the time that he files his application for credit.
However, the taking of the credit on the return shall be deemed to be part of the
application for credit and shall be subject to the provisions in respect to applications

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for credit in section eleven hundred thirty-nine as provided in subdivision (e) of such
section . . . .
Section 1210(a)(1) of the Tax Law provides, in part:
. . .Any local law, ordinance or resolution enacted by any city of less than one
million or by any county or school district, imposing the taxes authorized by this
subdivision, shall exclude from the operation of such local taxes all sales of tangible
personal property for use or consumption directly and predominantly in the
production of tangible personal property, gas, electricity, refrigeration or steam, for
sale, by manufacturing. . .(emphasis supplied)
Section 528.13(c) of the Sales And Use Tax Regulations provides:
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.
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(2) Usage in activities collateral to the actual production process is not
deemed to be used directly in production.
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(3) Machinery used to produce other machinery or equipment or parts for self
use in production is considered to be used directly in production.
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(4) Machinery and equipment is used predominantly in production, if over
50% of its use is directly in the production phase of a process.
Section 534.3(e) of the Sales and Use Tax Regulations provides, in part:
Property, the use of which is restricted to fabricating, processing, printing,
or imprinting. (1) A purchaser who has paid the tax on the tangible personal property
may claim a refund or credit for such tax provided:
(i) the use of the tangible personal property in New York is restricted to
fabricating such property (including the incorporation of it into or assembling it with
other tangible personal property), processing, printing, or imprinting such property;
and
(ii) such property is then shipped to a point outside New York State for use
outside the State, and
(iii) such property is so used within three years from the date the tax was
payable to the Department of Taxation and Finance, and application for the credit or
refund is filed within three years after the date the tax was payable to the Department
of Taxation and Finance.
(2) The fabricator, assembler, processor, printer, or imprinter may be either
the purchaser or a user distinct from the purchaser.
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Example 2: A multi-location firm purchases equipment and has it delivered
to its New York State location. In New York State the firm’s employees assemble
the equipment and ship the finished product to New Jersey for installation. As
delivery occurs in New York State, the firm is liable for New York State sales tax.
When the finished product is shipped to New Jersey a refund or credit for the tax paid
will be allowable even though the purchaser of the tangible personal property in this
instance is both the assembler and the ultimate user.
Opinion
Petitioner’s client produces its own equipment which it will use in its manufacturing
operations to produce goods for sale. Machinery and equipment used to produce other machinery
and equipment is eligible for the exemption provided under Section 1115(a)(12) of the Tax Law, if
the machinery or equipment produced is used directly and predominantly in the production of

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tangible personal property for sale. The exemption under Section 1115(a)(12) also applies to
equipment used to make supplies that are used in the production of tangible personal property for
sale. (See The Fairbanks Company, Det St Tx Comm, March 22, 1978, TSB-H-81(172)S). Parts,
tools and supplies are also exempt from State and local sales and use taxes under Sections 1105-B
and 1210(a) of the Tax Law when used directly and predominantly in production. Parts, tools and
supplies will qualify for the production exemption when used in connection with machinery and
equipment that qualifies for such exemption. See Section 528.13(e) of the Sales and Use Tax
Regulations. The fact that Petitioner’s client chooses to produce its own machinery rather than
purchase it from another source, does not change the application of the exemption provided under
Section 1115(a)(12) of the Tax Law. Thus, parts purchased by Petitioner’s client to assemble
equipment are considered to be used directly in production and will qualify for the exemption under
Section 1115(a)(12) if the equipment is used directly and predominantly (over 50% of its use) to
produce tangible personal property for sale. Whether the equipment is used in or outside of New
York State is immaterial for purposes of the production exemption under Section 1115(a)(12).
In addition, it is noted that, under Section 1119(a)(4) of the Tax Law Petitioner’s client may
be entitled to a refund or credit on sales or use tax paid on parts if, in the course of making the
equipment, the use of such parts is restricted to fabricating (including incorporating them into or
assembling them with other tangible personal property to make the equipment), processing, printing
or imprinting such parts, and the completed equipment is then shipped outside New York State for
use outside New York State. See Section 527.4 of the Sales and Use Tax Regulations for definitions
of "fabricating," "processing," "printing" and "imprinting."

DATED: December 30, 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.