Can an HVAC ductwork fabricator get a sales or use tax refund or credit for the sheet steel that becomes scrap or gets returned to inventory during the cutting process?

Plain-English summary

Striker Sheet Metal fabricates and installs HVAC ductwork for construction projects, typically contracting with a general contractor or HVAC contractor. It buys sheet steel by the pound, in individual sheets or 10,000-pound coils, and cuts it into duct sections -- straight cuts for rectangular duct, and compound/curved cuts for duct that changes direction or size. Cutting always produces some waste, worst on the curved cuts, and the leftover steel either becomes scrap or gets returned to inventory as fractional sheets for future jobs. Striker asked whether it can get a sales or use tax refund or credit for that lost or unused material.

Assuming the duct-work installation qualifies as a capital improvement (a permanent addition to the building), Striker doesn't have to collect sales tax from its own customer for the ductwork or its installation -- that part of the transaction is exempt at the contractor level. But that exemption runs the other way for Striker's own purchases: as the contractor buying materials to install in real property, Striker is treated as the ultimate consumer of the steel and must pay sales tax on it at purchase within New York, or compensating use tax if the steel was bought outside New York and then used here (plus any extra local-rate difference if the steel was bought in one taxing jurisdiction and used in a higher-rate one).

The Department's answer to the actual refund question is simple and stark: neither Article 28 of the Tax Law nor its regulations contain any provision for a refund or credit tied to the amount of material that ends up scrapped or returned to inventory during fabrication or installation. The tax was properly due on the steel at the time of purchase (or use), and no loss-factor, waste, or "didn't actually get installed" exception exists to claw any of it back.

What this means for you

Fabricators and contractors who buy raw material for capital-improvement installations

Tax is owed on the full quantity of material you purchase, not just the portion that ends up physically installed -- cutting waste, scrap, and returned-to-inventory fractional stock don't reduce your tax liability, no matter how significant the loss factor is on a particular job.

Businesses considering a refund claim for wasted or scrapped material

Don't assume a refund exists just because the finished product's installation itself is tax-exempt as a capital improvement -- the contractor-purchase rule (tax due on materials regardless of end use) and the absence of any scrap-refund provision are two separate, independently controlling rules.

Accountants and tax professionals

This is a useful negative precedent to cite directly when a client asks about recovering tax on manufacturing waste or inventory returns in a contractor/capital-improvement context -- the Department's answer here is a clean "no such provision exists," not a fact-dependent analysis.

Common questions

Q: Is there any way to get a refund for steel that ends up as scrap during fabrication?
A: No -- the Department confirmed there is no statutory or regulatory refund or credit provision tied to scrapped or returned-to-inventory material in this context.

Q: Does the customer ever pay sales tax on ductwork installed as a capital improvement?
A: No -- if the installation is a genuine capital improvement, the customer isn't charged sales tax; instead, the contractor pays tax on its own material purchases as the ultimate consumer.

Q: Does it matter whether the steel is bought inside or outside New York?
A: Yes for which tax applies (sales tax if bought in New York, compensating use tax if bought elsewhere and used in New York), but not for whether tax is owed at all -- and a rate difference between purchase and use locations can trigger additional local use tax.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (retail sale, contractor purchases)
• Tax Law § 1101(b)(7) (definition of use)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1110(a) (compensating use tax)
• Tax Law § 1119(c) (refund for contractor's later retail sale of purchased property)
• 20 NYCRR § 527.7(b)(5) (contractor pays tax on materials for capital improvements)
• 20 NYCRR § 541.1(b), (c) (contractor purchases; capital improvement receipts not taxed)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_45s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(45)S
Sales Tax
November 10, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990125A

On January 25, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Striker Sheet Metal, Inc., 266 Middle Island Road, Medford, New York
11763.
The issue raised by Petitioner, Striker Sheet Metal, Inc., is whether a refund or credit of sales
and compensating use tax may be allowed with respect to material which is scrapped or returned to
inventory by Petitioner as described below.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is in the sheet metal industry. Members of the sheet metal construction trade
usually contract with the general contractor or heating, ventilating and air conditioning (HVAC)
contractor of a building construction project. The functions performed by Petitioner include:
a) design and drawing of fabrication blueprints to specifications for the project;
b) the fabrication of the specified duct work; and
c) the installation of the duct work on the job site.
Duct work is fabricated out of sheet steel that is bought in individual sheets or as a coil of
approximately 10,000 pounds. Sheet steel is sold by the pound by gauge (thickness). The duct work
is cut from the sheet steel by machines. Generally, the machines produce two types of cuts: straight
cuts for straight rectangular duct work and compound and curved cuts for fabrication of duct work
that changes direction or dimension.
The machines that cut the steel are programmed to optimize the cut from the sheet steel.
However, there is always a scrap or loss factor on all processes and the loss factor is highest on the
cutting of compound or curved cuts. Excess steel is disposed of as scrap or returned to inventory as
fractional sheets.
Applicable Law and Regulations
Section 1101(b)(4) of the Tax Law defines the term "retail sale," in part, as follows:
Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible
personal property, or (B) for use by that person in performing the services subject to

-2­
TSB-A-99(45)S
Sales Tax
November 10, 1999

tax under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five where the property so sold becomes a physical component part of the
property upon which the services are performed or where the property so sold is later
actually transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax. Notwithstanding the preceding provisions
of this subparagraph, a sale of any tangible personal property to a contractor,
subcontractor or repairman for use or consumption in erecting structures or buildings,
or building on, or otherwise adding to, altering, improving, maintaining, servicing or
repairing real property, property or land, as the terms real property, property or land
are defined in the real property tax law, is deemed to be a retail sale regardless of
whether the tangible personal property is to be resold as such before it is so used or
consumed, except that a sale of a new mobile home to a contractor, subcontractor or
repairman who, in such capacity, installs such property is not a retail sale....
Section 1101(b)(7) of the Tax Law defines the term "use," as follows:
Use. The exercise of any right or power over tangible personal property by
the purchaser thereof and includes, but is not limited to, the receiving, storage or any
keeping or retention for any length of time, withdrawal from storage, any installation,
any affixation to real or personal property, or any consumption of such property.
Without limiting the foregoing, use also shall include the distribution of only tangible
personal property, such as promotional materials.
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:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
Section 1110(a) of the Tax Law provides, in part:
Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state . . . (A) of any tangible personal property
purchased at retail . . . .
Section 1119(c) of the Tax Law provides a refund or credit of sales or compensating use tax
paid on the sale or use of tangible personal property "if a contractor, subcontractor or repairman

-3­
TSB-A-99(45)S
Sales Tax
November 10, 1999

purchases tangible personal property and later makes a retail sale of such tangible personal property,
the acquisition of which would not have been a sale at retail to him but for the second to last
sentence of subparagraph (i) of paragraph (4) of subdivision (b) of section eleven hundred one."
Section 527.7(b)(5) of the Sales and Use Tax Regulations provides:
Any contractor who is making a capital improvement must pay a tax on the
cost of materials to him, as he is the ultimate consumer of the tangible personal
property.
Section 541.1 of the Sales and Use Tax Regulations provides, in part:
(b) The principal distinguishing feature of a sale to a contractor, as
compared to a sale to other vendors who purchase tangible personal property for
resale, is that the sale of tangible personal property to a contractor for use or
consumption in construction is a retail sale and subject to sales and use tax,
regardless of whether tangible personal property is to be resold as such or
incorporated into real property as a capital improvement or repair. Whenever a
contractor uses materials, on which the contractor has paid sales tax, in a repair or
maintenance contract (except interior cleaning and maintenance contracts of 30 days
or more) subject to the sales tax on services under section 1105(c) of the Tax
Law, the contractor may be entitled to a refund or credit of the portion of the tax he
paid attributable to the materials transferred to the customer. Cross-reference: For
refund or credit, see section 534.5 of this Title.
(c) Receipts from the performance of a capital improvement to real property
by a contractor are not subject to the sales tax.
Cross-reference: For additional information on capital improvements and
repairs, see section 527.7 of this Title.
Opinion
Petitioner is the fabricator of duct work which generally is installed by Petitioner as a
constituent part of a building construction project. Assuming the project qualifies as a capital
improvement under Section 1101(b)(9) of the Tax Law, Petitioner is not required to collect sales tax
from its customers for the sale of the duct work or installation services. See Section 541.1(c) of the
Sales and Use Tax Regulations. Petitioner, however, would be required to pay sales tax on its
purchases within New York of materials used in fabricating the duct work in accordance with
Section 1101(b)(4)(i) of the Tax Law and Sections 527.7(b) and 541.1(b) of the Sales and Use Tax
Regulations. Petitioner must pay a compensating use tax on any materials it purchases outside of

-4­
TSB-A-99(45)S
Sales Tax
November 10, 1999

New York State when it uses such materials in this State. See Section 1110 of the Tax Law.
Petitioner would also owe local compensating use tax if it purchases the materials in one local taxing
jurisdiction and then uses the materials in another local taxing jurisdiction with a higher local rate,
to the extent of the difference in the rates. There are no provisions in Article 28 of the Tax Law or
the Sales and Use Tax Regulations in the above circumstances for a refund or credit based upon the
excess of material used in the fabrication or installation process that is scrapped or returned to
Petitioner's inventory for future sale or use.

DATED: November 10, 1999

NOTE:

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

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