Is the rental of a slitting machine used to cut metal coils to customers' specifications exempt from sales tax as production machinery?

Plain-English summary

General Aerospace Materials Corporation (Plainview, New York), a distributor of aluminum, stainless steel, and other metals, receives large metal coils and applies processes — heat treating, anodizing, flattening and recoiling, edge rounding, painting, circling and blanking, and protective coating — to turn them into products it sells. It rents a slitting machine to cut the large coils into smaller coils to customers' specifications, and asked whether the rental receipts are taxable.

The answer: exempt — this is production machinery used in processing.

• § 1105(a) taxes receipts from the rental of tangible personal property.
• § 1115(a)(12) exempts machinery used directly and predominantly in producing tangible personal property for sale by processing.
• 20 NYCRR 531.2(e) defines "processing" as performing any service on tangible personal property that changes its nature, shape, or form. Cutting coils to size does exactly that.
• The slitting machine is used directly and predominantly (if not exclusively) to process metal into products for sale. So the rental of the machine is exempt from the New York State 4% sales and use tax and from any local sales and use tax imposed outside New York City.

What this means for you

Renting production machinery gets the same exemption as buying it. The § 1115(a)(12) exemption covers machinery used directly and predominantly in producing goods for sale — and it applies to the rental receipts, not just to purchases.

"Processing" is broad. Any service that changes the nature, shape, or form of property counts. Cutting, slitting, flattening, and similar operations that transform raw stock into a saleable product qualify as processing.

Watch the New York City line. The Department flagged that the exemption applies to the State tax and to local taxes outside New York City. NYC has historically not extended this production-equipment exemption the same way, so a machine used in NYC can be treated differently.

Common questions

Q: We only rent the slitting machine — does the exemption still apply?
A: Yes. Section 1115(a)(12) exempts machinery used directly and predominantly in producing goods for sale, and that exemption reaches the rental receipts, not just outright purchases.

Q: Is cutting coils really "processing"?
A: Yes. Under 20 NYCRR 531.2(e), processing is any service on property that changes its nature, shape, or form — cutting large coils into smaller ones to customer specs qualifies.

Q: Does this exemption apply everywhere in New York?
A: The opinion says it applies to the State 4% tax and to local taxes outside New York City. Confirm the treatment separately for machinery used within New York City.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from the rental of tangible personal property
• Tax Law § 1115(a)(12) — exempts machinery used directly and predominantly in producing tangible personal property for sale by processing
• 20 NYCRR 531.2(e) — defines "processing" as performing a service on property that changes its nature, shape, or form

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h80_155s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-80(155)S
Sales Tax
August 18, 1980

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION #S800325A

On March 25, 1980, a Petition for Advisory Opinion was received from
General Aerospace Materials Corporation, 95 East Bethpage Road, Plainview, New
York 11803.
The issue raised is whether receipts from the rental of a slitting machine
used by Petitioner to cut metal coils to its customers' specifications would be
subject to tax under Article 28 of the Tax Law. Article 28 of the Tax Law imposes
New York's sales and compensating use taxes.
Petitioner is a distributor of aluminum, stainless steel and other
products. Petitioner receives large coils of metal to which it applies various
processes in order to transform the same into a product which it sells. The
product being sold is processed in one or more of the following ways:

1. heat treated to make the metal either harder or softer
2. material is annodized
3. flattened and recoiled to specific sizes and weights
4. round edged
5. painted to color
6. circled and blanked
7. vinyl and paper protected.
   A rented slitting machine is then used to cut the large coils of metal so
   as to produce smaller coils in accordance with its customers' specifications. The
   foregoing processes are necessary to render the coils suitable for use by the
   ultimate consumer.
   Section 1105(a) of the Tax Law imposes a tax on the receipts from the
   rental of tangible personal property. However, section 1115(a)(12) of the Tax Law
   provides for an exemption from such tax with respect to machinery "... for use
   ... directly and predominantly in the production of tangible personal property
   ... for sale ... by ... processing . . . ." Processing is defined in the Sales
   and Use Tax Regulations as " ... the performance of any service on tangible
   personal property which effects a change in the nature, shape or form of the
   property." 20 NYCRR531.2(e)
   The machine in question is used directly in the production of tangible
   personal property for sale, by means of processing. It is understood from
   Petitioner's description that the machine is used predominantly, if not
   exclusively, for such purposes.
   Accordingly, receipts from the rental of the slitting machine used by
   Petitioner in the manner described above are exempt from the New York State 4%
   sales and use tax and any sales and use tax imposed by a locality outside of New
   York City.

Dated: July 28, 1980

s/ LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR