When a contractor makes asphalt and uses it in its own capital-improvement road jobs, is that a 'sale' of the asphalt that qualifies the contractor for the production machinery and fuel exemptions?

Plain-English summary

Willets Point Contracting Corp. (Flushing, New York) produces asphalt and uses more than 50% of it to perform capital improvements to streets for New York City and other governmental entities, under unit-price contracts. It asked whether its transfers of asphalt to customers are "sales" — which would let it claim the exemptions for machinery (§ 1115(a)(12)) and fuel and utilities (§ 1115(c)) used to produce tangible personal property for sale — and whether it is a "vendor."

The answer: no — the contractor is the consumer of the asphalt, not a seller of it, so the production exemptions don't apply.

• § 1115(a)(12) exempts machinery used directly and predominantly in producing tangible personal property for sale; § 1115(c) gives a parallel exemption for fuel, gas, electricity, refrigeration, and steam used in such production. Both hinge on producing property for sale.
• The Department treated Willets Point's unit-price jobs as the equivalent of lump-sum capital-improvement contracts. In such contracts, the contractor is the ultimate consumer of the materials it incorporates into the improvement — whether it buys or makes them — and cannot be considered to resell them to the customer.
• So Willets Point does not sell the asphalt it produces and is not a vendor of it. And because its machinery, fuel, and utilities are not used to produce property for sale, those costs are not exempt — they're taxable.

What this means for you

Making your own materials for your own construction jobs isn't "producing for sale." A contractor that manufactures asphalt (or concrete, or other materials) and installs it into a capital improvement is consuming those materials, not selling them. The production exemptions for machinery and fuel are reserved for producers who sell what they make.

Unit-price billing doesn't turn a construction contract into a sale of goods. Even when a bid or voucher separately lists materials and labor, if the deal is really a capital-improvement contract, the contractor is the consumer of the materials — so it owes tax on those materials and on its production equipment and fuel.

You pay tax on your inputs. Because you're the end user, expect to pay sales tax on the machinery, fuel, and utilities you use to make materials for your own jobs — you can't claim the manufacturer's exemptions.

Common questions

Q: I manufacture asphalt for my road jobs — why don't the machinery and fuel exemptions apply?
A: Because you don't sell the asphalt; you consume it in performing capital improvements. The § 1115(a)(12) and § 1115(c) exemptions require producing tangible personal property for sale.

Q: Am I a "vendor" of the asphalt I make?
A: No. In a capital-improvement contract you're the ultimate consumer of the materials, not a reseller, so you aren't a vendor of them.

Q: Does separately listing materials and labor on the bid change the result?
A: No. The Department treated the unit-price arrangement as the equivalent of a lump-sum capital-improvement contract regardless of the itemization.

Citations and references

Statutes and authority:

• Tax Law § 1115(a)(12) — exempts machinery/equipment used directly and predominantly in producing tangible personal property for sale
• Tax Law § 1115(c) — exempts fuel, gas, electricity, refrigeration, and steam (and related services) used in producing tangible personal property for sale

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_176s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-80(176)S
Sales Tax
September 30, 1980

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

PETITION NO. S800616A

On June 12, 1980 a Petition for Advisory Opinion was received from Willets
Point Contracting Corp., 127-50 Northern Boulevard, Flushing, New York 11368.
The issue raised is whether Petitioner's transfers of asphalt to its
customers constitute "sales" so as to entitle Petitioner to the exemptions from
sales and use tax provided for under Sections 1115(a)(12) and 1115(c) of the Tax
Law with respect to (1) machinery and (2) fuel, gas, electricity, refrigeration
and steam and like services used in the production of tangible personal property
for sale. In addition, Petitioner inquires as to whether it is a "vendor" with
respect to such transfers.
Petitioner states that it produces asphalt which it uses in performing
capital improvements to streets for the City of New York and other governmental
entities, and that more than 50% of the material so produced is used in
fulfilling contracts for such capital improvements. Petitioner indicates that its
provision of capital improvements is contracted for on a unit price basis.
Petitioner has submitted a sample bid proposal and a sample payment voucher, both
stating the cost of materials and labor (and other costs) separately, and both
amalgamating such costs into a total aggregate bid and total cost of work done,
respectively.
Section 1115(a)(l2) of the Tax Law provides an exemption from sales and use
taxes for "Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property ... for sale ...."
Section 1115(c) of the Tax Law provides a similar exemption for "Fuel, gas,
electricity, refrigeration and steam and gas, electric, refrigeration and steam
service used ... in the production of tangible personal property for sale ...."
Arrangements of the type described in Petitioner's submissions constitute
the equivalent of lump sum contracts for the rendering of capital improvements.
The contractor in such instances is the ultimate consumer of the materials which
are incorporated into the capital improvement, whether purchased or manufactured
by it, and cannot be considered to re-sell such materials to its customers.
Accordingly, Petitioner does not sell the asphalt produced by it and
consequently is not a vendor with respect to the same. It follows that
Petitioner's costs for machinery, fuel and utilities are not exempt from sales
tax inasmuch as these items are not used for the production of tangible personal
property for sale.

DATED: September 8, 1980

s/GABRIEL B. DiCERBO
Deputy Director
Technical Services Bureau

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