Can a hazardous-waste disposal company claim New York's production-machinery exemption on the equipment it uses to transport, treat and dispose of other companies' chemical waste?

Plain-English summary

Frontier Chemical Waste Process, Inc. of Niagara Falls, New York, is in the business of transporting, treating and disposing of hazardous chemical wastes for various industrial and commercial customers. It picks up waste from its customers' sites and treats it for disposal at its own facility. It does not produce tangible personal property for sale.

Frontier asked whether the machinery, equipment and supplies it uses for this work are exempt from sales tax, relying on 20 NYCRR 528.13(d), the regulation that treats certain waste-disposal equipment as used "directly and predominantly in production."

The Department ruled the purchases are taxable — the exemption does not apply.

• Tax Law § 1115(a)(12) exempts machinery and equipment used directly and predominantly in the production of tangible personal property for sale by manufacturing, processing, generating, assembling, refining, mining or extracting (but not short-life parts, tools or supplies). Tax Law § 1105-B separately reduces and phases out the tax on those parts, tools and supplies when used in production.
• The waste-treatment regulation, 20 NYCRR 528.13(d)(1), treats waste-handling equipment as used directly in production only if (i) it is purchased by a manufacturer and used predominantly to treat, bury or store waste from a production process, and (ii) over 50% of the waste treated comes from that production process.
• Because Frontier is not engaged — directly or as a subcontractor — in producing tangible personal property for sale, it is not a manufacturer within the meaning of the regulation. So its machinery, equipment and supplies are not "used in production," and they do not qualify for exemption under § 1115(a)(12) or § 1105-B.

What this means for you

The production-machinery exemption follows the manufacturer, not the machine. New York's exemption is for equipment used to make goods for sale. A business that provides a service — even an environmentally essential one like hazardous-waste disposal — is not a manufacturer, so its equipment is fully taxable no matter how industrial it looks.

The waste-treatment rule is an extension of the manufacturing exemption, not a stand-alone break. Section 528.13(d) exists so that a manufacturer can exempt the pollution-control and waste-handling equipment that deals with waste from its own production line. It does not exempt a third-party waste hauler or processor that handles other companies' waste.

Ask who owns the production process. If the waste being treated comes from your own manufacturing (and is more than half of what the equipment handles), the equipment can qualify. If you are treating waste generated by your customers, it does not.

Common questions

Q: We run heavy industrial treatment equipment — why isn't it exempt production machinery?
A: The exemption applies only to equipment used to produce tangible personal property for sale. A waste-disposal business provides a service and doesn't produce goods for sale, so its equipment is taxable even though it is industrial in nature.

Q: Doesn't the pollution-control / waste-treatment regulation exempt our equipment?
A: Only for a manufacturer treating waste from its own production process (with over half the treated waste coming from that process). It does not cover a company whose business is treating other companies' waste.

Q: Would it matter if we were a subcontractor to a manufacturer?
A: The Department noted Frontier wasn't producing goods for sale "either directly or as a subcontractor." Being a subcontractor doesn't help unless the work is actually part of producing tangible personal property for sale.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1115(a)(12) — exempts machinery and equipment used directly and predominantly in producing tangible personal property for sale (excluding short-life parts, tools and supplies)
• Tax Law § 1105-B — reduces and phases out the tax on parts (one-year-or-less life), tools and supplies used directly and predominantly in production
• 20 NYCRR 528.13(b)(1)(ii) — defines "production" (from handling/storage of raw materials through finishing and packaging for sale)
• 20 NYCRR 528.13(c) — defines "directly," excluding usage in activities collateral to the actual production process
• 20 NYCRR 528.13(d)(1) — treats waste-treatment equipment as used in production only when purchased by a manufacturer and used predominantly on waste from its own production process (over 50%)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h81_68s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(68)S
Sales Tax
April 3, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S801205A

On December 5, 1980 a Petition for Advisory Opinion was received from
Frontier Chemical Waste Process, Inc., 4626 Royal Avenue, Niagara Falls, New York
14303.
The issue raised is whether Petitioner's purchases of machinery, equipment
and supplies used in the transportation, treatment and disposal of chemical waste
are subject to sales tax. Petitioner contends that Section 528.13(d) of the Sales
and Use Tax Regulations provides the basis for exempting such purchases.
Petitioner is engaged in the business of the transportation, treatment and
disposal of hazardous chemical wastes for various industrial and commercial
customers. Waste material is transported by Petitioner from its customers' places
of business to Petitioner's processing site, where it is treated for disposal.
Petitioner does not produce tangible personal property for sale.
Section 1115(a)(12) of the Tax Law exempts from sales tax the receipts from
the sale of "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...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." However, Section 1105-B of the Tax Law provides for the reduction and
subsequent elimination of State sales tax on receipts from sales of parts with
a useful life of one year or less, as well as tools and supplies, for use or
consumption directly and predominantly in production, as described above.
The Sales and Use Tax Regulations provide the following definitions,
applicable herein: "'Production' includes the production line of the plant
starting with 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." 20 NYCRR 528.13(b)(1)(ii). "'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....Usage in activities collateral to the
actual production process is not deemed to be use directly in production." 20
NYCRR 528.l3(c).
The Sales and Use Tax Regulations treat the subject of waste treatment
equipment as follows: "Machinery and equipment used for disposing of industrial
waste, as a part of a process for preventing water or air pollution, will be
considered as being used directly and predominantly in production by
manufacturing, processing, generating, assembling, refining, mining or extracting
if: (i) the machinery and equipment is purchased by a manufacturer and used
predominantly to actually treat, bury, or store waste materials from a production
process, and (ii) over fifty percent of the waste treated, buried or stored
results from the production process." (Emphasis added). 20 NYCRR 528.13(d)(1).

TP-8 (4/80)

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

2
TSB-H-81(68)S
Sales Tax
April 3, 1981

Inasmuch as Petitioner is not engaged, either directly or as a
subcontractor, in the production of tangible personal property for sale it is not
a manufacturer within the meaning and intent of 20 NYCRR 528.13(d). Consequently,
the machinery, equipment and supplies at issue herein do not constitute
machinery, equipment and supplies used in production, and the receipts from the
retail sale thereof to Petitioner do not qualify for the exemption from sales tax
provided under sections 1115(a)(12) and 1105-B of the Tax Law.

DATED: March 18, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau