Is the machinery and equipment a scrap processor buys to turn scrap into salable standard products exempt from sales tax?

Plain-English summary

Wm. E. Kugler & Bro., Inc. processes scrap metal and scrap paper into various standard products for sale in the scrap trade, using operations such as torching, breaking, shearing, sorting, compressing, bundling and baling — with equipment like mobile cranes, electro-magnets, torching and cutting equipment, high lifts, shears, balers and in-yard trucks. It asked whether its purchases of machinery, equipment, parts, tools and supplies for these operations are subject to sales tax.

The Department held the purchases qualify for the production exemption.

• The operations are production. Under 20 NYCRR 531.2, manufacturing produces property with a different identity from its ingredients, and processing effects a change in the nature, shape or form of property — Kugler's scrap operations fit.
• The equipment is used directly and predominantly in production. Under 20 NYCRR 528.13, machinery is used "directly" when it acts on the material, has an active causal role, or handles/stores/conveys/packages the product, and "predominantly" when over 50% of its use is in the production phase.
• The core exemption. Section 1115(a)(12) exempts machinery or equipment used directly and predominantly in producing tangible personal property for sale by manufacturing, processing and the like — but not short-life (one year or less) parts, tools or supplies.
• The § 1105-B rate history. For those short-life parts, tools and supplies, § 1105-B reduced the State tax to 2% for September 1, 1980–February 28, 1981 and to 0% as of March 1, 1981.
• Bottom line and paperwork. Sales to Kugler of machinery, equipment, parts, tools and supplies used directly and predominantly in this production are not subject to sales tax. To buy them without paying tax, Kugler must give its supplier a properly completed Exempt Use Certificate (Form ST-121).

What this means for you

Scrap and recycling operations can be "production" for the exemption. Turning scrap into standardized salable products through processes like shearing, baling and sorting is manufacturing/processing under the regulations, so the equipment that does it can qualify for the § 1115(a)(12) exemption.

"Directly and predominantly" is the standard — and it's broad. Equipment counts as used directly in production when it acts on the material or handles, stores, conveys or packages the product, and it qualifies if more than half its use is in the production phase. Even material-handling gear can qualify.

Short-life parts, tools and supplies followed a rate schedule — and get the ST-121. Those items aren't in the § 1115(a)(12) machinery exemption, but § 1105-B phased their State tax down to zero by March 1, 1981. Either way, present a properly completed Exempt Use Certificate (Form ST-121) to buy the qualifying items without tax.

Common questions

Q: Is my scrap-processing equipment exempt from sales tax?
A: Yes, if it's used directly and predominantly in producing tangible personal property for sale — Kugler's torching, shearing, baling and similar operations qualify under § 1115(a)(12) and the 20 NYCRR 531.2/528.13 definitions.

Q: What about parts, tools and supplies?
A: Short-life (one year or less) parts, tools and supplies aren't in the § 1115(a)(12) machinery exemption, but § 1105-B reduced their State tax to 2% (9/1/1980–2/28/1981) and to 0% as of March 1, 1981.

Q: How do I actually buy these items without paying tax?
A: Give your supplier a properly completed Exempt Use Certificate (Form ST-121).

Citations and references

Statutes, regulations and authority:

• Tax Law § 1115(a)(12) — exempts machinery/equipment used directly and predominantly in producing tangible personal property for sale, excluding short-life parts, tools and supplies
• Tax Law § 1105-B — reduced the State tax on short-life parts, tools and supplies used in production to 2% (9/1/1980–2/28/1981) and to 0% as of 3/1/1981
• 20 NYCRR 531.2 — defines manufacturing, assembling and processing
• 20 NYCRR 528.13 — defines "directly" and "predominantly" for the production-machinery exemption
• Exempt Use Certificate (Form ST-121) — required to purchase the qualifying items without paying tax

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_75s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(75)S
Sales Tax
April 13, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S801203A

On December 3, 1980, a Petition for Advisory Opinion was received from Wm.
E. Kugler & Bro., Inc., Junction Road, Lockport, New York 14094.
The issue raised is whether Petitioner's purchases of machinery, equipment,
parts, tools and supplies for use in the processing of scrap materials to form
standard scrap products for sale are subject to the sales tax imposed under
Article 28 of the Tax Law.
Petitioner is engaged in the business of processing scrap metals and scrap
paper to produce various standard products acceptable for sale in the scrap
trade. The operations performed by Petitioner include such processes as torching,
breaking, shearing, sorting, compressing, bundling and baling. Equipment used in
these processes include mobile cranes, electro-magnets, torching and cutting
equipment, high lifts, shears, balers, in-yard trucks and various handling and
sizing equipment.
Section 1115(a)(12) of the Tax Law exempts from the sales tax 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." Section 1l05-B of the Tax Law provides for the reduction and
subsequent elimination of the 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
reduced rate is 2% for the period September 1, 1980 through February 28, 1981.
As of March 1,1981 the rate became 0%.
The Sales and Use Tax Regulations provide the following definitions,
applicable herein:
"(b) Manufacturing. Manufacturing is the production of
tangible personal property that has a different identity
from its ingredients. Manufacturing includes the production
of standardized items as well as the production of items to
a customer's specifications....
(c) Assembling. Assembling is the coupling or the uniting
of parts or materials as a manufacturing process or as a
step in the manufacturing process which results in a new
product....
(e) Processing. Processing is the performance of any
service on tangible personal property which effects a
change in the nature, shape or form of the property." 20
NYCRR 531.2
" '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."

TP-8 (4/80)

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

2
TSB-H-81(75)S
Sales Tax
April 13, 1981

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...Machinery or equipment
is used predominantly in production, if over 50% of its use is directly in the
production phase of a process." 20NYCRR 528.13(c).
In light of the above provisions of the Tax Law and the Sales and Use Tax
Regulations, it can be said that Petitioner's described operations come within
the exemption set forth in sections 1115(a)(12) and 1105-B of the Tax Law.
Accordingly, receipts from sales to Petitioner of machinery, equipment, parts,
tools and supplies, for use directly and predominantly in such production of
tangible personal property for sale, are not subject to sales tax. In order to
make such purchases without the payment of sales tax, Petitioner should present
its supplier with a properly completed Exempt Use Certificate (ST-121).

DATED: March 26,1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau