Are industrial gases used in manufacturing exempt from sales tax, and does the buyer need an exempt use certificate to purchase them tax-free?

Plain-English summary

Airweld, Inc. asked two questions: (1) whether gases such as nitrogen, argon, oxygen and acetylene used in production — to operate machinery, control atmosphere, or physically change a product — are subject to tax, and (2) whether an Exempt Use Certificate (Form ST-121) is required to buy production machinery parts, tools and supplies tax-free (and which box to use).

The Department held the production gases are exempt, and a certificate is required to buy exempt.

• Production gas is exempt. Section 1105(a) taxes retail sales of tangible personal property and § 1105(b) taxes retail sales of gas, but § 1115(c) exempts "fuel, gas ... for use or consumption directly and exclusively in the production of tangible personal property ... for sale, by manufacturing, processing" from the § 1105(a)/(b) taxes and the § 1110 use tax.
• "Gas" and "directly" are defined broadly. The regulations define "gas" as any gaseous substance used in a production function or to create a production-conducive atmosphere, and "directly" as operating exempt production machinery, creating conditions necessary for production, or performing an actual part of the production process (20 NYCRR 528.22). (Example: an inert gas used to weld stainless-steel railings is used directly in production.)
• Airweld's gases qualify — and always have. Gases used as Airweld described are exempt from the § 1105(a)/(b) taxes. The "2% rate" Airweld referred to applied not to these gases but to certain parts, tools, supplies and services relating to production property for the period September 1, 1980–February 28, 1981 (those became State-exempt as of March 1, 1981). The gases themselves have been exempt since the sales tax began.
• A certificate is still required. Under § 1132(c), all receipts are presumed taxable unless the vendor takes an exemption certificate. So to buy the gases (or the machinery parts, tools and supplies) exempt, Airweld must give the vendor a properly completed Exempt Use Certificate (Form ST-121), using box "(h)" — fuel, gas, electricity, refrigeration or steam used directly and exclusively in production. The same was required for the parts, tools and supplies during the 2% period.

What this means for you

Gases consumed directly and exclusively in manufacturing are exempt. If you use industrial gases to run production equipment, create a necessary production atmosphere, or physically change the product, they qualify for the § 1115(c) production exemption from State and local sales tax and use tax.

"Directly and exclusively" is the test — collateral uses don't qualify. The exemption reaches gas used in the production phase itself. Gas used in activities collateral to actual production is not "directly" used and won't qualify.

Exemptions run on paperwork. Even a clearly exempt purchase is presumed taxable until you hand the vendor a properly completed Exempt Use Certificate (Form ST-121). Use the right box — here, box "(h)" for fuel/gas/electricity/refrigeration/steam used directly and exclusively in production.

Common questions

Q: Are nitrogen, argon, oxygen and acetylene used in production taxable?
A: No — when used directly and exclusively in producing tangible personal property for sale by manufacturing or processing, they're exempt under § 1115(c) from the § 1105(a)/(b) taxes and the § 1110 use tax.

Q: What was the "2% rate" about, then?
A: That reduced rate applied to certain parts, tools, supplies and services relating to production property for September 1, 1980 through February 28, 1981 (State-exempt as of March 1, 1981) — not to the production gases, which have been exempt since the sales tax began.

Q: Do I need a certificate to buy the gases (and parts/tools/supplies) exempt?
A: Yes. Section 1132(c) presumes receipts are taxable unless the vendor takes a certificate, so give the vendor a properly completed Exempt Use Certificate (Form ST-121), using box "(h)."

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1105(b) — imposes sales tax on receipts from retail sales of gas and other utilities
• Tax Law § 1115(c) — exempts fuel and gas used directly and exclusively in producing tangible personal property for sale by manufacturing/processing from the § 1105(a)/(b) taxes and the § 1110 use tax
• Tax Law § 1110 — compensating use tax
• Tax Law § 1132(c) — presumes all receipts taxable unless the vendor takes a properly completed exemption certificate
• 20 NYCRR 528.22 — defines "gas" and "directly and exclusively" for the production-fuel/gas exemption, with examples

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_88s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(88)S
Sales Tax
April 30,1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S80l023A

On October 23, 1980 a Petition for Advisory Opinion was received from
Airweld, Inc., 94 Marine Street, Farmingdale, New York 11735.
The issues raised are:
(1)

whether gases such as nitrogen, argon, oxygen, acetylene, etc. which
are used in production either to operate machinery, control
atmosphere or physically change a product, are subject to "the 2%
sales tax," and

(2)

whether an exempt use certificate (form ST-121) is required in order
to make tax exempt purchases of machinery parts, tools or supplies
used directly in the manufacturing of tangible personal property for
sale and, if so, which box on the certificate should be utilized.

Section 1105(a) of the Tax Law imposes a tax on the receipts from "every
retail sale of tangible personal property," while section 1105(b) imposes a tax
on the receipts from the retail sale of "gas," among other things. However,
section 1115(c) provides for an exemption from these taxes with respect to the
receipts from certain sales of gas, as follows:
"Fuel, gas...for use or consumption directly and exclusively in the
production of tangible personal property...for sale, by manufacturing,
processing...shall be exempt from the taxes imposed under subdivisions (a) and
(b) of section eleven hundred five and the compensating use tax imposed under
section eleven hundred ten."
Appicable provisions of the Sales and Use Tax Regulations define the term "gas,"
as used in the foregoing exemption provision, to mean
"any gaseous substance inert or otherwise, whether taxed under subdivision
(a) or (b) of section 1105 of the Tax Law, used in the performance of a
production function or to create an atmosphere which is conductive to or
necessary for production." 20 NYCRR 528.22(b)(2).
To qualify for the exemption provision the gas must not only be used exclusively
in production, but it must be "directly" so used. The Regulations elucidate this
requirement, as follows:
"Directly and exclusively. (1) 'Directly' means the fuel, gas, electricity,
refrigeration and steam and like services, must during the production phase of
a process, either:
(i)
operate exempt production machinery or equipment, or
(ii) create conditions necessary for production, or
(iii) perform an actual part of the production process.
(2)
Usage in activities collateral to the actual production process is
not deemed to be use directly in production.

TP-8 (4/80)

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

2
TSB-H-81(88)S
Sales Tax
April 30,1981

Example 1: A welding shop produces stainless steel railings. In order to
carry out the production, the railings must be welded in an inert atmosphere. The
welding shop purchases an inert gas which is used to create the inert atmosphere.
The gas is used directly in production." 20 NYCRR 528.22(c)(1).
In accordance with the foregoing, Petitioner's purchases of gases to be
used as described are not subject to either of the taxes imposed under section
1105(a) and (b) of the Tax Law. The 2% State sales tax rate referred to by
Petitioner was a rate applicable not to gases used as described above, but to
"certain parts, tools, supplies and services relating to tangible personal
property used or consumed in production" for the period September 1, 1980 through
February 28, 1981. Such sales became exempt from the State sales tax as of March
1, 1981. The sales of gases described by Petitioner have been exempt since the
very inception of the State sales tax.
As to the question of the necessity of using an Exempt Use Certificate
(Form ST-121) section 1132(c) of the Tax Law provides, in relevant part, as
follows:
"...it shall be presumed that all receipts for property or services...are
subject to tax until the contrary is established, and the burden of proving that
any receipt, amusement charge or rent is not taxable hereunder shall be upon the
person required to collect tax or the customer. Unless (1) a vendor shall have
taken from the purchaser a certificate in such form as the tax commission may
prescribe, signed by the purchaser and setting forth his name and address and,
except as otherwise provided by regulation of the tax commission, the number of
his registration certificate, together with such information as said commission
may require, to the effect that the property or service was purchased for resale
or for some use by reason of which the sale is exempt from tax under the
provisions of section eleven hundred fifteen...the sale shall be deemed a taxable
sale at retail..."
Accordingly, in order for Petitioner to purchase either gases or machinery
parts, tools and supplies exempt from tax it must supply the vendor with a
properly completed Exempt Use Certificate, utilizing the box marked "(h) Fuel,
gas, electricity, refrigeration or steam for use or consumption directly and
exclusively in the production of tangible personal property, gas, electricity,
refrigeration or steam for sale." The same was true with respect to purchases of
machinery parts, tools and supplies purchased between September 1, 1980 and
February 28, 1981, with respect to the applicability of the then 2% State sales
tax rate.
DATED: April 15, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau