Do a home-improvement retailer's cardboard baler and its in-store lumber, pipe, and flooring cutting machines qualify for New York's manufacturing/production sales tax exemption?

Plain-English summary

Lowe's Home Centers, a national "Big Box" home improvement chain, asked whether four types of equipment used in its New York stores qualify for the manufacturing/production sales tax exemption: (1) a cardboard baler/compactor that compacts scrap cardboard, which a commercial hauler then removes and later sells to recyclers; (2) panel and cross-cut saws that cut lumber and plywood to a customer's specified size before the sale is finalized; (3) pipe cutting/threading equipment that cuts and threads plumbing and electrical conduit to customer specifications; and (4) carpet and vinyl flooring cutting equipment (assembled from several invoiced components) that measures and cuts flooring rolls to a customer's specifications.

New York's production exemption applies only to machinery used directly and predominantly in the production phase — after raw materials are received and before the finished product is packaged for sale — not to administration or distribution activities like storing, displaying, or selling already-finished products. The Department found none of the four equipment types qualified:

• The baler/compactor fails a more basic requirement: the exemption only covers equipment used to produce tangible personal property for sale, and Lowe's isn't producing anything for sale with it — it's simply compacting waste that a hauler removes and separately resells to recyclers.
• The saws and cutting/threading equipment fail because, by the time a customer asks for lumber, pipe, or flooring cut to size, that material has already left the production line and entered retail distribution — it may already be sitting on display for sale. Cutting or threading it to a customer's specifications at that point is a distribution-phase customer-service activity, not a continuation of production.

The Department distinguished this from its earlier Sherwin-Williams ruling (TSB-A-99(21)S), where in-store paint-tinting equipment was found to qualify for the production exemption — because that equipment actually mixed an additive (tint) into a white base to create a genuinely new product (the specific color of paint the customer wanted), with the production process not considered complete until that mixing happened. Cutting a board or a piece of flooring to size doesn't create a new product the same way; it's just resizing an already-finished item.

What this means for you

Home improvement retailers and other "Big Box" stores

Cutting, sizing, or otherwise customizing already-finished retail merchandise to a customer's specifications at the point of sale is a distribution/customer-service activity, not exempt production, even though it happens on equipment that looks similar to real manufacturing machinery. The production exemption is reserved for equipment used before the product is finished and ready for sale — not equipment used to finalize a retail sale of an already-complete item.

Retailers running in-store mixing, blending, or combining processes

Contrast this with the Sherwin-Williams paint-tinting precedent: if your in-store process genuinely creates a new product (mixing raw components into something new, rather than just resizing a finished item), that equipment has a real chance at the production exemption. The line between "still finishing the product" and "just adjusting an already-finished product for the customer" is the crux of this whole area.

Accountants and tax professionals

Note the equipment-used-for-waste-disposal issue is analytically separate from the cutting-equipment issue: the baler fails because Lowe's isn't a producer of anything for sale at all with respect to that equipment (the exemption requires production of tangible personal property for sale, and here Lowe's role is limited to compacting trash for a third-party hauler), while the cutting equipment fails on the distribution-vs-production timing question under 20 NYCRR § 528.13(b)-(c). Both fact patterns are common in general retail and are useful templates for similar equipment questions.

Common questions

Q: Does cutting or resizing merchandise to a customer's specifications ever qualify for New York's manufacturing exemption?
A: Generally not, once the item has already entered retail distribution (e.g., is on display for sale) — that's treated as a distribution-phase activity. It could be different if the process genuinely creates a new product rather than just resizing a finished one, as in the paint-tinting precedent.

Q: Does compacting or baling cardboard or other recyclables ever qualify for the production exemption?
A: Not where the retailer itself isn't producing anything for sale — here, Lowe's pays a third-party hauler to take the compacted scrap and separately sell it to recyclers, so Lowe's isn't the one producing tangible personal property for sale.

Q: Can another retailer rely on this ruling for similar in-store cutting equipment?
A: No. This advisory opinion binds the Department only for Lowe's Home Centers on the facts described, though the underlying production-vs-distribution framework applies generally under 20 NYCRR § 528.13.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1115(a)(12) (production exemption for machinery/equipment)
• 20 NYCRR § 528.13(b) (definition of "production"; administration/production/distribution phases)
• 20 NYCRR § 528.13(c) (directly and predominantly used in production)

Prior rulings referenced:

• Sherwin-Williams Company, Adv Op Comm T&F, April 8, 1999, TSB-A-99(21)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(51)S
Sales Tax
November 30, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990713A

On July 13, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Lowe’s Home Centers, Inc., PO Box 1111, Tax Dept., N. Wilkesboro, NC 28656.
The issue raised by Petitioner, Lowe’s Home Centers, Inc., is whether the types of equipment
described below are used directly and predominantly in the production of tangible personal property
for sale and are exempt from sales and compensating use tax under Section 1115(a)(12) of the Tax
Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a national company that operates “Big Box” home improvement centers across
the country. Petitioner provides the following descriptions of four types of equipment that are used
in retail locations in New York State:
1.

Cardboard baler/compactor: This equipment is used to compact and
bale scrap cardboard. Petitioner pays a commercial hauler to remove
the scrap cardboard from its stores, and the scrap cardboard is later
sold by the hauler to recycling companies.

2.

Panel and cross cut saws: These saws are used to cut lumber and
plywood sheeting to sizes that are specified by the customer prior to
the sale being finalized.

3.

Pipe cutting/threading equipment: This piece of equipment cuts and
threads plumbing and electrical conduits as required by the customer
prior to the sale being finalized.

4.

Carpet and vinyl floor cutting equipment: Each machine holds 10 plus
rolls of flooring that rotates each roll to a cutting station where the
flooring is measured and cut to the specifications of the customer.
The cutting equipment is invoiced as separate line items, but is
assembled into one piece of equipment before it goes into service.
Once assembled, this equipment cuts carpet and vinyl flooring to
meet the requirements of the customer prior to the sale being
finalized.

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Sales Tax
November 30, 2000

Petitioner furnished photographs of the four types of equipment described above and the
invoices for the purchase of such equipment as part of its Petition for Advisory Opinion.
Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes sales tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided in this article.
Section 1115(a) of the Tax Law provides, in part:
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*

*

*

(12) Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, gas, electricity,
refrigeration or steam for sale, by manufacturing, processing, generating, assembling,
refining, mining or extracting....
Subdivisions (b) and (c) of Section 528.13 of the Sales and Use Tax Regulations provide, in
part:
(b) Production. (1) The activities listed in paragraph (a)(1) of this section
are classified as administration, production or distribution.
(i) Administration includes activities such as sales promotion, general office
work, credit and collection, purchasing, maintenance, transporting, receiving and
testing of raw materials and clerical work in production such as preparation of work,
production and time records.
(ii) Production includes the production line of the plant starting with the
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.
(iii) Distribution includes all operations subsequent to production, such as
storing, displaying, selling, loading and shipping finished products.
(2) The exemption applies only to machinery and equipment used directly
and predominantly in the production phase. Machinery and equipment partly used

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TSB-A-00(51)S
Sales Tax
November 30, 2000

in the administration and distribution phases does not qualify for the exemption,
unless it is used directly and predominantly in the production phase.
(3) The determination of when production begins is dependent upon the
procedure used in a plant. If on receiving raw materials, the purchaser weighs,
inspects, measures or tests the material prior to placement into storage, production
begins with placement into storage, and the prior activities are administrative.
If the materials are unloaded and placed in storage for production without such
activities, the unloading is the beginning of production.
*

*

*

(4) Production ends when the product is ready to be sold.
*

*

*

(c) Directly and predominantly. (1) 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.
(2) Usage in activities collateral to the actual production process is not
deemed to be used directly in production.
*

*

*

(4) Machinery or equipment is used predominantly in production, if over 50%
of its use is directly in the production phase of a process.

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TSB-A-00(51)S
Sales Tax
November 30, 2000

Opinion
In this case, the cardboard baler/compactor is used by Petitioner to compact and bale scrap
cardboard. Petitioner pays a commercial hauler to remove the cardboard scrap from its stores.
Under these circumstances, the cardboard baler/compactor does not qualify as machinery and
equipment used or consumed directly and predominantly in the production of tangible personal
property for sale. In order to qualify for the exemption as production equipment under Section
1115(a)(12) of the Tax Law, the machinery or equipment must be used to produce tangible personal
property for sale. Petitioner is not producing tangible personal property for sale. Instead, it pays a
commercial hauler to remove the crushed cardboard.
As for the panel and cross cut saw, pipe cutting/threading equipment and carpet and vinyl
floor cutting equipment, used to cut, or in some cases thread, products to customers’ specifications,
pursuant to Sections 528.13(b) and (c) of the Sales and Use Tax Regulations this equipment is not
used directly in the production of tangible personal property for sale. Petitioner’s materials have
already left the production line and have entered into the retail distribution chain which cannot be
construed to be a continuation of the production process. The materials may already be on display
for sale. Thus, the equipment and tools used to size, cut or thread the materials to customers’
specifications do not meet the requirement for the production exemption.
The facts in this Advisory Opinion are distinguishable from Sherwin-Williams Company,
Adv Op Comm T & F, April 8, 1999, TSB-A-99(21)S, which held that mixing and blending
machinery and equipment, and related computer equipment, used in the paint tinting process in a
retail store were used directly and predominantly in the production of tangible personal property for
sale. The machinery and equipment were used to tint a white base, to produce the colored paint
selected by a customer. Unlike the present case, the machinery and equipment in Sherwin-Williams
Company were used to process raw material with an additive (tint), which would result in a finished
product that was sold as paint. At such time the production process was deemed to have ended.

DATED: November 30, 2000

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.