Does New York's sales-tax exemption for manufacturing/production equipment cover the equipment, materials, and supplies bought to build a sewage treatment plant that will be dedicated to a county government once finished?

Plain-English summary

Tallmadge Woods STP Associates, LLC owns land where its member-developers plan to build a 400,000-gallon sewage treatment plant (STP) to serve their surrounding developments. Once built, the STP will be donated, with no charge, to the County of Suffolk (or its nominee), which will then own and operate it under a recorded Sewer Agreement. Petitioner asked whether the equipment, materials, and supplies it and its contractors buy to build the STP qualify for New York's manufacturing/production sales-tax exemption.

The Department said no. The production exemption (Tax Law § 1115(a)(12)) only covers machinery and equipment used directly and predominantly to manufacture, process, or produce tangible personal property for sale — including certain waste-treatment equipment, but only when it's used by a manufacturer to handle industrial waste from its own production process. Here, neither Petitioner nor Suffolk County is a manufacturer, and the STP will process ordinary human and commercial waste, not manufacturing byproduct — so the purchases don't fit the exemption at all.

The Department also ruled out two other possible exemptions. The exemption for materials sold to a contractor for building or repairing property owned by an exempt government entity didn't apply, because Suffolk County won't own the land or buy any of the construction property until the finished plant is later dedicated to it — during construction, Petitioner (a private entity) is the purchaser. And a brand-new March 2001 exemption for pollution-control equipment at manufacturing/industrial facilities didn't apply either, since the STP isn't processing manufacturing or industrial waste. The Department noted this last point without deciding whether different facts might someday qualify for that newer exemption.

What this means for you

Developers and contractors building infrastructure to be donated to a municipality

Don't assume that building something a government will eventually own makes your construction purchases tax-exempt. The government exemptions generally require the government to actually own the land and be the purchaser during construction — donating the finished project later doesn't retroactively exempt the materials bought along the way. Confirm ownership and purchasing structure carefully if you're relying on a government exemption for a build-to-donate project.

Businesses building waste-treatment or pollution-control equipment

The production exemption for waste-treatment equipment is narrow: it requires the purchaser to be a manufacturer treating waste generated by its own production process. A stand-alone treatment plant serving a community or development — rather than a specific factory's own industrial effluent — won't qualify, even though it performs a similar function.

Accountants and tax professionals

Note the distinction the Department draws between "production," which requires manufacturing tangible personal property for sale, and simple waste processing/disposal, which does not qualify no matter how industrial the equipment looks. Also worth flagging for clients: the March 1, 2001 pollution-control exemption under § 1115(a)(40) is new and untested on facts like a shared community sewage plant — this opinion expressly declines to rule on that scenario.

Common questions

Q: If I'm building something that will eventually be owned by a government entity, are my construction purchases automatically exempt?
A: No. The relevant exemptions generally require the government to already own the property and be the actual purchaser during construction, not just the eventual recipient of a donation.

Q: Does the manufacturing/production exemption cover sewage or wastewater treatment equipment?
A: Only in narrow circumstances — where a manufacturer is treating waste generated by its own industrial production process. A standalone treatment plant serving a community's general human and commercial waste doesn't qualify.

Q: Can other developers rely on this ruling for their own infrastructure projects?
A: No. This advisory opinion binds the Department only for Tallmadge Woods STP Associates, LLC on the facts described. A project with different ownership timing, purchaser identity, or waste source could reach a different result.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(2) (tax on producing/processing services)
• Tax Law § 1105-B(a) (production exemption for parts, tools, and supplies)
• Tax Law § 1115(a)(12) (production exemption for machinery/equipment)
• Tax Law § 1115(a)(15), (16) (materials sold to a contractor for an exempt organization's real property)
• Tax Law § 1115(a)(40) (pollution-control machinery/equipment exemption, effective March 1, 2001)
• Tax Law § 1116(a)(1) (exemption for sales to/by New York State and its subdivisions)
• 20 NYCRR § 527.4 (definitions of "producing" and "processing")
• 20 NYCRR § 528.13 (definition of "production"; waste treatment equipment exemption)

Prior rulings/cases referenced:

• Matter of Delta Sonic Car Wash Systems, Inc. v. State Tax Commission, 142 A.D.2d 828
• Central New York Industrial Services, Inc., Adv Op Comm T&F, Oct. 24, 1986, TSB-A-86(44)S
• BDT, Inc., Adv Op Comm T&F, Dec. 1, 1986, TSB-A-86(47)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a01_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(14)S
Sales Tax
April 17, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000911C

On September 11, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Tallmadge Woods STP Associates, LLC, c/o Cahn Wishod & Knauer, LLP,
425 Broadhollow Road, Suite 315, Melville, New York 11747.
The issue raised by Petitioner, Tallmadge Woods STP Associates, LLC, is whether the
equipment, materials, and supplies purchased by Petitioner and its contractors for the construction
of a sewage treatment plant qualify for the exemption from sales tax provided under Section
1115(a)(12) of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is the owner of the site on which a 400,000- gallon sewage treatment plant (“STP”)
will be constructed to service the lands of Petitioners members, who are developers in the
surrounding communities. Petitioner will retain the contractors to build the STP, which, upon
completion, will be dedicated, without charge, to the County of Suffolk or its nominee, pursuant to
a recorded Sewer Agreement. The County of Suffolk will own and operate the STP, which will
process, treat, and dispose of human and/or commercial waste that comes in from Petitioner’s
surrounding lands. No manufacturing or industrial facilities will be constructed on such lands.
Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes a tax on “[t]he receipts from every retail sale of
tangible personal property, except as otherwise provided in this article.”
Section 1105(c) of the Tax Law imposes sales tax, in part, upon:
The receipts from every sale, except for resale, of the following services:
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(2) Producing, fabricating, processing, printing or imprinting tangible
personal property, performed for a person who directly or indirectly furnishes the
tangible personal property, not purchased by him for resale, upon which services are
performed.
Section 1105-B(a) of the Tax Law provides, in part:

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Sales Tax
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Receipts from the retail sales of parts with a useful life of one year or less,
tools and supplies 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 shall be exempt from the tax imposed by subdivision (a) of section eleven
hundred five of this article. (Emphasis added)
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:
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(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, but not including parts with a useful life of one year
or less or tools or supplies used in connection with such machinery or equipment. . . .
(Emphasis added)
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(15) Tangible personal property sold to a contractor, subcontractor or
repairman for use in (i) erecting a structure or building (A) of an organization
described in subdivision (a) of section eleven hundred sixteen . . . or (ii) adding to,
altering or improving real property, property or land (A) of such an organization . . .
as the terms real property, property or land are defined in the real property tax law;
provided, however, no exemption shall exist under this paragraph unless such
tangible personal property is to become an integral component part of such structure,
building or real property.
(16) Tangible personal property sold to a contractor, subcontractor or
repairman for use in maintaining, servicing or repairing real property, property or
land (i) of an organization described in subdivision (a) of section eleven hundred
sixteen . . . as the terms real property, property or land are defined in the real property
tax law; provided, however, no exemption shall exist under this paragraph unless
such tangible personal property is to become an integral component part of such
structure, building or real property.

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Section 1115(a)(40) of the Tax Law, as added by Chapter 63 of the Laws of 2000, effective
March 1, 2001, exempts from the sales tax imposed by Section 1105(a) and from the compensating
use tax imposed by Section 1110 of the Tax Law:
Machinery or equipment for use or consumption directly and predominantly
in the control, prevention, or abatement of pollution or contaminants from
manufacturing or industrial facilities, to the extent such machinery or equipment is
not otherwise exempt under paragraph twelve of this subdivision.
Section 1116(a) of the Tax Law provides, in part:
Except as otherwise provided in this section, any sale . . . by or to any of the
following . . . shall not be subject to the sales and compensating use taxes imposed
under this article:
(1) The state of New York, or any of its agencies, instrumentalities, public
corporations (including a public corporation created pursuant to agreement or
compact with another state or Canada) or political subdivisions where it is the
purchaser, user or consumer, or where it is a vendor of services or property of a kind
not ordinarily sold by private persons . . . .
Section 527.4 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. (1) Section 1105(c)(2) of the Tax Law imposes a tax on the
receipts from services of . . . processing . . . tangible personal property, performed for
a person who directly or indirectly furnishes the property.
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(b) Producing. Producing means the manufacture of a product from raw
materials and any process in which raw materials loses its identity when the
production process is completed.
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
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(b)(1)(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.

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(d) Waste treatment equipment. (1) Machinery and equipment used for
disposing of industrial waste, as 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 50 percent of the waste treated, buried or stored results from the
production process.
Example 1:

A manufacturing plant has a pumping station to transmit
effluent from an industrial process to a municipal sewage
treatment system. The equipment at the pumping station is
exempt.

Example 2:

A manufacturing plant has a treatment plant at which it treats
effluent from an industrial process and sanitary waste. Eighty
percent of the waste treated is industrial effluent. The
equipment at the treatment plant is exempt as it is used
directly and predominantly in production.
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(2) Building materials, which become part of a capital improvement used as
a waste treatment facility are not eligible for the exemption.
*
Example 7:

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A company increases the height of a smokestack as part of its
pollution control program. The materials used to construct
the smokestack are not machinery or equipment but are
additions to real property and are not exempt although
equipment contained therein may qualify for the exemption.
(Emphasis added)

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Opinion
Petitioner’s contractors will construct a sewage treatment plant to be dedicated to the County
of Suffolk, or its nominee, who will then own and operate the plant for the treatment of human
and/or commercial wastes from surrounding areas. Since the equipment, materials, and supplies
purchased for construction of the plant will ultimately be used to perform waste treatment services,
Petitioner contends that such purchases should be exempt from the imposition of sales tax under the
production exemption provided in Section 1115(a)(12) of the Tax Law.
To be eligible for the production exemption, equipment and supplies used in the production
process must be used directly and predominantly in the production of tangible personal property for
sale. Under Section 528.13(b)(1)(ii) of the Sales and Use Tax Regulations, the term "production"
is defined to include "the production line of the plant starting with the handling and storage of raw
materials at the plant site.” “Producing” means the manufacture of a product from raw materials and
any process in which raw materials lose their identity when the production process is completed.
See Section 527.4(b) of the Sales and Use Tax Regulations. “Manufacturing” generally results in
the creation of a product that is substantially different in form, character, composition and usefulness
from its components. See New York State Department of Taxation and Finance Publication 852
(12/97), Sales Tax Information for Manufacturers, Processors, Generators, Assemblers, Refiners,
Miners and Extractors, and Other Producers of Goods and Merchandise, at page 2.
With regard to waste treatment equipment and supplies, purchases of these items by a
manufacturer that are used predominantly to prevent water or air pollution in the disposal of
industrial waste that results from a production process during manufacturing qualify for the
production exemption from sales and use taxes. See Section 528.13(d)(1) of the Sales and Use Tax
Regulations. This exemption is not applicable in Petitioner’s case since neither Petitioner nor the
County of Suffolk is a manufacturer (see Central New York Industrial Services, Inc., Adv Op Comm
T&F, October 24, 1986, TSB-A-86(44)S). Moreover, neither Petitioner nor the County of Suffolk
is engaged in the production of tangible personal property for sale. Rather, the STP which will be
operated by the County of Suffolk, or its nominee, will process, treat and dispose of human and
commercial waste. Accordingly, the equipment and supplies at issue do not constitute equipment
and supplies used in production, and the receipts from the retail sale of this property to Petitioner and
its contractors do not qualify for the exemptions from sales and use tax provided under Sections
1115(a)(12) and 1105-B of the Tax Law (see Matter of Delta Sonic Car Wash Systems, Inc. v. State
Tax Commission, 142 AD2d 828; BDT, Inc., Adv Op Comm T&F, December 1, 1986,
TSB-A-86(47)S; Central New York Industrial Services, Inc., supra). It should be noted that during
construction of the STP, the County of Suffolk does not own the land or STP, and does not purchase
the tangible personal property for the construction project. Therefore, the exemptions provided in
Sections 1115(a)(15) and 1115(a)(16) of the Tax Law for tangible personal property incorporated
into the land, buildings, or structures of an exempt governmental entity, and the exemption provided
in Section 1116(a)(1) of the Tax Law for purchases by governmental entities, are not applicable to
the purchases made by Petitioner in erecting the STP.

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It is noted that the machinery and equipment exemption provisions enacted by Chapter 63
of the Laws of 2000 apply to sales or uses, occurring on or after March 1, 2001, of machinery or
equipment that will be used or consumed in the control, prevention, or abatement of pollution or
contaminants from manufacturing or industrial facilities. See Section 1115(a)(40) of the Tax Law.
Since the STP is not expected to be processing waste from manufacturing and/or industrial facilities,
it will not qualify for exemption under Section 1115(a)(40). This opinion makes no determination
as to whether, under different facts, purchases for the construction of the STP could otherwise be
eligible for the new exemption.

DATED: April 17, 2001

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.