Is a candy manufacturer's wastewater pipeline, metering/sampling equipment, and holding tank exempt as manufacturing waste-treatment equipment, or taxable as building materials?

Plain-English summary

Richardson Brands manufactures candy and chewing gum, generating industrial wastewater that must meet a local discharge permit (an Industrial User Discharge Permit) before it can flow into the Village of Canajoharie's municipal treatment plant. To comply, Richardson built a project combining wastewater from its north and south plants into underground pipelines leading to a flow metering and sampling manhole (measuring quantity and contaminant levels), then into a single pipe to a 69,500-gallon above-ground steel holding tank. The tank temporarily stores, mixes, and dilutes the daily wastewater so it can be released to the municipal plant continuously, 24/7, within the permit's daily limits — the system doesn't pre-treat contaminants, just evens out the discharge flow. The project also includes manhole enclosures and foundations/footings for the enclosures and tank.

New York exempts machinery and equipment used directly and predominantly in a manufacturer's production process — and that exemption specifically extends to waste-treatment equipment, as long as it's purchased by the manufacturer and used predominantly to actually treat, bury, or store waste materials, with over half of that waste coming from the manufacturer's own production. The Department found the pipelines exiting the two plants, the metering/sampling equipment, the connecting pipe, and the holding tank itself all satisfy that test — they work together as an integrated system to store and dilute Richardson's own manufacturing wastewater, so all of it is exempt manufacturing equipment.

But the exemption has real limits. The pipeline running from the holding tank to the municipal plant doesn't qualify — its only function is discharging already-processed wastewater, not treating, burying, or storing it, making it functionally just an ordinary sewer connection. And building materials like manhole enclosures and their foundations/footings aren't "machinery or equipment" at all — they're taxable construction materials regardless of who buys them (Richardson or its contractor).

There's one more piece of good news, though: because the entire installation — both the exempt equipment and the taxable building materials — qualifies as a capital improvement to real property, the contractor's labor charges for installing everything are exempt from sales tax, separate from the taxability of the materials themselves. Richardson needs to issue an Exempt Use Certificate (Form ST-121) for the exempt equipment and a Certificate of Capital Improvement (Form ST-124) for the installation labor, while the contractor should keep records distinguishing exempt equipment purchases from taxable building-material purchases.

What this means for you

Manufacturers building on-site waste treatment or discharge-compliance systems

Equipment that actually treats, dilutes, buries, or stores your own production waste can qualify for the manufacturing exemption — but the pipe segment that merely discharges already-processed waste into a public sewer doesn't, and neither do ordinary building materials like manhole enclosures or foundations.

Contractors installing industrial waste-treatment systems

Track which components are exempt "machinery and equipment" versus taxable "building materials" separately, since your customer needs different exemption certificates for each (Form ST-121 for equipment, Form ST-124 for capital-improvement installation labor) — and installation labor can be exempt even when some of the underlying materials are taxable.

Accountants and tax professionals

This is a useful worked example of the § 1115(a)(12) waste-treatment exemption's "over 50% production-derived waste" and "actually treat/bury/store" tests, paired with the separate capital-improvement labor exemption — a good template for auditing similar industrial discharge-compliance projects.

Common questions

Q: Is all wastewater-handling equipment at a factory exempt from sales tax?
A: Only equipment that actually treats, dilutes, buries, or stores waste where over 50% comes from the manufacturer's own production process — equipment that merely discharges already-processed waste into a public sewer doesn't qualify.

Q: Are manhole covers and foundations exempt as part of the waste-treatment system?
A: No — building materials like manhole enclosures and their footings/foundations are taxable construction materials, not exempt machinery or equipment, even when built as part of an otherwise-exempt waste-treatment project.

Q: If some materials are taxable, does that make the contractor's installation labor taxable too?
A: Not necessarily — if the overall project qualifies as a capital improvement to real property, the contractor's installation labor charges can be exempt even though some individual materials within the project remain taxable.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9)(i) (capital improvement definition)
• Tax Law § 1105(c)(3) (installation services; capital improvement exception); § 1105(c)(5) (real property maintenance/repair)
• Tax Law § 1105-B(b) (installation/repair of exempt production machinery)
• Tax Law § 1115(a)(12) (manufacturing machinery/equipment exemption)
• 20 NYCRR § 528.13(a) (machinery/equipment used in production); § 528.13(c)(4) (directly and predominantly test); § 528.13(d) (waste treatment equipment)
• 20 NYCRR § 541.6(a) (machinery/equipment that becomes realty)
• TSB-M-78(15)S (July 21, 1978, materials and installation contracts in manufacturing process)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(27)S
Sales Tax
July 12, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S001219A

On December 19, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Richardson Brands Company, 6330 Manor Lane, South Miami, Florida
33143.
The issue raised by Petitioner, Richardson Brands Company, is whether charges for
pipelines, metering and sampling equipment, a wastewater holding tank, and materials used in their
installation, as described below, are exempt from the New York State and local sales and use taxes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a manufacturer of various candy and chewing gum products. Petitioner’s
manufacturing process produces waste water which must be disposed of in an environmentally
sound manner. Petitioner has undertaken a capital project which will enable Petitioner to comply
with the Village of Canajoharie Industrial User Discharge Permit # 2 (IUDP) initially issued on
April 1, 1998. The IUDP defines the effluent limitations, monitoring requirements and other
conditions for Petitioner to discharge process wastewater generated by Petitioner’s manufacturing
process to the Municipal Waste Water Treatment Plant (Municipal Plant). The project consists of
combining the wastewater flows from the Petitioner’s north and south plant into a common
discharge point by means of an underground piping system installed by a contractor. At this location
a flow metering and sampling manhole is installed by the contractor for the purpose of determining
the quantity and the contaminant levels of the wastewater being discharged to the Municipal Plant.
A single pipe is installed from the sampling manhole (where the discharge pipes from the two plants
join) to a holding tank, described below. The holding tank discharges wastewater into a pipeline that
feeds directly to the Municipal Plant. Virtually all of the wastewater is produced by Petitioner’s
manufacturing processes.
In order to comply with the daily limitations set by the Village for various contaminants and
discharges of wastewater, a Flow Equalization System will be installed by the contractor. This
system is basically a 69,500 gallon above ground steel storage tank where all the daily process
wastewater is temporarily stored, mixed and diluted in order to obtain compliance with the daily
limits set by the Village. The proposed system does not provide for pre-treatment of any
contaminants in the process wastewater before being discharged to the Municipal Plant. The
objective of this system is to produce a more evenly distributed discharge flow to the Municipal
Plant on a 24 hour per day, 7 day per week basis.
The project may also include the construction of manhole enclosures and footings or
foundations for the manhole enclosures and for the holding tank.

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Except for the installation of the 69,500 gallon holding tank, the project was completed prior
to March 1, 2001.
Applicable Law and Regulations
Section 1101(b)(9)(i) of the Tax Law defines the term “capital improvement” as:
An addition or alteration to real property which:
(A)

Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and

(B)

Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the
property or article itself; and

(C)

Is intended to become a permanent installation.

Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:
(a)

The receipts from every retail sale of tangible personal property,
except as otherwise provided in this article.
*

(c)

*

*

Installing tangible personal property . . . or maintaining, servicing or
repairing tangible personal property . . . not held for sale in the
regular course of business . . . except:
*

(iii)

*

The receipts from every sale, except for resale, of the following
services:
*

(3)

*

*

*

for installing property which, when installed, will constitute an
addition or capital improvement to real property, property or land, as

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the terms real property, property or land are defined in the real
property tax law as such term capital improvement is defined in
paragraph nine of subdivision (b) of section eleven hundred one of
this chapter . . . .
*
(5)

*

*

Maintaining, servicing or repairing real property, property or land, as
such terms are defined in the real property tax law, whether the
services are performed in or outside of a building, as distinguished
from adding to or improving such real property, property or land, by
a capital improvement as such term capital improvement is defined
in paragraph nine of subdivision (b) of section eleven hundred one of
this article . . . .

Section 1105-B(b) of the Tax Law provides:
Receipts from every sale of the services of installing, repairing, maintaining
or servicing the tangible personal property described in paragraph twelve of
subdivision (a) of section eleven hundred fifteen of this article, including the parts
with a useful life of one year or less, tools and supplies described in subdivision (a)
of this section, to the extent subject to such tax, shall be exempt from the tax on sales
imposed under subdivision (c) of section eleven hundred five of 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
....

Section 528.13 of the Sales and Use Tax Regulations provides, in part:
Machinery and equipment used in production; telephone and telegraph
equipment; parts, tools and supplies. (Tax Law, S 1115(a)(12)) (a) Exemption.

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(1)

Exemption from statewide tax. An exemption is allowed from the tax
imposed under subdivisions (a) and (c) of section 1105 of the Tax
Law, and from the compensating use tax imposed under section 1110
of the Tax Law, for receipts from sales of the following:

(i)

Machinery or equipment (including parts with a useful life of more
than one year) used or consumed directly and predominantly in the
production for sale of tangible personal property, gas, electricity,
refrigeration or steam, by manufacturing, processing, generating,
assembling, refining, mining or extracting. . . .
*

*

*

(iv)

The services of installing, repairing, maintaining or servicing the
exempt machinery, equipment, apparatus, parts, tools or supplies
identified in subparagraph (i), (ii) or (iii) of this paragraph.

(2)

Exemption from taxes imposed by localities other than New York
City.

(i)

There is an exemption from all local sales and use taxes, other than
the taxes imposed in New York City, for all sales and uses of:
(a) tangible personal property used or consumed directly and
predominantly in the production for sale of tangible personal
property, gas, electricity, refrigeration or steam by
manufacturing, processing, generating, assembling, refining,
mining or extracting . . . .
*

*

*

(c)(4) Machinery or equipment is used predominantly in production, if over
50 percent of its use is directly in the production phase of a process.
Example 11: A fork lift is used 60 percent of the time on an assembly line
and 40 percent of the time for loading finished products onto railroad cars for
delivery. The fork lift is used predominantly in production.
*
(d)

*

*

Waste treatment equipment. (1) Machinery and equipment used for
disposing of industrial waste, as a part of a process for preventing

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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.
*
(2)

*

*

Building materials, which become part of a capital improvement used
as a waste treatment facility are not eligible for the exemption.
*

*

*

Example 7: 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.
Section 541.6(a) of the Sales and Use Tax Regulations provides:
Machinery and equipment which becomes realty. If a contractor, in the
performance of a contract, is required to purchase and install production machinery
and equipment that qualifies for the manufacturer's exemption provided for in section
1115(a)(12) of the Tax Law and such machinery and equipment subsequently
becomes part of the real property, the contractor is required to obtain from the
customer a properly completed certificate of capital improvement and an exempt use
certificate which identifies the machinery and equipment that qualifies for the
manufacturer's exemption and which, upon installation, becomes part of the real

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property. The contractor then may purchase such machinery or equipment exempt
from the New York State and local taxes, including the sales and use taxes in
New York City, upon issuance of a properly completed contractor exempt purchase
certificate to his supplier.
Opinion
Petitioner’s manufacturing process produces industrial wastewater which may need to be
mixed and diluted to be in compliance with the IUDP issued by the Village of Canajoharie before
it can be discharged into the Municipal Plant. Furthermore, the wastewater can only be released to
the Municipal Plant at a rate in gallons per hour which is in compliance with the IUDP. Over 50
percent of the wastewater results from Petitioner’s production process. The 69,500 gallon holding
tank is designed to store the wastewater so that the wastewater produced each day can be
continuously discharged into the Municipal Plant 24 hours per day, seven days per week at a rate
which is in compliance with the IUDP.
In this case, Petitioner is hiring a contractor who will install underground pipelines
connecting Petitioner’s north and south manufacturing plants to a flow metering and sampling
manhole which is, in turn, connected by a single pipeline to a 69,500 gallon above ground holding
tank. The holding tank discharges into a separate underground pipeline which is connected to the
Municipal Plant. The pipelines exiting the two plants, the flow metering and sampling equipment,
the pipeline leading from the sampling manhole to the holding tank and the holding tank itself will
be considered to be machinery or equipment used directly and predominantly in production by
manufacturing, processing, generating, assembling, refining, mining or extracting, if the machinery
and equipment is purchased by Petitioner and used predominantly to actually treat, bury, or store
waste materials from Petitioner’s production process, and over 50 percent of the waste treated,
buried or stored results from Petitioner’s production process. The 69,500 gallon holding tank is
used to store the wastewater, albeit briefly, prior to its release to the Municipal Plant. The piping
and flow metering equipment leading into the tank operates harmoniously with the tank to make an
integrated and synchronized system that enables Petitioner to discharge its process wastewater in
compliance with the IUDP.
Accordingly, the piping system exiting the plants, the flow metering and sampling
equipment, the piping leading to the holding tank and the tank itself qualify as machinery and
equipment used predominantly to actually treat, bury, or store waste materials from Petitioner’s
production process where over 50 percent of the waste treated, buried or stored results from
Petitioner’s production process. See Technical Services Bureau Memorandum, TSB-M-78(15)S,
dated July 21, 1978, entitled Materials and Installation Contracts in Manufacturing Process, with
respect to piping and metering and sampling equipment. The purchase of this tangible personal
property, therefore, is exempt from sales and use tax under Section 1115(a)(12) of the Tax Law.
Petitioner should issue an Exempt Use Certificate (Form ST-121) to the material supplier, or to the
contractor if the contractor is purchasing this machinery and equipment. The contractor, in turn,

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July 12, 2002
should furnish a Contractor Exempt Purchase Certificate (Form ST-120.1) to the supplier. See
Section 541.6(a) of the Sales and Use Tax Regulations.
The pipeline leading from the holding tank to the Municipal Plant does not qualify for
exemption under Section 1115(a)(12) of the Tax Law since this section of piping is used merely to
discharge waste water into the Municipal plant and not to actually treat, bury or store such waste.
In this regard, it is similar to any sewer pipe leading from a manufacturing or other facility to a
sewer main or other point where sewage is discharged. Purchases of the manhole enclosure and
materials for footings or foundations for the manhole enclosure and holding tank are not purchases
of machinery and equipment. These are purchases of building materials that do not qualify for
exemption under Section 1115(a)(12) of the Tax Law and are subject to sales tax whether such
material purchases are made by Petitioner or Petitioner’s contractor. See Section 528.13(d)(2) of
the Sales and Use Tax Regulations. However, since the installation of pipeline and building
materials, as well as the exempt machinery and equipment described above, qualifies as a capital
improvement to real property under Section 1101(b)(9) of the Tax Law, the charges by the
contractor for such installation are exempt from sales tax pursuant to Section 1105(c)(3)(iii) of the
Tax Law. Petitioner should provide a properly completed Certificate of Capital Improvement (Form
ST-124) to the prime contractor to purchase these capital improvement services exempt from sales
tax.
The prime contractor should keep records substantiating which purchases of tangible
personal property qualify as machinery or equipment exempt under Section 1115(a)(12) of the Tax
Law and which purchases are taxable.

DATED: July 12, 2002

NOTE:

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

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