If I resell a product that arrives partly cooled or degraded and I use fuel and electricity to restore it to a saleable condition before delivery, do those utility purchases qualify for New York's production exemption?

Plain-English summary

A company buys liquid asphalt from refineries and resells it from a New York City terminal. The asphalt arrives by heated barge or ship already hot (325°F+) but cools in transit to a semi-solid state (200-275°F); if it were allowed to cool further, it would become useless and undeliverable. So the company reheats it to about 300-310°F using purchased fuel oil and electricity before storing and delivering it. It asked whether those fuel and electricity purchases qualify for New York's sales tax exemptions for production machinery and utilities used in production. The Department said no exemption applies.

The machinery/equipment exemption (§1115(a)(12)) doesn't fit at all, because fuel and electricity simply aren't "machinery or equipment" — that exemption is for the physical hardware, not the power that runs it.

The utilities-in-production exemption (§1115(c)(1)) is the closer question, but still fails, because "production" for sales tax purposes generally ends at the refinery — the asphalt was already in its finished, sale-ready form when it arrived at the company's terminal. The company doesn't add raw materials or otherwise change the asphalt; it just restores its temperature so it can be stored and delivered. Department regulations distinguish "production" (which includes handling and storing raw materials through the last step of finishing and packaging) from "distribution" (which includes storing, displaying, selling, loading, and shipping the finished product) — and utilities used in storage of finished tangible personal property are specifically called out as taxable. Reheating here served exactly that storage/delivery function, making it a post-production, distribution-stage activity rather than a step that creates "conditions necessary for production" or performs "an actual part of the production process."

What this means for you

Resellers, distributors, and terminal operators who condition a product for storage or delivery

Utilities used to keep a purchased, already-finished product in a deliverable condition — reheating, refrigerating, or otherwise maintaining it for storage and shipment — are generally not exempt production utilities, even if the product would be ruined or unusable without that treatment. The exemption is tied to whether your own activity is still part of making the product, not whether your activity is operationally necessary.

Manufacturers who both produce and later re-condition their own product

If your production process is complete before a later reheating/storage step, don't assume the exemption follows the product downstream through your own supply chain — the Department looks at whether the specific activity using the utility is a production step or a distribution step, regardless of who is doing it.

Accountants and tax professionals

The controlling regulatory language (20 NYCRR §528.22(c)) requires utilities to either operate exempt production equipment, create "conditions necessary for production," or perform "an actual part of the production process" — and §528.13(b)(1)(iii) plus §528.22(a)(2) specifically flag storage-related utility use as taxable. This opinion applies that framework cleanly: reheating for storage/delivery purposes falls on the taxable, distribution side of the line even though it's essential to the business.

Common questions

Q: We buy a finished product that needs reconditioning (reheating, cooling, etc.) before we can store or ship it — do our utility costs for that qualify for the production exemption?
A: Generally no, per this opinion, if the product was already in its finished, sale-ready form when you received it. Utilities used to maintain or restore a finished product for storage and delivery are treated as a distribution-stage cost, which is taxable.

Q: Does it matter that the product would be ruined without the reheating?
A: No. The Department's analysis turns on whether the activity is part of the production process (as defined by regulation), not on whether it's operationally essential to the business.

Q: Would this analysis be different if we were the original manufacturer rather than a reseller?
A: The key question is still where production ends — generally at the point the product is in its finished form ready for sale. If your own manufacturing process is already complete before the reheating/storage step, the same distribution-side conclusion would likely apply regardless of whether you made the product yourself or bought it from someone else.

Q: Does this ruling apply to any reseller reconditioning a purchased product?
A: Not automatically. An advisory opinion binds the Department only as to the taxpayer who requested it and only on the facts described, though the production-versus-distribution framework it applies is general, settled Department policy.

Citations and references

Statutes and regulations:

• Tax Law §1115(a)(12) (machinery/equipment production exemption)
• Tax Law §1115(c)(1) (utilities production exemption)
• 20 NYCRR §528.22(a)(2), (c) ("directly" in production; storage utilities taxable)
• 20 NYCRR §528.13(b)(1)(i)-(iii) (production vs. distribution)

Cited cases and opinions:

• XO New York, Inc. v. Commissioner, 51 A.D.3d 1154 (3d Dept. 2008)
• KM Davies Co., Inc., TSB-A-05(47)S

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(31)S

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(31)S
Sales Tax
July 28, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S090624A

Petitioner name and address redacted requests an advisory opinion on whether it is eligible for the
exemptions contained in Tax Law §1115(a)(12) and §1115(c), and thus entitled to a refund of State and local
sales taxes paid on purchases of electricity, gas, and fuel oil used directly in its reheating of hot liquid asphalt
for sale. We conclude that Petitioner is not eligible for either exemption. Tax Law §1115(a)(12) applies to
purchases of machinery or equipment used in the production of tangible personal property, not to purchases
of utilities and fuel. Tax Law §1115(c)(1), which does exempt utility and fuel purchases used in the
production of tangible personal property for sale, is not available when the use of the utilities facilitates
storage and delivery rather than the production of the tangible personal property.
Facts
Petitioner purchases liquid asphalt from independent refineries and sells the liquid asphalt from a
terminal located in New York City. The liquid asphalt is shipped to the terminal from refineries on heated
barges or ships. Although loaded at the refineries as a hot liquid at a temperature of 325 degrees Fahrenheit
or above, it arrives at the terminal in a semi-solid state, having cooled to an average temperature between 200
and 275 degrees Fahrenheit during shipping. If not stored at a higher temperature, the asphalt would further
cool and revert to a semi-solid/solid state, which would make it useless for its intended purpose and
undeliverable to customers. Therefore, upon arrival at the terminal, the asphalt is transferred via heated pipes
into processing/holding tanks in which its average temperature is restored to 300 to 310 degrees,
reconverting it from a semi-solid state into a hot liquid. Petitioner purchases fuel oil and electricity for the
reheating process.
Issue
Do Petitioner’s purchases of fuel oil and electricity for reheating liquid asphalt to the temperature
required for sale qualify for exemption from State and local sales and use taxes pursuant to Tax Law
§1115(a)(12) and Tax Law §1115(c)?
Analysis
Tax Law §1115(a)(12) provides an exemption from sales and use tax for purchases of “(m)achinery
and equipment for use or consumption directly and predominantly in the production of tangible personal
property… for sale.” This exemption is not applicable to Petitioner’s situation because fuel oil and
electricity, although needed to power machinery and equipment, are not machinery or equipment. See XO
New York, Inc. v. Commissioner, 51 A.D.3d 1154, 1156 (3d Dept. 2008).
For different reasons, the sales and use tax exemption contained in Tax Law §1115(c)(1) is also not
available to Petitioner.
Tax Law §1115(c)(1) provides, in pertinent part:

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TSB-A-09(31)S
Sales Tax
July 28, 2009

Fuel, gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam service of
whatever nature for use or consumption directly and exclusively in the production of tangible
personal property, gas, electricity, refrigeration or steam, for sale, by manufacturing, processing,
assembling, generating, refining, mining or extracting shall be exempt from the taxes…
Petitioner argues that “directly” using fuel oil and electricity in the process of reheating asphalt to
raise it to the appropriate temperature for sale qualifies as the “processing” of “tangible personal property,”
which should qualify its fuel oil and electricity purchases for exemption from sales and use taxes pursuant to
this section. However, Petitioner’s storage of the asphalt in a heated condition is not “directly” contributing
to its “production,” as required to qualify for exemption pursuant to this section. See 20 N.Y.C.R.R.
§528.22(c), which provides that:
(1)

Directly means the fuel, gas, electricity…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.

Petitioner apparently believes that its use of fuel oil and electricity falls within subparagraphs (ii) and
(iii) of the definition. However, in the instant case, the oil and electricity are neither creating “conditions
necessary for production” nor performing “an actual part of the production process.” Although cooled from
its optimal temperature during shipping, the asphalt is in final form and ready for use upon arrival at
Petitioner’s premises. It must be reheated by Petitioner and stored in a hotter state than that in which it is
received in order to facilitate delivery to purchasers. Petitioner’s storage of the asphalt in a heated state does
not constitute production of tangible personal property by processing for purposes of Tax Law §1115(a)(12).
See KM Davies Co., Inc., Adv Op Comm T & F, TSB-A-05(47)S, December 28, 2005. Thus, the utilities
here are being used in “activities collateral to the actual production process;” that is, in a post-production
process.
Notably, the regulations, which differentiate distribution activities from the production process,
provide further support for this position. “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.” See 20 N.Y.C.R.R. §528.13(b)(1)(i-ii). With the
exception of packaging, which is not relevant to the product in question, each of the aforementioned steps in
the production process are completed at the asphalt refineries, prior to shipping to Petitioner. Petitioner does
not handle the raw materials from which the liquid asphalt is produced, or add any materials to the asphalt to
finish it for sale.
Rather, in order to store and deliver asphalt manufactured elsewhere to end-users, Petitioner reheats
it. This is a post-production function. See 20 N.Y.C.R.R. §528.13(b)(1)(iii) which provides that
“Distribution includes all operations subsequent to production, such as storing, displaying, selling, loading
and shipping finished products.” “Storing,” “selling,” and “shipping finished products,” that is, distribution
functions, best describe Petitioner’s role. See also 20 N.Y.C.R.R. §528.22(a)(2) which states, in part, “(f)uel,
gas, electricity…used or consumed…in the storage of tangible personal property, are subject to the sales
tax.”

TSB-A-09(31)S
Sales Tax
July 28, 2009

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Based upon the facts presented, Petitioner, as a reseller of liquid asphalt, does not qualify for the
production exemption from State and local sales and use taxes.

DATED: July 28, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.