Can a soft ice cream stand claim the production exemption on the electricity used to make and store its ice cream?

Plain-English summary

A soft ice cream stand (represented by its CPA, Herman H. Gerstman) mixes prepared mixtures and milk in a machine to make soft ice cream, which it sells as cones, sundaes, shakes and splits, and also bulk-packages some for storage in a freezer. It asked whether the electricity used to prepare and store the ice cream qualifies for the production exemption.

The Department held most of the electricity is taxable, with a narrow bulk-ice-cream carve-out.

• An ice cream stand sells taxable restaurant food. Dairy bars and ice cream stands are among the establishments selling food and drink taxed under § 1105(d) (20 NYCRR 527.8(b)), whether eaten on or off premises.
• Making that food isn't "production." Under Burger King, Inc. v. State Tax Commission, 51 N.Y.2d 614, preparing food and drink taxed under § 1105(d) is not production of tangible personal property, so the § 1115(a)(12) (machinery) and § 1115(c) (utilities) exemptions don't apply. Electricity used to make cones, sundaes, shakes and splits is taxable.
• Storage after dispensing is post-production. Because the ice cream is ready for sale when dispensed from the machine, production ends there. Electricity running the freezer that later stores bulk ice cream is taxable under § 1105(b).
• Only bulk-ice-cream production is exempt. Selling ice cream in bulk (pint, quart, half-gallon, gallon), prepackaged novelties and ice cream cakes is exempt food under § 1115(a)(1) (20 NYCRR 527.8(e)). So only the electricity consumed in the mixing machine to prepare that bulk ice cream is exempt under § 1115(c); and the mixing machine itself is exempt under § 1115(a)(12) only if over 50% of its use goes to that bulk production.

What this means for you

An ice cream or dairy stand isn't a "manufacturer" for sales tax. Making soft-serve to sell as cones and shakes is taxable restaurant food under § 1105(d), and the Burger King decision forecloses the production exemption for that activity. Don't assume your machines and utilities are exempt just because you "make" the product.

The exemption survives only for food you sell like a grocery store. Bulk ice cream (by the pint/quart/half-gallon/gallon), prepackaged novelties and ice cream cakes are exempt food. Electricity used in the mixer to make those is exempt, and a mixer used over 50% for bulk qualifies for the machinery exemption.

Watch the production cut-off. Production ends when the product is ready for sale. Here that's when the ice cream is dispensed — so the freezer that merely stores finished bulk ice cream afterward is taxable, even though the bulk product itself is exempt food. Separate your exempt bulk-production use from everything else, or it all defaults to taxable.

Common questions

Q: I make my own ice cream — why aren't my machines and electricity exempt?
A: Because you sell it as food taxed under § 1105(d) (cones, sundaes, shakes). Under Burger King, preparing that food isn't production of tangible personal property, so the production exemptions don't apply.

Q: What part of my electricity is exempt?
A: Only the electricity used in the mixing machine to prepare ice cream you sell in bulk (pints/quarts/half-gallons/gallons), prepackaged novelties and ice cream cakes — exempt food under § 1115(a)(1).

Q: Is the freezer that stores my bulk ice cream exempt?
A: No. Production ends when the ice cream is ready for sale (on dispensing), so electricity for the freezer that stores it afterward is taxable, even for the exempt bulk product.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a), § 1105(b), § 1105(d) — retail sales, electricity, and restaurant food
• Tax Law § 1115(a)(1) — food exemption (not food taxed under § 1105(d)); § 1115(a)(12) — production machinery; § 1115(c) — production utilities
• 20 NYCRR 527.8(b), 527.8(e), 528.13(b), 528.13(c)(4), 528.22(c)(3)
• Burger King, Inc. v. State Tax Commission, 51 N.Y.2d 614

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/a81_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(31) S
Sales Tax
October 5, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810527A

On May 27, 1981 a Petition for Advisory Opinion was received from Herman H.
Gerstman, CPA, 4020 Hempstead Turnpike, Bethpage, New York 11714.
The issue raised is whether the operator of a soft ice cream stand is entitled to exemption
on purchases of electricity used to prepare and store soft ice cream.
Petitioner states that prepared mixtures and milk are placed in a mixing machine and
mixed to produce the soft ice cream. The soft ice cream is sold in various forms, such as cones,
sundaes, shakes and splits. Some of the ice cream is also bulk packaged for storage in a freezer.
Section 1105(a) of the Tax Law imposes a tax on "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article." The sale of electricity or
electric service is subject to tax pursuant to section 1105(b). Also, section 1105(d) imposes a tax
on "The receipts from every sale of . . . food and drink or food alone, when sold in or by
restaurants, taverns or other establishments in this state . . . : (1) in all instances where the sale is
for consumption on the premises where sold; . . . and (3) in those instances where the sale is for
consumption off the premises of the vendor, except where food (other than sandwiches) or drink
or both . . . are of a type commonly sold for consumption off the premises and in the same form
and condition, quantities and packaging, in establishments which are food stores other than those
principally engaged in selling foods prepared and ready to be eaten."
Food, food products, beverages, dietary foods and health supplements sold for human
consumption are exempt from the tax imposed pursuant to section 1105(a). Tax Law §
1115(a)(1). Such exemption provision further states: "Nothing herein shall be construed as
exempting food or drink from the tax imposed under subdivision (d) of section eleven hundred
five."
Section 1115(a)(12) of the Tax Law provides an exemption for: "Machinery or equipment
for use or consumption directly and predominantly in the production of tangible personal
property, . . . for sale, by manufacturing, processing . . ." In explaining the application of the
manufacturing exemption, the Sales and Use Tax Regulations state: "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 . . . ." 20 NYCRR 528.13(b). The Regulations further provide that: "Machinery or equipment
is used predominantly in production, if over 50% of its use is directly in the production phase of a
process." 20 NYCRR 528.13(c)(4).

JAMES H. TULLY, JR., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81(31) S
Sales Tax
October 5, 1981

Section 1115(c) exempts from the tax imposed pursuant to section 1105(b): ". . .
electricity . . . for use or consumption directly and exclusively in the production of tangible
personal property . . . for sale, by manufacturing, processing . . ." The Regulations relating to this
exemption state: " 'Exclusively' means that the . . . electricity . . . and like services are used in total
(100%) in the production process." 20 NYCRR 528.22(c)(3).
The Sales and Use Tax Regulations include dairy bars and ice cream stands among the
types of establishments which sell food and drink subject to the tax imposed pursuant to section
1105(d) of the Tax Law. 20 NYCRR 527.8(b).
Cones, sundaes, shakes, splits and similar hand prepared or dispensed items are food items
subject to tax pursuant to section 1105(d) of the Tax Law, whether sold for consumption on or off
premises. Based on a decision of the New York State Court of Appeals (Burger King, Inc. vs.
State Tax Commission 51 NY 2nd 614), the exemptions provided in sections 1115(a)(12) and
1115(c) for machinery, equipment and utilities used in the production of tangible personal
property for sale are not applicable to the preparation of food and drink which are subject to tax
pursuant to section 1105(d). However, the sale of ice cream in bulk (pint, quart, half-gallon,
gallon), prepackaged novelty items and ice cream cakes is a retail sale which is exempt pursuant
to section 1115(a)(1) as such items are in the same form, condition, quantity and packaging found
in food stores. 20 NYCRR 527.8(e).
Thus, electricity used to prepare ice cream for sale as cones, sundaes, shakes, splits and
similar items is taxable.
Since the ice cream prepared in the machine is ready for sale upon dispensation,
production ends at that point and electricity used to operate the freezer in which the bulk ice
cream is subsequently stored is subject to tax pursuant to section 1105(b). Only the portion of
electricity consumed in the mixing machine to prepare ice cream for sale in bulk (pints, quarts,
half-gallons, gallons), prepackaged novelty items and ice cream cakes is eligible for the
exemption provided in section 1115(c). Also, provided more than 50% of the use of the mixing
machine is devoted to processing bulk ice cream, prepackaged novelty items and ice cream cakes,
such machine is also eligible for exemption. Tax Law § 1115(a)(12) and 20 NYCRR
528.13(c)(4).

DATED: September 18, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau