Is natural gas used to control a furniture plant's humidity and temperature exempt as used 'directly and exclusively' in production, when the heat also keeps employees comfortable?

Plain-English summary

Fancher Chair Co., Inc. manufactures furniture for sale. To make its operations possible, it controls the plant's relative humidity by maintaining the indoor temperature at 60–65°F and adding moisture with humidifiers — which controls the moisture content of the wood, affecting the wood's workability and the absorption, bonding and drying of the glue and finishes. It asked whether the natural gas it buys for this is exempt under § 1115(c).

The Department held the gas is used "directly" in production, but only the portion used exclusively for production is exempt.

• The exemption requires "directly AND exclusively." Section § 1115(c) exempts gas used directly and exclusively in producing tangible personal property for sale by manufacturing.
• "Directly" — yes. Under 20 NYCRR § 528.22, gas that "creates conditions necessary for production" is used directly. Controlling temperature and humidity to manage the wood's moisture content does exactly that, so it's direct use.
• "Exclusively" — this is where it fails. "Exclusively" means 100% production use; gas used for more than one function doesn't qualify. The plant's 60–65°F winter heating presumably also ensures employee comfort, so that dual use makes it generally ineligible. (Contrast the regulation's greenhouse example, where heating above normal levels serves the plants exclusively.)
• Exempt where comfort isn't a factor. The exemption does apply to gas heating areas where employee comfort isn't in play — here the first-floor lumber-storage room (before carving) and the second-floor unfinished-chair storage room.
• Mechanics. The company may buy the qualifying portion exempt or claim a refund/credit for tax paid, keeping allocation records and supporting the split with an engineering survey (or use Form ST-121 while assuming full liability for any tax on non-exempt use).

What this means for you

"Directly and exclusively" is two separate hurdles — and "exclusively" is strict. Even when fuel genuinely serves production (creating necessary conditions), the exemption is lost on any volume that also serves a non-production purpose. Comfort heating is the classic dual-use trap.

Space-by-space allocation is how you salvage the exemption. The Department allowed the exemption for storage rooms where nobody's comfort is at stake. Map your building by use: areas heated purely for the process (or where people aren't the point) can qualify; mixed-use production/occupied space usually won't.

Document the split rigorously. To claim the exempt portion — by up-front exemption or refund/credit — keep allocation records and be ready to back the numbers with an engineering survey or your calculation formulas. An ST-121 shifts the risk to you for any tax on the non-exempt part.

Common questions

Q: We heat and humidify our plant for the manufacturing process. Is the gas exempt?
A: Partly. Controlling temperature/humidity for production is "direct" use, but the exemption requires exclusive production use. Heating that also keeps employees comfortable is dual-use and generally taxable.

Q: Is any of the gas exempt then?
A: Yes — gas heating areas where employee comfort isn't a factor, such as the lumber-storage and unfinished-chair storage rooms here, qualifies. You can buy that portion exempt or claim a refund/credit.

Q: What records do I need to claim the exempt portion?
A: Allocation records distinguishing exempt production use from non-exempt use, supported by an engineering survey or your allocation formulas. An Exempt Use Certificate (ST-121) is an alternative, but you assume liability for tax on any non-exempt use.

Citations and references

Statutes:

• Tax Law § 1115(c) — exemption for gas used directly and exclusively in production by manufacturing

Regulations:

• 20 NYCRR § 528.22 — "directly" and "exclusively" defined; refund/credit, allocation records, engineering survey, ST-121 alternative (greenhouse Example 3)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_11s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(11)S
Sales Tax
March 15, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820120A

On January 20, 1982 a Petition for Advisory Opinion was received from Fancher Chair Co.,
Inc., South Work Street, Falconer, New York.
The issue raised is whether Petitioner's purchases of natural gas, for use and consumption in
connection with its production of furniture for sale, are subject to New York State and local sales
and use taxes. It is concluded herein that a portion of such purchases qualify for the exemption from
tax available under Tax Law § 1115(c), applicable to purchases of ". . . gas . . . for use or
consumption directly and exclusively in the production of tangible personal property . . . for sale, by
manufacturing . . . . "
Petitioner manufactures furniture for sale. Petitioner states that the relative humidity inside
its manufacturing plant must be controlled in order to permit its manufacturing operations. This is
accomplished by maintaining the indoor temperature between 60 and 65° F. and by adding the
appropriate amount of moisture to the air by means of humidifiers. By means of this process
Petitioner is able to control the moisture content of the wood used in the manufacturing process.
Such control is necessary because the moisture content of the wood affects the workability of the
wood and the absorption, bonding and drying of the glue used in joining the various components.
The indoor temperature also affects the workability of the glue and the drying of the wood finishes.
The Sales and Use Tax Regulations elaborate on the statutory exemption provision referred
to above, as follows:
(c)

Directly and exclusively.
(1) "Directly" means the. . .gas. . . must during the
production phase of a process, either:
operate exempt production machinery or equipment, or
create conditions necessary for production, or
perform an actual part of the production process.

(i)
(ii)
(iii)
...
(3)(i) "Exclusively" means that the. . . gas. . . is used in total (100%) in the production
process.
(ii)
Because. . .gas, . . .when purchased by the user is normally received in bulk or in a
continuous flow and a portion thereof is used for purposes which would make the
exemption inapplicable to such purchases, the user may claim a refund or credit for
the tax paid only on that portion used or consumed directly or exclusively in
production.
(iii) In the alternative, an Exempt Use Certificate (Form ST-121) may be used, providing
full liability is assumed for any state and local tax due on any part of purchases used
for other than the exempt purposes described in subdivision (a) of this section. The
taxable portion of these purchases is to be reported as a "purchase subject to use tax"
on a sales and use tax return required to be filed with the Tax Commission.
ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO , DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-83(11)S
Sales Tax
March 15, 1983

(iv)
(v)

The user must maintain adequate records with respect to the allocation of. . .gas. .
.used directly and exclusively in production and for non-exempt purposes.
For the purpose of substantiating the allocation of. . .gas. . . used directly and
exclusively in production from that used for non-exempt purposes, the user must,
when claiming a refund or credit, submit an engineering survey or the formulae used
in arriving at the amounts used in an exempt manner.

Example 3: A commercial greenhouse purchases natural gas to create a heated atmosphere
for growing plants. The gas is also used to heat salesrooms. The gas used to heat the
greenhouse is used directly in production while the gas used to heat salesrooms is not used
in production. 20 NYCRR 528.22.
Petitioner controls the relative humidity inside its plant by maintaining the indoor
temperature at certain levels and by adding the appropriate amount of moisture to the air. As this
procedure, by controlling the moisture content of the wood, has a direct effect on the workability of
the wood, the workability, bonding and drying of the glue and the drying of the wood finishes,
Petitioner is considered to be creating conditions necessary for production, within the meaning of
section 528.22(c)(1)(ii) of the Sales and Use Tax Regulations. As Petitioner uses natural gas to
maintain the indoor temperature, the amount of natural gas so used is thus considered to be used
directly in production. However, the statutory exemption is applicable only to gas used exclusively
in production. If gas is used for more than one function it does not qualify for the exemption. In the
present case the gas is used for heating Petitioner's plant, such heating being necessary to maintain
environmental conditions necessary for production. However, such winter heating, to a level of only
60-65° F., is presumably also for the purpose of ensuring employee comfort. This is not a case like
that described in the Regulations, supra, wherein gas used to heat a commercial greenhouse is held
to be exempt. There the gas is required to heat the premises to a level higher than normal, such
heating being required for the exclusive purpose of ensuring the life of the plants. In the present case,
the dual use of the gas renders it generally ineligible for the exemption provided for in section
1115(c) of the Tax Law. The exemption would, however, apply to gas used to heat areas where
employee comfort is not a factor. In Petitioner's plant this would include the first floor room used
for the storage of lumber prior to carving, and the second floor room used for the storage of
unfinished chairs.
Accordingly, Petitioner may purchase a portion of the natural gas tax exempt, or may claim
a credit or refund of tax paid, in accordance with the provisions of the Sales and Use tax Regulations
quoted above.

DATED: February 25, 1983

s/FRANK J. PUCCIA
Deputy Director
Technical Services Bureau