Does a steel warehouse that cuts, shapes, drills and bends stock to order 'process' goods so its machinery qualifies for the production exemption?

Plain-English summary

Lancaster Steel Service Co. runs a steel warehouse stocking sheets, plates, angles, bar stock, re-bar, wire and foundry supplies. Using plate shears, automatic burning machines, an iron worker, threading machines, saws and bending machines, it cuts, shapes, drills and bends stock to each customer's specifications and sells the result (it does no installation). It asked whether these operations are "production" by processing so that its machinery qualifies for the sales-tax exemption in § 1115(a)(12).

The Department held the operations are "processing," so the production machinery is exempt.

• Cutting/shaping/drilling/bending steel to order is "processing." Section § 1115(a)(12) exempts machinery and equipment used directly and predominantly in producing tangible personal property for sale by processing. Under 20 NYCRR § 531.2(e), "processing" is performing any service on tangible personal property that effects a change in its nature, shape or form — which is exactly what Lancaster's machines do.
• "Predominantly" means over half the use. Equipment is used predominantly in production if more than 50% of its use (measured by time) is in the production phase.
• The machines qualify — exempt purchase. The plate shears, burning machines, iron worker, threading machines, saws and bending machines predominantly used in this processing may be purchased without sales tax.
• Parts, tools and supplies phase in over time. Parts, tools and supplies used predominantly in the processing are exempt if purchased on or after March 1, 1981; they were taxed at a 2% State rate from September 1, 1980 through February 28, 1981, and at the full 4% State rate before September 1, 1980.

What this means for you

Fabricating to a customer's spec is "processing," and processing is production. You don't have to run a classic factory. If your equipment changes the nature, shape, or form of material — cutting, shaping, drilling, threading, bending steel to order — that's processing, and the machinery you use predominantly for it can be purchased exempt under § 1115(a)(12).

"Predominantly" is a real, countable test. The exemption for a given machine depends on over 50% of its use (by time) being in production. Keep usage records for equipment that does double duty, so you can support the exemption for the machines that qualify.

Mind the historical phase-in for parts, tools and supplies. Machinery got the exemption earlier; parts, tools and supplies were only fully exempt from March 1, 1981, with a 2% State rate in the transitional window and the full rate before it. For purchases from that era, the date drives the rate. (These are State figures; the rules interact with local taxes separately.)

Common questions

Q: We cut, drill and bend steel to customer specs. Is our machinery exempt?
A: Yes. That's "processing" — changing the nature, shape or form of the material — so machinery used predominantly (over 50% by time) in it can be bought exempt under § 1115(a)(12).

Q: What counts as "predominantly" used in production?
A: More than 50% of the equipment's use, measured by time, in the production phase.

Q: Are parts, tools and supplies exempt too?
A: Yes if purchased on or after March 1, 1981. They carried a 2% State rate from September 1, 1980 to February 28, 1981, and the full 4% State rate before September 1, 1980.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) — exemption for machinery and equipment used directly and predominantly in production by processing
• 20 NYCRR § 531.2(e) — definition of "processing" (a service that changes the nature, shape or form of property)

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_29s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(29)S
Sales Tax
June 24, 1983

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S821018A

On October 18, 1982 a Petition for Advisory Opinion was received from Lancaster Steel
Service Co. Div. of Lancaster Iron & Metal Co., Inc., 126 Central Avenue, Lancaster, New York
14086.
The issue raised is whether Petitioner's operations constitute production within the meaning
of section 1115(a)(12) of the Tax Law.
Petitioner operates a steel warehouse which stocks a variety of steel products such as sheets,
plates, angles, bar stock, and re-bar as well as wire and foundry supplies. Using its machinery and
equipment, Petitioner cuts, shapes, drills and bends warehouse stock to meet its customer's
specifications, and sells the resultant creations. Petitioner does not do any installation work.
Petitioner states that it uses the following machines: plate shears (to change the size and shape of
pieces of steel); automatic burning machines (to burn out pieces of plate to order); an iron worker
machine (to drill holes in steel); threading machines; steel cutting saws; and bending machines.
Section 1115(a)(12) of the Tax Law provides an exemption from sales tax with respect to
machinery and equipment "for use or consumption directly and predominantly in the production of
tangible personal property . . . by . . . processing . . . . " Processing is defined as "the performance
of any service on tangible personal property which effects a change in the nature, shape or form of
the property." 20 NYCRR 531.2(e). Machinery or equipment is used predominantly in production
if over fifty per cent of its use (measured in terms of time) is in production.
The activities described by Petitioner constitute processing, within the meaning and intent
of Section 1115(a)(12) of the Tax Law. Accordingly, Petitioner's purchase of machines or
equipment which are predominantly used in such activities may be purchased without the payment
of sales tax. Parts, tools and supplies to be used predominantly in connection with such activities are
exempt from tax where purchased on or after March 1, 1981, but were subject to a 2% State tax
where purchased between September 1, 1980 and February 28, 1981, and were subject to the full 4%
State tax where purchased prior to September 1, 1980.

DATED: June 8, 1983

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

s/FRANK J. PUCCIA
Director
Technical Services Bureau

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR