Is the electricity that powers a frozen-drink (Slurpee) machine in a convenience store exempt as electricity used to produce goods for sale?

Plain-English summary

The Southland Corporation (operator of 7-Eleven stores) asked whether the electricity used to power a frozen-drink processor (a Slurpee machine) in a retail food store is subject to sales tax. The machine combines flavored syrup, carbon dioxide and water into a carbonated drink, sold frozen or semi-frozen in a cup.

The Department held the electricity is taxable — it doesn't qualify for the production exemption.

• The drink it makes is taxable prepared food and drink. Section § 1105(d) taxes receipts from sales of drink sold by restaurants and other establishments. The Slurpee is a carbonated drink whose sale is taxable under § 1105(d) (citing Burger King v. State Tax Commission, 51 N.Y.2d 614; 20 NYCRR 527.8).
• A § 1105(d) drink is not "tangible personal property." The production exemption in § 1115(c) covers electricity used directly and exclusively to produce tangible personal property for sale. But it is well established that food and drink taxed under § 1105(d) is not "tangible personal property" for Tax Law purposes (Burger King).
• So the exemption doesn't apply, and the power is taxable. Because the machine produces a § 1105(d)-taxable drink, not tangible personal property, the electricity falls outside the § 1115(c) exemption and is itself subject to sales tax under § 1105(b).

What this means for you

The production-electricity exemption only reaches power used to make goods ("tangible personal property") for sale. If the thing you're making is instead prepared food or drink taxed under § 1105(d), New York doesn't treat it as tangible personal property — so the electricity used to make it isn't exempt production power.

Making a taxable end product doesn't automatically make your inputs exempt. It's tempting to think "I'm producing something I sell and collect tax on, so my power should be exempt." But the exemption's category is narrow: goods, not restaurant-style food and drink. A Slurpee, fountain drink, or similar prepared beverage falls on the taxable-power side.

This is the mirror image of the equipment exemptions. Where New York does exempt production inputs (machinery, fuel), it's for making tangible goods for sale. Prepared-food operations generally don't get that treatment for the utilities that run their food/drink equipment.

Common questions

Q: We run a Slurpee/fountain-drink machine in our store. Is the electricity for it exempt production power?
A: No. The drink is taxable prepared food/drink under § 1105(d), which isn't "tangible personal property," so the electricity doesn't qualify for the § 1115(c) production exemption and is taxable under § 1105(b).

Q: But we collect sales tax on the drink — doesn't that make the power exempt?
A: No. The exemption is for electricity used to produce tangible personal property. A § 1105(d)-taxable drink isn't tangible personal property, so the power stays taxable.

Q: Does this apply to the ice-maker and mixer feeding the machine too?
A: Yes — the Department reached the same result for the mixer/cuber and the ice-maker in companion opinions (TSB-A-83(32)S and TSB-A-83(31)S).

Citations and references

Statutes and regulations:

• Tax Law § 1105(d) — tax on food and drink sold by restaurants and other establishments
• Tax Law § 1105(b) — tax on sales of gas, electricity and other utilities
• Tax Law § 1115(c) — exemption for fuel and utilities used directly and exclusively to produce tangible personal property for sale
• 20 NYCRR § 527.8 — prepared food and drink

Other authorities referenced:

• Burger King v. State Tax Commission, 51 N.Y.2d 614

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_33s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(33)S
Sales Tax
July 6, 1983

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

PETITION NO. S820930A

On September 30, 1982 a Petition for Advisory Opinion was received from The Southland
Corporation, 425 Cherry Street, Bedford Hills, New York 10507.
The issue raised herein is whether the electricity used to power frozen food processors
(Slurpee machines) in a retail food store is subject to sales tax.
The frozen food processor combines flavored syrup, carbon dioxide and water into a frozen
product. This product is a carbonated beverage sold in either a frozen or semi-frozen state, delivered
to the purchaser in a coated paper or plastic cup.
Section 1105(d) of the Tax Law imposes a sales tax on "the receipts from every sale of . . .
any . . . drink of any nature . . . 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;
...
(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 (A) sold in an unheated state and (B) 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."
Accordingly, sales of the product of the Slurpee machine are subject to the sales tax imposed
under section 1105(d) of the Tax Law. Burger King v. State Tax Commission, 51 N.Y. 2d 614; 20
NYCRR 527.8(c), (d), (e)(2)(iv) Ex. 4.
Section 1115(c) of the Tax Law provides for an exemption from sales tax with respect to
electricity used or consumed directly and exclusively in the production of tangible personal property
for sale. However, the proposition that food and drink sold by a restaurant or other establishment
which is subject to tax under section 1105(d) of the Tax Law is not "tangible personal property" for
purposes of the Tax Law is well established. Burger King v. State Tax Commission, 51 N.Y. 2d 614.
Accordingly, electricity used to power Slurpee machines, which produce a drink the sale of which
is subject to tax under section 1105(d) of the Tax Law, does not come within the exemption provided
for under section 1115(c) of the Tax Law. The purchases of such electricity are therefore subject to
sales tax, pursuant to section 1105(b) of the Tax Law.

DATED: June 10, 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