Are a gas driller's site-prep and well-service vehicles taxable, and does use tax apply to a copy machine bought in Louisiana and moved to New York?

Plain-English summary

J.C. Trahan Drilling Contractor, Inc. — a New York gas-well driller — raised three questions arising out of a February 1980–November 1982 audit: whether sales tax applied to (1) four-wheel-drive vehicles carrying surveying and staking equipment, used to prepare well locations before drilling; (2) pickup trucks carrying well-production equipment (pipe-hauling "headache" racks, tool boxes, valves and pipe connections for repair and maintenance, fire extinguishers and safety gear); and (3) whether use tax applied to a copy machine it bought in Louisiana in July 1982 and moved to its New York office in January 1983.

The Department held: the vehicles were taxable during the audit period but exempt after Aug. 26, 1981, and the copy machine owes New York use tax measured by market value.

• The site-prep and well-service vehicles are not used "directly" in production. The general exemption in § 1115(a)(12) reaches machinery and equipment used directly and predominantly in producing gas for sale, and 20 NYCRR § 528.13(c) treats use that is merely collateral to production as not "direct." However essential these vehicles are, their causal role isn't proximate enough to production to be "direct," so their purchase was taxable as the exemption stood at the start of the audit period.
• But a 1981 amendment made them exempt going forward. L. 1981, c. 846 amended § 1115(a)(12) — effective August 26, 1981 — to exempt "vehicles . . . used in the . . . production . . . of gas." So any purchases or uses of vehicles of this type on or after August 26, 1981 are not subject to tax.
• The Louisiana copy machine owes New York use tax — but on market value. A New York resident who buys property outside the State and uses it here, without paying New York sales tax, owes compensating use tax under § 1110. Use tax is normally computed on the purchase price, but where the taxpayer shows the property was used outside New York for more than six months before its first New York use, the tax is instead measured by the property's current market value at that first use (§ 1111). And under § 1118(7)(a), the petitioner gets a credit for any sales or use tax it paid on the Louisiana purchase.

What this means for you

"Essential to the job" isn't the same as "used directly in production." New York's production exemption demands a close, proximate role in the actual production process. Trucks and 4x4s that prepare sites, haul equipment, or carry repair supplies are treated as collateral — necessary, but not "direct" — and so aren't covered by the general exemption.

A specific statute can exempt an industry's vehicles by name. The 1981 amendment added gas-drilling and production vehicles to § 1115(a)(12) outright, so from its August 26, 1981 effective date those purchases are exempt regardless of the general "directly used" analysis. Effective dates matter: the same truck could be taxable one month and exempt the next.

Bringing property you bought out of state into New York can trigger use tax. If you're a New York resident and didn't pay New York sales tax, using the item here generally owes use tax. Two wrinkles help: if the property was genuinely used outside New York for more than six months first, the tax is measured by its (usually lower) current market value, not the original price; and you get a credit for sales or use tax already paid to the other state.

Common questions

Q: Are the trucks and 4x4s we use to prep sites and service gas wells exempt production equipment?
A: Not under the general "directly used in production" test — their use is collateral. But purchases and uses on or after August 26, 1981 are exempt under the amended § 1115(a)(12), which specifically lists gas-production vehicles.

Q: We bought equipment in another state and later moved it to New York. Do we owe tax?
A: If you're a New York resident and didn't pay New York sales tax, you generally owe compensating use tax under § 1110 when you use it here.

Q: Is the use tax based on what we originally paid?
A: Usually yes, but if you show the property was used outside New York for more than six months before its first New York use, the tax is measured by its current market value at that first use (§ 1111) — and you get a credit for tax paid to the other state (§ 1118(7)(a)).

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) — exemption for machinery and equipment used directly and predominantly in production; amended by L. 1981, c. 846 (eff. Aug. 26, 1981) to include gas-drilling/production vehicles
• Tax Law § 1110 — compensating use tax on property purchased outside New York
• Tax Law § 1111 — measure of use tax; current market value where property used outside New York more than six months
• Tax Law § 1118(7)(a) — credit for sales or use tax paid to another jurisdiction
• 20 NYCRR § 528.13(c) — meaning of "directly" used in production

Other authorities referenced:

• Cole Sand and Gravel Corp., State Tax Commission, Jan. 10, 1983, TSB-H-83(44)S
• Rochester Independent Packer, Inc. v. Heckelman, 83 Misc. 2d 1064

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_41s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(41)S
Sales Tax
October 27, 1983

STATE OF NEW YORK
STATE TAX DEPARTMENT
ADVISORY OPINION

PETITION NO. S830202A

On February 2, 1983 a Petition for Advisory Opinion was received from J.C. Trahan Drilling
Contractor, Inc., P.O. Box 2, Ellington, New York 14732.
This petition raises three issues:

1. Whether the purchase of four wheel drive vehicles used in the preparation of locations
   prior to drilling gas wells, and which contain surveying and staking equipment, is subject to sales
   tax.
2. Whether the purchase of pick-up trucks which contain equipment essential to the
   production of gas wells is subject to sales tax. Petitioner describes the equipment included as
   follows:
   "Headache" racks for hauling pipe and equipment to well locations
   and to the shop for repairs, large tool boxes for equipment used in
   testing wells and supplies (valves, pipe connections, etc.) for repair
   and maintenance of wells, fire extinguishers and safety equipment.
3. Whether a copy machine purchased in July, 1982 by Petitioner's Louisiana office, and
   subsequently transferred to Petitioner's New York office in January, 1983, is subject to use tax.
   Petitioner was a resident of New York in July, 1982.
   These issues arise within the context of an audit concerning the period February 2, 1980
   to November 30, 1982.
   Section 1115(a)(12) of the Tax Law provides for an exemption from sales tax with respect
   to sales of machinery and equipment purchased for use "directly and predominantly "in the
   production of gas, among other things, for sale. The terms "directly and predominantly" are defined
   in the Sales and Use Tax Regulations, in relevant part, as follows:
   (1)
   (i)
   (ii)
   (iii)
   (iv)

Directly means the machinery or equipment must, during the
production phase of a process,
act upon or effect a change in material to form the product to
be sold, or
have an active casual relationship in the production of the
product to be sold, or
be used in the handling, storage or conveyance of materials or
the product to be sold, or
be used to place the product to be sold in the package in
which it will enter the stream of commerce.

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

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

-2­
TSB-A-83(41)S
Sales Tax
October 27, 1983

(2)

(4)

Usage in activities collateral to the actual production process
is not deemed to be used directly in production.
...
Machinery or equipment is used predominantly in production,
if over 50% of its use is directly in the production phase of a
process.

While the vehicles in question are indubitably used in connection with the production of gas, and
may even be considered essential thereto, their causal role in the process of gas production is not
sufficiently proximate to the production itself to render their use "direct", within the meaning of the
portion of section 1115(a)(12) of the Tax Law quoted above. Cole Sand and Gravel Corp., State Tax
Commission, January 10, 1983, TSB-H-83(44)S; Rochester Independent Packer, Inc. v. Heckelman,
83 Misc. 2d 1064. Their purchase, accordingly, does not come within the ambit of such exemption
as it existed at the commencement of the Audit period in question. However, section 1115(a)(12)
was amended subsequently thereto, so as to exempt "vehicles . . . used in the . . . production . . . of
gas . . . . " L.1981,c.846. Such amendment took effect on August 26, 1981. Accordingly, any
purchases or uses by Petitioner of vehicles of the type described above, on or after August 26, 1981,
were not subject to tax.
The copy machine at issue was purchased in Louisiana and subsequently moved to and used
in New York. Section 1110 of the Tax Law imposes a compensating use tax on the use within New
York of tangible personal property purchased by a resident of New York at retail and on which New
York sales tax was not paid. Such being the case in the matter at hand, use tax is due on Petitioner's
use of the machine within New York. Such tax is generally computed on the basis of the purchase
price of the property whose use is subject to tax. However, where a taxpayer demonstrates that the
property was used outside New York for more than six months prior to its use within New York, the
use of the property is taxed on the basis of current market value at the time of its first use within New
York. Tax Law, §1111. In addition, Petitioner would be entitled to an exemption from use tax to the
extent that retail sales or use taxes were paid on the purchase in Louisiana. Tax Law, §1118(7)(a).

DATED: September 26, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau