Are an oil producer's subcontracted well-pulling repair service, its bulldozers and snowmobiles, and the diesel fuel for those vehicles subject to New York sales or use tax?

Plain-English summary

K-Arcy Corp., an oil producer in the Wellsville field, asked whether New York sales or use tax applied — during a June 1978–May 1981 audit — to three things used in its extraction operations: subcontracted "expertise and labor" to service its wells, its bulldozers and snowmobiles, and the diesel fuel for those vehicles.

The Department's answers turn on the production exemptions — and on an August 26, 1981 law change that expanded them for oil, gas and mining vehicles.

• The well-pulling service is a taxable repair service, but the State tax was later eliminated for production equipment. The subcontractor brings in a "pulling rig" to remove, inspect and replace worn well pipe, joints and pumps. That is installing, servicing or repairing tangible personal property under § 1105(c)(3) — a taxable service (with use tax under § 1110 if sales tax wasn't paid). But § 1105-B cut the State rate on such services from 4% to 2% as of September 1, 1980, and fully exempted the State tax as of March 1, 1981, when the service is performed on machinery used directly and predominantly in production by extracting. Local sales taxes still apply.
• The bulldozers and snowmobiles were taxable during the audit period, then exempt after Aug. 26, 1981. These vehicles prepare sites, clear terrain, build roads, and carry workers and equipment between wells. That role is collateral to actual production, so they are not used "directly" in production under § 1115(a)(12) and 20 NYCRR § 528.13(c) — meaning their purchase and use were taxable. But L. 1981, c. 846 amended § 1115(a)(12), effective August 26, 1981, to exempt "all pipe, pipeline, drilling rigs, service rigs, vehicles and associated equipment used in the drilling, production and operation of oil, gas and solution mining activities." So purchases and uses on or after that date are exempt — State and local, except in New York City.
• The diesel fuel follows the vehicles. The § 1115(c) fuel exemption requires fuel used "directly and exclusively" in production. Because the vehicles weren't used directly before Aug. 26, 1981, their fuel was taxable then; once the amendment deemed the vehicles used "directly" in production, the fuel became exempt on or after that date.

What this means for you

"Essential to the business" is not the same as "used directly in production." New York's manufacturing/extraction exemptions require a close, proximate causal role in the production process itself. Vehicles that prepare sites, build access roads, or move crews and gear between locations are treated as collateral — essential, maybe, but not "direct" — and so are not exempt under the general rule.

A statute can override the "directly used" test for a whole industry. The 1981 amendment carved out oil, gas and solution-mining vehicles and equipment by name, effectively deeming them used directly in production. When the Legislature does that, the ordinary "directly and predominantly" analysis gives way to the specific list.

Watch the effective dates and the State-vs-local split. The same purchase could be fully taxable in early 1981 and exempt weeks later. And exemptions don't always move in lockstep: the § 1105-B relief for repair services applied to the State tax only, leaving local sales tax in place, while the § 1115(a)(12) vehicle exemption reached both State and local tax (outside New York City).

Common questions

Q: Is the labor to pull, inspect and rework an oil well taxable?
A: Yes — it's a taxable repair/service under § 1105(c)(3). But under § 1105-B, the State portion was reduced (Sept. 1, 1980) and then eliminated (March 1, 1981) for equipment used directly and predominantly in production; local tax still applies.

Q: Are bulldozers and snowmobiles used at the wells exempt as production equipment?
A: Not under the general rule — they're used collaterally, not "directly," in production. But purchases and uses on or after August 26, 1981 are exempt under the amended § 1115(a)(12), which lists oil/gas/mining vehicles and equipment.

Q: What about the diesel fuel for those vehicles?
A: It tracks the vehicles under § 1115(c): taxable before August 26, 1981, exempt on or after that date once the vehicles were deemed used directly in production.

Citations and references

Statutes:

• Tax Law § 1105(c)(3) — tax on installing, maintaining, servicing and repairing tangible personal property not held for sale
• Tax Law § 1105-B — reduction (4%→2%) and then elimination of the State tax on services to machinery/equipment used directly and predominantly in production
• 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 oil/gas/solution-mining vehicles and equipment
• Tax Law § 1115(c) — exemption for fuel used directly and exclusively in production
• Tax Law §§ 1110, 1111 — compensating use tax
• 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_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(44)S
Sales Tax
November 29, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S821012C

On October 12, 1982 a Petition for Advisory Opinion was filed by K-Arcy Corp., 313 North
Main Street, Wellsville, New York 14895.
The issue raised, within the context of the oil extraction industry, is whether sales or use tax
is due with respect to 1) certain "subcontracted expertise and labor," 2) certain bulldozers and
snowmobiles, and 3) diesel fuel used in such vehicles. This issue has arisen in the course of an audit
covering the period June 1, 1978 to May 31, 1981.
Petitioner is engaged in the oil extraction industry. According to Petitioner, as part of the
extraction process, the well pipes and pumps are removed from the earth (pulled) and inspected a
number of times over the life of a working well. The operation in question is often subcontracted out
to a company with expertise in this area. Machinery commonly called a pulling rig is brought to the
well site by truck and set up over the well. The pipe, joints and pumps are then removed from the
well by mechanically pulling them upward. The inner-workings of the well are then inspected and
a decision is made to continue the extraction process at the particular well or to cap the well. If the
decision to continue the extraction process is made, worn twenty-foot sections of pipe, Joints and
pumps will be replaced as required. The pipe, joints and pumps are placed into the well system by
the pulling rig.
The services performed by the subcontractor described above fall within the category of
"installing, . . . maintaining, servicing or repairing . . . tangible personal property . . . not held for sale
in the regular course of business." The receipts from the provision of such service are subject to the
tax imposed under section 1105(c)(3) of the Tax Law, as well as any similar applicable locally
imposed sales taxes. Use tax would be due where sales tax was not paid at the time of purchase. Tax
Law, § 1110. However, section 1105-B of the Tax Law provides that where such service is rendered
with respect to machinery or equipment used "directly and predominantly in the production of
tangible personal property . . . by . . . extracting," as is the case herein, the State sales tax rate was
reduced from 4% to 2% as of September 1, 1980, and such receipts became exempt from the State
tax as of March 1, 1981. These provisions have no bearing on locally imposed sales taxes.
Petitioner next inquires as to the applicability of sales and use taxes to its bulldozers and
snowmobiles. The bulldozers are utilized to prepare drilling sites, clear terrain and create roads in
order to enable drilling equipment to reach and operate on drilling sites. The bulldozers are not
licensed for over the road use. They are transported to the sites by tractor trailers which are licensed
for over the road use. The snowmobiles are utilized in the transportation of employees and
equipment from well to well. The snowmobiles are not licensed for over the road use and are
transported to the property edge by pick-up trucks.

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

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

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TSB-A-83(44)S
Sales Tax
November 29, 1983

The wells are virtually inaccessible by any other means during the winter months.
Section 1115(a)(12) of the Tax Law provides for an exemption from sales and use taxes with
respect to machinery and equipment used "directly and predominantly in the production of tangible
personal property . . . for sale, by . . . extracting." The term "directly" is explicated in the Sales and
Use Tax Regulations, as follows:
(1)

Directly means the machinery or equipment must, during the production phase of a
process,

(i)

act upon or effect a change in material to form the product to be sold, or

(ii)

have an active causal relationship in the production of the product to be sold, or

(iii)

be used in the handling, storage or conveyance of materials or the product to be sold,
or

(iv)

be used to place the product to be sold in the package in which it will enter the stream
of commerce.

(2)

Usage in activities collateral to the actual production process is not deemed to be
used directly in production . . . 20 NYCRR § 528.13(c).

While the vehicles in question are indubitably used in connection with the production of oil,
and may even be considered essential thereto, their causal role in the actual process of oil production
is not sufficiently proximate 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 and use, accordingly, do not come within the ambit of the exemption described
above, as it existed during the audit period at issue. It is to be noted, however, that section
1115(a)(12) of the Tax Law was amended, in 1981, by the addition of the following sentence: "This
exemption shall include all pipe, pipeline, drilling rigs, service rigs, vehicles and associated
equipment used in the drilling, production and operation of oil, gas and solution mining activities
to the point of sale to the first commercial user." L. 1981, c. 846. Such amendment took effect on
August 26, 1981, and is applicable to both State and local sales and use taxes (other than in New
York City). Accordingly, any purchase by Petitioner of vehicles to be used as described above, as
well as any such use, on or after August 26, 1981 would not be subject to sales or use tax.
Petitioner inquires, finally, as to the sales and use tax status of diesel fuel used in the vehicles
described above. Section 1115(c) of the Tax Law provides for an exemption from sales tax with
respect to "fuel . . . for use or consumption directly and exclusively in the production of tangible
personal property, gas . . . for sale, by . . . extracting . . . . " The vehicles in question are not used
"directly" in production, and it is for this reason that their purchase and use prior to August 26, 1981
was not exempt from tax. It follows, accordingly, that fuel used to power such vehicles during such

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TSB-A-83(44)S
Sales Tax
November 29, 1983

period was not used directly in production, and was therefore subject to tax. However the statutory
amendment described above carved out an exemption for a variety of equipment used in the gas, oil
and solution mining industries, including the subject vehicles, in effect statutorily deeming them to
be "used directly" in production. Accordingly, on or after August 26, 1981, where vehicles referred
to in the second sentence of section 1115(a)(12) are used predominantly in the activities there
described, they are, within the present meaning of the Tax Law, "directly and predominantly" used
in the production of gas or other tangible personal property for sale by extracting. The fuel used to
power such vehicles during such activities would thus come within the purview of the exemption
provided for in section 1115(c) of the Tax Law.

DATED: October 26, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau