Is equipment a gravel plant rents from a related corporation to assemble the plant exempt as production machinery, and is the related-party rental taxable?

Plain-English summary

Gernatt Asphalt Products, Inc., which produces sand and gravel by extraction and processing for sale, assembled its gravel plant on site in 1981 from components (conveyors, bins, shaker screens, scalping tanks, sand classifiers, dewatering screws) shipped in by manufacturers. To erect the plant it rented welding and earth-moving equipment — plus a labor force — from a related corporation (Dan Gernatt Gravel Products, Inc.), and it had dominion and control of that equipment. Gernatt asked two questions.

Issue 1 — Can the rented assembly equipment qualify for the manufacturing exemption? The production exemption (Tax Law 1115(a)(12)) covers machinery and equipment used directly and predominantly in producing tangible personal property for sale. By regulation, machinery used to produce other machinery or equipment for the taxpayer's own use in production is considered used directly in production (20 NYCRR 528.13(c)(3)), and "predominantly" means over 50% of its use is in the production phase (measured, here, over the rental period). So equipment used to assemble the gravel plant can qualify — but:

• The petition lacked enough detail about how each piece was used to decide piece-by-piece; and
• Only equipment directly used in assembling the plant components qualifies. Machinery used in collateral activities — such as building the plant's foundations — does not qualify.

Issue 2 — Is a rental between related corporations taxable? Yes. Sales tax applies to retail sales, including rentals, of tangible personal property (Tax Law 1105(a)). A sale or rental of property between related corporations is a taxable retail sale, taxed to the extent of the consideration paid, or the fair market value if the consideration doesn't reflect true value (20 NYCRR 526.7(d)(8)(i)). The two companies being related does not make the rental exempt.

What this means for you

Equipment that builds your production machinery can share in the production exemption — but only for the assembly work itself. New York treats machinery used to make (or assemble) your own production equipment as used directly in production. The catch is that it must be predominantly (over half) so used, and only the genuine assembly work counts.

Foundation and other collateral work is outside the exemption. Even on the same project, equipment used to pour foundations or do other collateral tasks doesn't qualify — the exemption is tied to acting on the production machinery/product, not to site preparation.

Renting from a sister company doesn't avoid tax. Related-party status is not an exemption. A rental between affiliated corporations is a taxable retail sale, valued at the consideration paid or, if that's not a true value, at fair market value. Document real, arm's-length consideration.

Common questions

Q: We rented equipment to assemble our own production plant. Is that rental exempt?
A: It can be, to the extent the equipment was used directly and predominantly (over 50%) in assembling the production machinery (1115(a)(12); 528.13(c)(3)). But you must document each piece's use, and foundation/collateral work doesn't qualify.

Q: What doesn't qualify?
A: Equipment used in collateral activities such as constructing the plant's foundations. Those aren't "directly in production."

Q: We rented the equipment from a related company. Does that make it tax-free?
A: No. A rental between related corporations is a taxable retail sale, taxed on the consideration paid or fair market value if the consideration isn't a true value (526.7(d)(8)(i)).

Citations and references

Tax Law:

• 1115(a)(12) — exempts machinery and equipment used directly and predominantly in producing tangible personal property for sale
• 1105(a) — imposes sales tax on retail sales, including rentals, of tangible personal property

Regulation:

• 20 NYCRR 528.13(c) — "directly and predominantly"; machinery used to produce other production machinery for self-use is used directly in production; predominant = over 50%
• 20 NYCRR 526.7(d)(8)(i) — a sale or rental between related corporations is a taxable retail sale, measured by consideration paid or fair market value

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_39s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(39)S
Sales Tax
August 28, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840222A

On February 22, 1984 a Petition for Advisory Opinion was received from Gernatt Asphalt
Products, Inc., Taylor Hollow Road, Box 400, Collins, New York 14034.
Petitioner, the owner and operator of a gravel plant, produces sand and gravel by extraction
and processing for sale to contractors and asphalt producers. In 1981 Petitioner assembled the gravel
plant on location from components (such as conveyors, bins, shaker screens, scalping tanks, sand
classifiers and dewatering screws) shipped to the site by various manufacturers. Petitioner rented
welding, earth-moving and other equipment needed for the erection of the plant. This equipment
was rented from a related corporation, Dan Gernatt Gravel Products, Inc., which also supplied a labor
force to help Petitioner's own employees with the set-up and assembly of the new installation.
Petitioner exercised dominion and control of the equipment rented from the related corporation.
Petitioner submitted with its Petition for Advisory Opinion an itemized bill submitted by Dan
Gernatt Gravel Products, Inc. This bill includes separate charges for each piece of construction
equipment and for labor supplied with the equipment.
Petitioner raises two issues with respect to the application of Article 28 of the Tax Law to
its aforementioned rental of equipment.
Issue (1)
Is the equipment rented by Petitioner eligible for the exemption from sales
tax allowed for machinery and equipment used in a manufacturing process?
Section 1115(a)(12) of the Tax Law provides an exemption from sales and use tax for
"machinery and equipment for use or consumption directly and predominantly in the production of
tangible personal property . . . for sale, by manufacturing, processing, generating, assembling,
refining, mining or extracting. . . ."
Sales and Use tax Regulations Section 528.13 states, in part:
"(c) Directly and predominantly. (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

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

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

-2­
TSB-A-85(39)S
Sales Tax
August 28, 1985
(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.
(3) Machinery used to produce other machinery or equipment or parts for self use
in production is considered to be used directly in production.
(4) Machinery or equipment is used predominantly in production, if over 50 percent
of its use is directly in the production phase of a process."
Thus, pursuant to regulation section 528.13(c)(3), machinery used to produce other
machinery or equipment is considered to be used directly in production and will qualify for the
exemption under section 1115(a)(12) if it meets the other conditions specified in section 528.13 of
the regulations. In this regard the applicable period for determining predominant use will be the
period of rental of the equipment.
Since the Petition for Advisory Opinion submitted by Petitioner does not contain sufficient
information regarding the specific use by Petitioner of each piece of machinery, it is not possible to
determine whether any particular piece of equipment qualifies for the exemption. However, it should
be noted that only equipment directly used in the assembly of the gravel plant components will
qualify for exemption. Machinery used in collateral activities (such as the construction of
foundations for the gravel plant) will not qualify for exemption.
Issue (2)
Is the rental of equipment between related corporations a taxable event?
Section 1101 of the Tax Law offers, in part, the following definitions:
"(a) When used in this article the term "person" includes an individual, partnership, . . . corporation.
...
Section 1105(a) of the Tax Law imposes a sales tax on the receipts from the retail sale (which
includes rentals) of tangible personal property.
Section 526.7 (d)(8) of the Sales and Use Tax Regulations provides with respect to inter­
corporate transactions:
"(i) The sale of property by one related corporation to another related corporation is a retail
sale, and taxable to the extent of the consideration paid, or the fair market value, if the consideration
paid is not an adequate indication of the true value of the property transferred."

-3­
TSB-A-85(39)S
Sales Tax
August 28, 1985
In accordance with the foregoing, the rental of equipment by Petitioner from Dan Gernatt
Gravel Products, Inc., is not exempt by virtue of the two corporations being related corporations.

DATED: August 12, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.