Can a gas supplier buy the cylinders it provides to customers tax-free as purchases for resale?

Plain-English summary

Jackson Welding Co. sells industrial gases, welding supplies, and accessories, and provides gas cylinders to industrial customers — mostly by lease (outright sales are rare due to safety rules). It asked whether its cylinder purchases are exempt as purchases for resale under § 1101(b)(4). It argued the cylinder-leasing side is independent of gas sales, pointing to five facts: customers needn't lease to buy gas; cylinders may be filled by other distributors; cylinder rental and gas are billed separately; separate accounts show a separate profit center; and there's no fixed return period.

The Department held Jackson didn't show the cylinders were purchased for resale.

• Property supplied as a component of a vendor's sales/services isn't "for resale." It is well settled that tangible personal property a vendor supplies to customers as a component of its sales or services is not purchased for resale (Albany Calcium Light — cylinders were not for resale where the seller treated their cost as a cost of selling the gas; U-Need-A-Rolloff — trash containers with no distinguishable consideration).
• Resale requires a specific charge and a genuine option. To be a purchase for resale, property must be bought with the intent to resell it as such, not to use it as a component of a service. A resale occurs only where there is a specific rental charge (Niagara Lubricant), and the substance of the transaction gives the customer a true option to rent the property without buying the service, or buy the service without renting. Merely stating a separate cylinder charge on an invoice does not make it a resale.
• On these facts, no resale shown. Nothing indicated Jackson ever provides cylinders except in conjunction with gas sales; its offer to rent cylinders without gas carries no weight if no customer would actually do so. So Jackson failed to demonstrate its cylinder purchases were for resale.
• Genuine rentals may qualify — with segregation. If Jackson actually rents empty cylinders, those may qualify for exemption; but a vendor that also uses the same type of property for non-qualifying uses (e.g., self-use) must segregate the rental units — using them interchangeably disqualifies all of them (Micheli Contracting).
• Audit context. Because the issue arose in an audit, whether Jackson actually rents cylinders will be determined in that audit under the policy stated here.

What this means for you

"Purchase for resale" is about substance, not invoice formatting. Splitting out a separate charge for equipment (cylinders, containers) doesn't make it a resale if customers only ever get the equipment as part of buying your product or service.

The test is a true, independent option. To treat rental property as bought for resale, a customer must realistically be able to rent it without buying your goods/service (or vice versa). A theoretical offer nobody takes doesn't count.

Keep rental inventory separate from what you use yourself. If you both rent and self-use the same kind of property, you must segregate the rental units. Mixing them means none qualify for the resale exclusion.

Common questions

Q: We bill cylinder rental separately from gas — can we buy cylinders tax-free for resale?
A: Not by itself. A separate line item isn't enough. You must show customers genuinely can rent cylinders without buying gas (or buy gas without renting), with a specific rental charge — otherwise the cylinders are a component of your gas sales and taxable when you buy them.

Q: What if some customers really do rent empty cylinders?
A: Those genuine rentals may qualify for the resale exemption, but you must segregate the rental cylinders from any you use for other purposes. Interchangeable use disqualifies all of them.

Q: The opinion came out of an audit — is this the final word?
A: The Department stated the policy; whether Jackson actually rents cylinders is a factual question to be resolved in the audit based on all the facts.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — taxes retail sales of tangible personal property
• Tax Law § 1101(b)(4) — defines "retail sale" and excludes purchases for resale
• Tax Law § 1101(b)(5) — defines "sale," including rentals/leases
• 20 NYCRR 526.6 — purchase for resale

Cases and determinations cited:

• Albany Calcium Light, Inc. v. State Tax Commission, 44 N.Y.2d 987 (1978) — cylinders supplied with gas not purchased for resale
• U-Need-A-Rolloff Corporation, Decision of the State Tax Commission, Jan. 20, 1984, TSB-H-84(16)S, aff'd 67 N.Y.2d 690 (1986) — trash containers not for resale
• Niagara Lubricant Company, Inc. v. State Tax Commission, 502 N.Y.S.2d 312 — resale needs a specific rental charge
• Micheli Contracting Corp. v. State Tax Commission, 109 A.D.2d 957 (1985) — interchangeable rental/self-use disqualifies the exclusion
• Also cited: Amherst Cablevision; Radiac Research Corp.; Laux Advertising, Inc. v. Tully

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_46s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(46)S
Sales Tax
December 1, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840103B

On January 3, 1984, a Petition for an Advisory Opinion was received from Jackson Welding
Co. 535 Buffalo Rd., Rochester, New York 14611.
Petitioner raises the issue of whether its purchases of gas cylinders which it provides to
customers as part of its business of selling industrial welding supplies and gases, are exempt from
sales tax as purchases for resale within the meaning of Section 1101(b)(4) of the Tax Law.
Petitioner is engaged in the business of selling industrial gases as well as welding supplies
and industrial accessories. A component of Petitioner's business includes the sale and rental of gas
cylinders to industrial customers. Petitioner states that due to stringent safety requirements the sale
of gas cylinders is rare and that, therefore, Petitioner engages almost exclusively in the leasing of
such cylinders either under a long term arrangement or on a month to month basis. Petitioner
contends that its cylinder leasing business is independent of its sale of industrial gases. In support
of this contention, Petitioner emphasizes the following facts:

1. Customers need not lease Petitioner's cylinders in order to buy gas.
2. The cylinders leased by Petitioner to its customers may be filled by
   other industrial gas distributors, provided those distributors meet
   Petitioner's safety requirements.
3. Petitioner bills its customers separately for cylinder rental and gas
   purchases.
4. Petitioner keeps separate accounts for its cylinder leasing business
   and can demonstrate a separate profit center arising from this business.
5. Petitioner does not insist on the return of its cylinders within any
   set time period, but permits customers to lease them as long as they
   wish.
   Generally, section 1105(a) of the Tax Law imposes a sales tax on receipts from every retail
   sale of tangible personal property unless otherwise excluded or exempted. Section 1101(b)(4)(i)
   defines "retail sale" as "a sale of tangible personal property to any person for any purpose, other than
   (A) for resale as such. . .". The effect of this provision is to remove property purchased for resale
   from the application of the sales tax imposed under Section 1105(a) of the Tax Law.
   Section 1101(b)(5) of the Tax Law defines "sale" as any transfer of title or possession or
   both, exchange or barter, rental lease or license to use or consume, conditional or otherwise, in any
   manner or by any means whatsoever for a consideration. ...
   RODERICK G. W. CHU, COMMISSIONER
   TP-8 (3/83)

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

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TSB-A-86(46)S
Sales Tax
December 1, 1986
It is well settled that tangible personal property purchased by a vendor and supplied to its
customers as a component of its services to its customers is not purchased for resale within the
meaning of section 1101(b)(4) of the Tax Law. Thus, it has been held that gas cylinders were not
purchased for resale where the seller of the gas did not impose a separate charge for the use of its
cylinders, but rather treated the cost as a cost of selling the gas itself. Albany Calcium Light, Inc.
v. State Tax Commission, 44 NY2d 987 (1978). Moreover, the nominal demurrage charge imposed
by the seller for the late return of cylinders was regarded by the court as merely incidental to the
selling of the gases since the seller did not acquire the cylinders with the expectation of collecting
these unusual charges.
Similarly, it has been held that where a vendor purchased trash containers for use as part of
a trash removal service with no distinguishable consideration being paid by the customers of such
service for the containers, such containers were not purchased for resale. U-Need-A-Rolloff
Corporation, Decision of the State Tax Commission, January 20, 1984, TSB-H-84(16)S; aff'd 67
NY2d 690, (1986). (See also: Amherst Cablevision, Inc., Decision of the State Tax Commission,
September 19, 1980, TSB-H-80(208)S; Radiac Research Corp., Decision of the State Tax
Commission, December 29, 1982, TSB-H-83(32)S; Laux Advertising, Inc. v. Tully, 67 A.D.2d 1066
(1979)).
Thus to qualify as a purchase for resale, tangible personal property must be purchased with
the intent to resell it as such and not to use it as a component of a service provided to a customer.
A resale will be deemed to occur only where a specific charge is made for the rental of the tangible
personal property in question. See Niagara Lubricant Company, Inc. v. State Tax Commission, 502
NYS2d 312. However, the mere separate statement on an invoice of charges for tangible personal
property where such tangible personal property is furnished as a component of services rendered will
not be deemed a resale of the tangible personal property.
To qualify as a resale, the substance of the transaction must be such that the customer has a
true option to rent the tangible personal property without also purchasing the services or to purchase
the services without renting the tangible personal property. There is nothing to indicate that
Petitioner ever provides cylinders except in conjunction with the sale of its industrial gases. The
mere separate statement of a charge for cylinders as a component of the charge for industrial gas does
not make their purchase a purchase for resale. Petitioner's offer to rent cylinders without the
purchase of gas is of no weight if no customer would rent such cylinders without also purchasing
gas.
Accordingly, Petitioner has failed to demonstrate that its purchases of cylinders were
purchases for resale.
Of course, if Petitioner actually rents any empty cylinders, such cylinders may qualify for
exemption on their purchase. However, it should be noted that if a vendor both rents tangible
personal property and uses the same type of tangible personal property for other non-qualifying uses

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TSB-A-86(46)S
Sales Tax
December 1, 1986
(e.g. self use), he must segregate the tangible personal property used for rental purposes. If the
vendor uses tangible personal property interchangeably for rental and for non-qualifying uses, none
of the tangible personal property will qualify for exclusion from sales and use tax since none of the
tangible personal property is used exclusively for resale. Micheli Contracting Corp. v. State Tax
Commission, 109 A.D. 2d 957 (1985).
Inasmuch as the issue raised in this Advisory Opinion was raised in the context of an audit
of the taxpayer, the factual determination of whether Petitioner rents cylinders to its customers will
be determined within the context of the audit based upon all of the facts and circumstances of the
case in a manner consistent with the policy of the Tax Commission as set forth herein.

DATED: December 1, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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