Is the gas and electricity a subcontractor uses to reprocess a manufacturer's rejected metal, glass, or plastic parts back into resalable material exempt as production fuel?

Plain-English summary

Burn Brite Metals Company, Inc. reprocesses metal, glass, or plastic parts that manufacturers rejected in production, converting them back into reusable form. Burn Brite never takes title — the reclaimed materials go back into the owner's production and are ultimately sold as parts or ingredients of a finished product. It asked whether the natural gas and electricity it consumes doing this qualifies for the production-fuel exemption.

The Department held the fuel is exempt to the extent used directly and exclusively in production — even though Burn Brite is only a subcontractor.

• The exemption. Tax Law § 1115(c) exempts fuel, gas, and electricity used or consumed directly and exclusively in producing tangible personal property for sale by manufacturing or processing.
• Processing counts. "Processing" (20 NYCRR § 527.4) is a service on property that changes its nature, shape, or form, and is exempt-eligible when performed on property intended for sale. "Directly" means the power operates production machinery, creates conditions necessary for production, or performs part of the process; "exclusively" means 100% (20 NYCRR § 528.22(c)).
• Subcontractor is fine. Reprocessing material intended for sale is a step in manufacturing, so the machinery qualifies under Tax Law § 1115(a)(12) whether its owner sells the product or merely acts as a subcontractor processing material for the seller. So the gas and electricity is fully exempt when running machinery used 100% in production, and must be apportioned when the machinery also serves nonproduction uses.
• How to claim it. Establish eligibility with a resale certificate (Form ST-120) from each customer buying the processing service for sale. Where exempt and taxable power share one meter, Burn Brite can either pay tax and claim a refund/credit (Form AU-11) for the exempt portion, or buy tax-free with an Exempt Use Certificate (Form ST-121) and report the taxable portion as a purchase subject to use tax — keeping records and an engineering survey to substantiate exempt use.

What this means for you

You don't have to own the goods to claim the production-fuel exemption. New York's exemption for fuel, gas, and electricity used directly and exclusively in production reaches a subcontractor who processes another company's material — as long as that material is destined for sale. Reclaiming or reworking rejected parts back into resalable form is a production step.

"Exclusively" means 100% — apportion mixed use. Power that runs machinery used entirely in production is fully exempt. If the same equipment (or meter) also serves nonproduction functions, only the production share is exempt, and you must document the split.

Get the paperwork right. Take resale certificates from customers whose material you process for sale, and choose your mechanism for the exemption — pay-and-refund (AU-11) or buy-exempt-and-self-assess (ST-121) — backed by records or an engineering survey.

Common questions

Q: We reprocess a manufacturer's scrap/rejects without ever owning it. Can our utilities be exempt?
A: Yes — to the extent the gas and electricity is used directly and exclusively in the reprocessing, which is a production step for material intended for sale. The exemption applies even though you're a subcontractor who doesn't take title.

Q: Our equipment runs both production and non-production tasks. Is all the power exempt?
A: No. "Exclusively" means 100%. You apportion, and only the portion used directly and exclusively in production is exempt.

Q: Exempt and taxable electricity are on one meter. How do we handle it?
A: Either pay the tax and claim a refund/credit on Form AU-11 for the exempt portion, or buy tax-free with an Exempt Use Certificate (Form ST-121) and report the taxable portion as a purchase subject to use tax — supported by records or an engineering survey.

Citations and references

Statute, regulation, and guidance:

• Tax Law § 1115(c) — exempts fuel, gas, electricity, refrigeration, and steam used or consumed directly and exclusively in producing tangible personal property for sale by manufacturing or processing
• Tax Law § 1115(a)(12) — production machinery and equipment exemption; applies to reprocessing material intended for sale whether the owner sells the product or acts as a subcontractor
• 20 NYCRR § 527.4(a)(2), (d) — defines "processing" (a service changing the nature, shape, or form of property) and treats processing services as exempt-eligible when performed on property intended for sale
• 20 NYCRR § 528.22(c) — "directly" (operating production machinery, creating conditions necessary for production, or performing part of production) and "exclusively" (100%); § 528.13(b)(1)(ii) defines the production line; § 528.22(c)(3) covers single-meter apportionment, refunds, and required records/engineering survey (see also TSB-M-82(25)S)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_17s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (17)S
Sales Tax
February 29, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870911A

On September 11, 1987, a Petition for Advisory Opinion was received from Burn Brite
Metals Company, Inc., 109 Baker Street, P.O. Box 171, Syracuse, New York 13206.
The issue raised is the taxable status, under Article 28 and 29 of the Tax Law, of natural gas
and electricity consumed in converting metal, glass or plastic parts, rejected in the manufacturing
process, into reusable form.
Petitioner, who performs this reprocessing service for manufacturers, does not take title to
the materials. The separated components or reclaimed raw materials are returned to re-enter the
owner's production process and are ultimately sold as parts or ingredients of a finished product.
The Tax Law (§ 1115[c]) exempts from sales and use tax the purchases of fuel, gas or
electricity for use or consumption directly and exclusively in the production of tangible personal
property for sale by manufacturing or processing.
The Sales and Use Tax Regulations define "processing" as the performance of any service
on tangible personal property for the owner which effects a change in the nature, shape, or form of
the property. Processing services are taxable unless performed on property intended for sale. 20
NYCRR 527.4(a)(2),(d). Gas or electricity is used "directly" in production if it operates machinery
or equipment while employed directly in production, or creates conditions necessary for production,
or performs an actual part of the production process. "Exclusively" means the gas or electricity must
be used in total (100%) in the production process. 20 NYCRR 528.22(c).
The Sales and Use Tax Regulations explain further: "'Production' includes the production line
of the plant starting with handling and storage of raw materials at the plant site and continuing
through the last step of production where the product is finished and packaged for sale." 20 NYCRR
528.13(b)(1)(ii).
When employed in reprocessing material intended for sale, as described by the Petitioner,
machinery and equipment is used directly in production because it is performing a step in a
manufacturing process; it is therefore eligible for the exemption provided in section 1115(a)(12) of
the Tax Law whether its owner sells the property produced or merely acts as a subcontractor
processing material for the seller.
Consequently, gas and electricity consumed by the Petitioner is fully exempt when operating
machinery and equipment employed 100% of the time directly in production. When providing power
to machinery used for both production and nonproduction purposes, gas or electricity must be
apportioned accordingly and exemption may be claimed only for the quantity consumed directly and
exclusively in the production process.
RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-88 (17)S
Sales Tax
February 29, 1988

Since purchases of machinery, equipment, gas and electricity qualify for exemption only
when employed to produce property for sale (with certain exceptions not here at issue), Petitioner
must establish eligibility for the exemption by obtaining a resale certificate (form ST-120) from each
customer purchasing its processing service for sale.
If the use of exempt and taxable gas and electricity is recorded on a single meter, sales tax
is normally charged on the total amount billed. In this event, the user may request a refund or credit
(on form AU-11) for the tax paid on the exempt portion of the power purchase. In the alternative,
a consumer may purchase gas or electricity without payment of tax (by furnishing the supplier with
an Exempt Use Certificate, form ST-121) and report the taxable portion as a "purchase subject to use
tax" on the sales tax return covering the time of purchase. The consumer must maintain records
substantiating exempt use and, when claiming a refund or credit, submit an engineering survey or
other formulae showing calculations of exempt use. 20 NYCRR 528.22(c)(3).
Petitioner may find it helpful to review the Department of Taxation and Finance publication
on Determining Electricity Used in the Production of Tangible Personal Property for Sale, September
7, 1982, TSB-M-82(25)S.

DATED: February 29, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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