How is use tax computed on custom cabinets a manufacturer builds and installs, and does its production machinery qualify for the manufacturer's exemption?

Plain-English summary

Bloch Industries, Inc. custom manufactures and installs kitchens. It keeps no inventory, catalog, or price list; every order is built to the customer's specifications with tolerances down to 1/8 of an inch, and adjustments are made at the installation site. About 30% of its cabinets are sold uninstalled. When it installs cabinets, it is acting as a contractor and owes use tax on the cabinets it consumes in the installation. It asked how that use tax should be measured — whether its cabinets are "items of the same kind" (measured at an offering price) or unique.

The Department's answer:

• Custom, job-specific cabinets are not "items of the same kind." Under Tax Law § 1110 and Regulation § 531.3(b)(1)(i)(a), when a manufacturer offers "items of the same kind" for sale in the regular course of business, use tax is based on the offering price (catalog price, price list, or the average of prices charged customers). But items made to the specifications of a particular job are not items of the same kind as catalog or inventory sales — and are not even the same kind as items made for a different job (Reg. § 531.3, Example 2). Because Bloch builds each kitchen to a specific job's specs, this rule applies (citing Cardinal Kitchens, Inc., STH-77-7).
• Use tax is measured on raw-material cost. Accordingly, the basis for Bloch's use tax on the cabinets it installs is the cost of the raw materials contained in the cabinets — not an offering or list price.
• No manufacturer's machinery exemption. Bloch's production machinery and equipment does not qualify for the manufacturer's exemption under Tax Law § 1115(a)(12), because fewer than 50% of its cabinets are sold uninstalled (i.e., it is predominantly a contractor consuming its own product, not a manufacturer selling tangible personal property at retail).

What this means for you

Custom fabricators who also install

If you build to each job's specifications and install the result, you are a contractor consuming your own product, and you owe use tax. Because your work is job-specific, it is not "items of the same kind," so your use tax is measured on your raw-material cost, not on a hypothetical retail or catalog price.

Standard vs. custom is the dividing line

Standard-size, cataloged products (even if built to order from a catalog description) are "items of the same kind," and use tax is measured at their offering price. Truly job-specific items are not — and are not even comparable to items you built for another job. Keep records showing each job's unique specifications.

The 50% test controls the machinery exemption

The manufacturer's production-machinery exemption (§ 1115(a)(12)) requires that you predominantly sell your product as tangible personal property. If, like Bloch, you install most of what you make (fewer than 50% sold uninstalled), you are predominantly a contractor and your machinery does not qualify for the exemption.

Accountants and tax professionals

Two holdings: (1) job-specification custom goods fall in the third paragraph of Reg. § 531.3 Example 2, so § 1110 use tax is measured on raw-material cost rather than an offering price (Cardinal Kitchens); and (2) the § 1115(a)(12) production-equipment exemption fails on the predominant-use test where fewer than 50% of units are sold uninstalled.

Common questions

Q: How is use tax computed on cabinets a maker builds and installs?
A: On the cost of the raw materials in the cabinets, because custom, job-specific cabinets are not "items of the same kind" measured at an offering or catalog price.

Q: What makes goods "items of the same kind"?
A: They belong to an identifiable class (not necessarily identical) and are offered for sale in the regular course of business — typically standard, cataloged, or inventory items. Job-specification items are not.

Q: Are two custom kitchens "the same kind" as each other?
A: No. Items made to the specifications of one particular job are not items of the same kind as items made to the specifications of another job.

Q: Does the maker's machinery qualify for the manufacturer's exemption?
A: No. Because fewer than 50% of its cabinets are sold uninstalled, the production machinery does not qualify for the § 1115(a)(12) exemption.

Q: Why does installing most of the product matter?
A: Installing most of what you make means you predominantly consume it as a contractor rather than selling it as tangible personal property, which is what the manufacturer's exemption requires.

Citations and references

Statutes and authorities:

• Tax Law § 1110 (compensating use tax on tangible personal property manufactured, processed, or assembled by the user)
• Sales and Use Tax Regulations § 531.3(b)(1)(i)(a) (basis of use tax; definition and examples of "items of the same kind")
• Tax Law § 1115(a)(12) (manufacturer's exemption for production machinery and equipment)
• Cardinal Kitchens, Inc., Dec. St. Tx. Comm., Sept. 28, 1976, STH-77-7

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_48s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (48) S
Sales Tax
June 19, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920206B

On February 6, 1992 a Petition for Advisory Opinion was received from Bloch Industries,
Inc., 140 Commerce Drive, Rochester, N.Y. 14623.
The issue raised by Petitioner, Bloch Industries, Inc., is whether kitchen cabinets produced
by Petitioner are considered to be "items of the same kind" or are considered to be unique when
determining Petitioner's use tax liability.
Petitioner custom manufactures and installs kitchens. Petitioner maintains no inventory, nor
does it have a catalog or price list. All orders are made to the specifications of the customer. Because
of the variations in kitchen design and layout, every kitchen is manufactured for the job with
tolerances down to 1/8 of an inch. After the cabinets have been manufactured, adjustments may be
made at the site of installation. Approximately 30% of Petitioner's cabinets are sold uninstalled.
In instances where Petitioner does not install the kitchens, Petitioner's customer, usually a
remodeling contractor and his customer, contacts Petitioner for design assistance due to the
restructuring aspects of the project. The remodeler and Petitioner then meet to solidify the initial
decision including decisions as to dimensions, plumbing and electrical considerations that will
impact cabinet design and construction. Once Petitioner, the remodeler and his customer agree on
design, materials and specifications, Petitioner produces the cabinets.
Section 1110 of the Tax Law provides in part that:
Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state on and after June first, nineteen hundred seventy­
one except as otherwise exempted under this article,. . .(B) of any tangible personal
property manufactured, processed or assembled by the user, (i) if items of the same
kind of tangible personal property are offered for sale by him in the regular course
of business.
Section 531.3(b)(1)(i)(a) of the Sales and Use Tax Regulations provides that:

TP-9 (9/88)

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TSB-A-92 (48) S
Sales Tax
June 19, 1992

(i) If the user offers items of the same kind for sale in the regular course of business,
the basis on which use tax is computed is the price at which items of the same kind
of tangible personal property are offered for sale by the user. The price at which items
are offered for sale is evidenced by a price list, catalog price or record of sales. In the
absence of a catalog price list, the average of the prices charged various customers
will be deemed to be the price at which the user would sell such item during the
regular course of business.
(a) Items of the same kind mean that items belong to an
identifiable class, but need not be identical.
Example 2:

Windows are items of the same kind when they are a
standard size and materials whether or not they are
sold from inventory or produced to order from a
catalog description. A manufacturer of windows
produces from a catalog description square, round and
hexagon shape windows from various materials. The
widows regardless of shape, size or material are
considered to be items of the same kind.
When items which are not standard or
cataloged are made to the specifications of a particular
job, these will not be considered items of the same
kind with catalog or inventory sales.
Items made to the specifications of a particular
job will not be considered items of the same kind as
items made to the specifications of another particular
job.

Petitioner does not offer". . .items of the same kind for sale in the regular course of business
. . ."Rather, Petitioner's business activities come within the purview of the third paragraph of
example 2 above and thus are not subject to the use tax imposed by Section 1110(B)(i) of the Tax
Law. (see: Cardinal Kitchens, Inc. Dec St Tx Comm, September 28, 1976 STH-77-7). The basis
upon which Petitioner therefore owes use tax on its installed cabinets, is the cost of the raw materials
contained in the cabinets.

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TSB-A-92 (48) S
Sales Tax
June 19, 1992

It should be noted that Petitioner's production machinery and equipment does not qualify for
the manufacturer's exemption provided by Section 1115(a)(12) of the Tax Law since less than 50%
of its cabinets are sold uninstalled.

DATED: June 19, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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