Does a manufacturer of CV-joint grinding machines have to collect sales tax when it sells them to auto parts remanufacturers and repair shops?

Plain-English summary

Constant Velocity Systems manufactures machines that regrind worn automotive CV (constant velocity) joints and add new ball bearings and parts to remanufacture them as "new" for the automotive parts industry. It asked the Department whether it must collect sales tax when selling these grinding machines.

The Department's answer turns entirely on what the buyer does with the machine. New York exempts machinery used directly and predominantly (over 50% of the time) in the production of tangible personal property for sale. If Constant Velocity sells its machine to a remanufacturer, parts dealer, or distributor that uses it to produce CV joints for sale to others, that's production, and the sale of the machine is exempt, assuming the majority-use threshold is met. The same holds if a repair shop uses the machine to regrind worn joints into an inventory of parts it later sells to different customers -- that's still producing goods for sale. But if a repair shop uses the machine only to regrind a specific customer's own worn joint and hand that same joint back to that same customer, the machine is being used for repair, not production, and the sale to that repair shop is taxable. Sales delivered and used entirely outside New York aren't subject to New York sales tax at all. To document an exempt sale, Constant Velocity needs a properly completed Exempt Use Certificate (Form ST-121) from the buyer within 90 days of delivery.

What this means for you

Manufacturers selling equipment that customers might use for either production or repair

The tax treatment of your equipment sale depends on your specific customer's actual use, not just the equipment's general capability -- the exact same machine can be an exempt production sale to one customer and a taxable sale to another, based on whether the buyer produces new goods for sale versus repairs and returns a customer's own item.

Auto parts remanufacturers and repair shops

If you regrind and resell parts to different customers, not returning the same part to the person who brought it in, your purchase of the grinding equipment can qualify for the production exemption. If you're just repairing and returning a specific customer's part, your purchase of that equipment is taxable.

Accountants and tax professionals

This is a clean worked example of the "directly and predominantly" production test applied at the point-of-sale-to-equipment-buyer level, and echoes the Department's own paper-machine-roll example (reconditioning vs. new production) in the regulation itself.

Common questions

Q: Does selling equipment that could be used either way make the seller responsible for classifying each sale?
A: Yes, functionally -- the seller needs to determine (and document via an Exempt Use Certificate) how each specific buyer will use the machine to know whether to collect tax.

Q: What if the buyer uses the machine for both production and repair?
A: The exemption applies if more than 50% of the machine's use is directly in the production phase; use split between production and repair is measured against that threshold.

Q: Are sales of these machines to out-of-state buyers taxable?
A: No. If the machine is delivered outside New York for use outside New York, the sale isn't subject to New York sales tax and the seller doesn't need to collect it.

Q: Can another equipment manufacturer rely on this ruling?
A: No. It's an Advisory Opinion binding the Department only as to Constant Velocity Systems and the facts it described about its specific machine and customer base.

Citations and references

• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(3) (installing/maintaining/servicing/repairing tangible personal property)
• Tax Law § 1115(a)(12) (production machinery and equipment exemption)
• Tax Law § 1132(c) (exempt use certificate requirement)
• 20 NYCRR § 528.13(c) (directly and predominantly test)
• 20 NYCRR § 532.4 (exempt use certificate procedure)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_47s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(47)S
Sales Tax
July 31, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S980205A

On February 5, 1998, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Constant Velocity Systems, Inc., 22 Corporate
Drive, Clifton Park, New York, 12065. Petitioner, Constant Velocity Systems,
Inc., submitted additional information pertaining to the Petition on April 2,
1998.
The issue raised by Petitioner is whether Petitioner is required to collect
sales tax on sales of its grinding machines.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner manufactures a grinding machine designed to manufacture
component parts of automotive axle shaft joints called constant velocity (CV)
joints.
The machine regrinds worn CV joints, and new ball bearings and other
parts are added to make the CV joint “new.” These remanufactured joints are sold
as new in the automotive parts industry.
Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes a tax on the receipts from every
retail sale of tangible personal property, except as otherwise provided.
Section 1105(c) of the Tax Law imposes a tax on the receipts from every
sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property, excluding a mobile home,
or maintaining, servicing, or repairing tangible personal property,
including a mobile home, not held for sale in the regular course of
business, whether or not the services are performed directly or by
means of coin-operated equipment or by any other means, and whether
or not any tangible personal property is transferred in conjunction
therewith.
Section 1115 (a) of the Tax Law provides, in part:
Receipts from the following shall be exempt from the tax on
retail sales imposed under subdivision (a) of section eleven hundred
five and the compensating use tax imposed under section eleven
hundred ten:

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Sales Tax
July 31, 1998

(12) Machinery or equipment for use or consumption directly
and predominantly in the production of tangible personal property,
gas, electricity, refrigeration or steam for sale, by manufacturing,
processing,
generating,
assembling,
refining,
mining
or
extracting....
Section 528.13(c) of the Sales and Use Tax Regulations provides, in part:
(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.
*

*

*

(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.
*
*
*
Example 13: A company produces a machine to produce new paper
machine rolls and to recondition old paper machine rolls for its
customers. The machine is to be used for production 70 percent of
the time and for reconditioning 30 percent of the time.
Reconditioning is a repair service to tangible personal property,
and machinery used for that purpose is not in production. However,
as the machine in this example will be used directly in production
over 50 percent of the time, it qualifies for exemption.
Opinion
Petitioner makes sales of equipment used to remanufacture used CV joints
for automobiles. These machines grind down the existing CV joint and new parts
are added to make the CV joint usable again. Machinery used directly and
predominantly in production of tangible personal property for sale qualifies for
exemption from sales tax. To qualify for this exemption, more than 50% of a
machine’s use must be in producing tangible personal property for sale.
When
Petitioner makes sales of these machines to automotive repair shops for use in
grinding down a customer’s worn CV joint and returning the remanufactured CV
joint back to the same customer, the machine is not being used in production but
rather is used to repair the CV joint, and would not qualify for the production

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Sales Tax
July 31, 1998

exemption. If the repair shop is using the machine to grind down worn CV joints
to keep as inventory for sale to customers, and not returning the remanufactured
part back to the same customer who furnished that part for repair, this use would
qualify the machinery for the production exemption under Section 1115(a)(12) of
the Tax Law, provided more than 50% of its use is in producing the CV joints for
sale.
When the machine is sold to remanufacturers, parts dealers, and other
distributors of CV joints who use the machines to produce CV joints for sale, the
machine would qualify as being used directly in production for purposes of
Section 1115(a)(12) of the Tax Law. The machine would be exempt if more than 50%
of the machine’s use is in this production activity.
If these machines are delivered outside New York for use outside New York,
these sales are not subject to sales tax and Petitioner would not be required
to collect sales or use tax on such sales.
Petitioner should obtain from its customers a properly completed Exempt Use
Certificate (Form ST-121) within 90 days after delivery when making exempt sales
of these machines. See Section 1132(c) of the Tax Law and Section 532.4 of the
Sales and Use Tax Regulations.

DATED: July 31, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.