United States

New York: Utilities Consumed to Wash Pans Not Exempt from Sales and Use Tax

Mar 27, 2017
From KPMG TaxWatch

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The New York Tax Appeals Tribunal recently addressed whether a taxpayer—a large retailer whose retail facilities included a bakery—was entitled to a sales and use tax exemption for utilities consumed in the operation of commercial pan washers. The pans washers at issue were used to wash, rinse, and sanitize bakery equipment for use in the process of producing baked goods. Under New York law, electricity used directly and exclusively in the production of tangible personal property for sale is exempt from sales and use tax. A regulation defines “directly” as requiring that the electricity for which the exemption is sought be used during the production phase of a process to either operate exempt machinery, create conditions necessary for production, or perform an actual part of the production process. An ALJ rejected the taxpayer’s requested refund on the basis that the utilities at issue were used prior to start of the production process. The taxpayer subsequently appealed.

Before the Tribunal, the taxpayer argued that the cleaning and sanitizing of the baking equipment was required to create the conditions necessary for production. In support of its contention, the taxpayer cited to U.S. Food and Drug Administration regulations concerning commercial food preparation and technical documents describing how its pan washers achieve the requisite level of sanitation. The Tribunal, reviewing the relevant tax regulations, observed that a consumption of utilities used in creating conditions necessary for production must have a direct and exclusive relationship to the actual production process and be consumed during that process. Here, the connection between the sanitizing function and the production process was too tenuous for the Tribunal to conclude that the pan washers were production equipment. The pan washers were not directly connected to production equipment and did not serve a vital function during the production process in maintaining a controlled environment necessary for production. Rather, the pan washers were used pre- and post-production of baked goods to sanitize the production equipment. The Tribunal also rejected the taxpayer’s alternative contention that it was entitled to an exemption for the utilities under a statutory section providing an exemption for the installation, maintenance and repair services performed on exempt production equipment. Please contact Judy Cheng at 212-872-3530 with questions on Matter of Costco Wholesale Corp.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.