New York Advisory Opinion TSB-A-13(9)C: May the shareholders of an S corporation claim the investment tax credit for a CNC machine used to cut and shape raw stone slabs into countertops?

Plain-English summary

A New York S corporation in the granite and marble business bought a computer-numerical-control (CNC) machine used exclusively to cut, reshape, polish, and remove imperfections from raw stone slabs, turning them into countertops and custom products markedly different in color, shape and finish from the raw stone. Its shareholders asked whether they could claim the investment tax credit (ITC).

The Department said yes. ITC flows through an S corporation to its shareholders, who claim their pro rata share of the corporation's credit base (Tax Law § 606(i)), determined under Tax Law § 210.12. Qualified property (Tax Law § 210.12(b)) must be depreciable, have a four-plus-year life, be acquired by purchase under IRC § 179(d), be located in New York, and be principally used in producing goods by manufacturing or processing. The only open issue was the last element. Property is "principally used" in production if more than 50% of its operating time is spent on a qualified activity (20 NYCRR § 5-2.4(c)), and "processing" means performing a service on property that changes its nature, shape or form. The CNC machine, used solely to transform raw slabs into finished products, met that test, so it was qualified property and the shareholders could claim the ITC.

What this means for you

Manufacturers, fabricators and S corporations

Equipment that transforms raw material into a finished product — changing its nature, shape or form — can be ITC-qualified "production of goods" property, and in an S corporation the credit passes through to the shareholders. The deciding factor is principal use: more than 50% of the machine's operating time on the qualifying activity.

Accountants and tax professionals

Confirm the four mechanical elements (depreciable, four-plus-year life, purchased under IRC § 179(d), New York situs), then focus on the over-50%-operating-time test in 20 NYCRR § 5-2.4(c). "Processing" borrows the sales-tax definition (change in nature, shape or form), as applied to Article 9-A in Continental Terminals.

Common questions

Q: Can S corporation shareholders claim the investment tax credit? A: Yes. The credit base is computed at the corporation level and passes through pro rata to shareholders under Tax Law § 606(i).

Q: What makes the machine qualified property?
A: Among other things, it must be principally used — over 50% of operating time — in producing goods by manufacturing or processing.

Q: Does cutting and polishing stone count as "processing"? A: Yes. It changes the nature, shape and form of the raw stone, which is processing.

Citations and references

• Tax Law § 606(i) (S corporation shareholder pass-through of the ITC; pro rata share of the credit base)
• Tax Law § 210.12 (investment credit base) and § 210.12(b) (qualified property; principally used in production of goods)
• IRC § 179(d) (acquired by purchase); IRC § 167 / § 168 (depreciable)
• 20 NYCRR § 5-2.4(c) (principally used = over 50% of operating time); 20 NYCRR 527.4(d) (processing); Continental Terminals, TSB-H-82(4)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a13_9c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(9)C
Corporation Tax
September 10, 2013

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C130311A

The Department of Taxation and Finance received a Petition for Advisory Opinion from name redacted. (“Petitioner”), address redacted. Petitioner asks whether Petitioner’s shareholders are eligible to claim the investment tax credit (“ITC”) under Tax Law § 606(a) for certain machinery used by Petitioner in its manufacturing division. Based on the facts provided, we conclude that Petitioner’s shareholders are entitled to claim the ITC. Facts Petitioner is a New York S corporation that operates a granite and marble business. Petitioner purchases raw slabs of marble and granite and prepares those materials for sale to customers as countertops and other custom items. The S corporation contains two divisions. The first division is responsible for sales contracts and product installation; the second division is responsible for converting the raw stone slabs into finished products, countertops and other custom kitchen products, prior to installation. In order to convert the raw stone slabs into countertops and other products, the second division purchased a computer numerical control (CNC) machine that is used to cut, reshape, polish and remove imperfections in the raw stone slabs prior to installation. The finished product is significantly different in color, shape, finish, imperfections etc., to the raw stone purchased by Petitioner. The CNC machine is used exclusively for these purposes. Analysis For purposes of determining the ITC of a shareholder of a New York S corporation, a shareholder is entitled to claim their pro rata share of the corresponding credit base of the S corporation determined for the corporation’s taxable year ending with or within the shareholder’s taxable year. See Tax Law § 606(i)(1)(A). With respect to the ITC, the corporation’s credit base is determined under Tax Law § 210.12. See Tax Law § 606(i)(1)(B)(i). Tax Law § 210.12(a) provides that the investment credit base is the cost or other basis for federal income tax purposes of tangible property, including buildings and structural components of buildings which is qualified property under Tax Law § 210.12(b), less certain nonqualified nonrecourse financing with respect to the property. Qualified property is tangible property, including buildings and structural components of buildings, which:
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is acquired, constructed, reconstructed, or erected by the taxpayer;

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TSB-A-13(9)C
Corporation Tax
September 10, 2013

is depreciable under IRC § 167 or § 168;
has a useful life of four years or more;
is acquired by the taxpayer by purchase under IRC § 179(d); is located in New York State; and is principally used by the taxpayer in producing goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing. . . . See Tax Law
§ 210.12(b).

For purposes of this Advisory Opinion, it is presumed that Petitioner has acquired the machinery by purchase under IRC § 179(d), the machinery is depreciable under IRC § 167 or
§ 168, the machinery has a useful life of four years or more, and the machinery is located in New York State. The only issue to be decided is whether the machinery is principally used by the Petitioner in the production of goods by manufacturing or processing so that the property is considered qualified property. Machinery is principally used in the production of goods if over 50 percent of its operating time is spent on a qualified activity. See 20 NYCRR § 5-2.4(c). Property used in the production of goods includes machinery, equipment, or other tangible property principally used in the production of goods. See 20 NYCRR § 5-2.4(a) & (b). The term "processing," while not defined in the statutory provision or regulation here at issue, is defined for sales and use tax purposes at 20 NYCRR § 527.4(d) 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." In Continental Terminals (State Tax Commission, TSB-H-82(4)C), the Tax Commission held such definition to be applicable to determinations made under Article 9-A. In Continental Terminals, the taxpayer’s machinery comprised a green coffee dump, bucket elevators, a cleaner/scalper, a feeder bin, a roaster and a scale/sewing machine/conveyor combination. The machinery accepted a quantity of green, moldy coffee beans and (1) cleansed the beans to remove foreign matter such as sticks, dust, bugs and string, (2) scalped the beans to uniform size and to remove cracked or rotten beans, (c) moistened the beans to soften any mold existing on them, (d) agitated the beans to remove the mold, (e) lightly roasted the beans into brown beans to prevent mold reformation, and (f) weighed, re-bagged and marked the beans for identification purposes. After the beans went through the machines they were in a clean, semi-roasted form and allowed to be released by the Food and Drug Administration and delivered to commercial roasters and blenders. The Tax Commission held that the taxpayer’s machinery effectuated a change in the nature and form of raw materials and it was principally used by the taxpayer in the production of goods by processing. Relying on the principles in Continental Terminals above, Petitioner’s machinery that is used to cut, reshape, polish and remove imperfections in the raw stone slabs so as to convert raw slabs into countertops and other custom kitchen products, that are significantly different from the raw material purchased by Petitioner, will qualify as machinery used for processing

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TSB-A-13(9)C
Corporation Tax
September 10, 2013

in the production of goods for purposes of the ITC. Because Petitioner uses the machinery 100 percent in these processing activities, the equipment will be considered to be principally used in production. Therefore, assuming Petitioner meets all other ITC requirements, Petitioner’s machine will be considered qualified property and eligible for the credit.

DATED: September 10, 2013

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.