New York Advisory Opinion TSB-A-86 (2)I: Does logging equipment used to cut and deliver logs to a paper company qualify for New York's investment tax credit, even though the logger performs the work as a contracted service rather than using the equipment in his own manufacturing business?

Plain-English summary

An accountant asked the Department whether an individual who buys logging equipment - chain saws, loaders, and skidders - to cut logs and deliver them to a loading area for a paper company qualifies for New York's investment tax credit under Tax Law § 606(a), even though the individual is providing a contracted service rather than manufacturing anything himself.

Personal Income Tax Regulations § 103.1(c)(1) generally limits the credit to property principally used by the taxpayer in production activities like manufacturing, processing, or farming. On its face, that could seem to exclude a contractor who never owns or processes the raw materials himself. But the Department pointed to its own earlier guidance, TSB-M-80-(1)-I, which follows the Boadle case: a custom farmer who bought combines and plows to provide plowing and planting services to other farmers could still claim the credit, because the equipment was doing production work - it just so happened the business paying for that work was someone else's.

Applying that same logic here, the Department reasoned that the paper company itself would have qualified for the credit on saws, skidders, and loaders if it cut and moved its own logs, since that's production activity (turning trees into raw material for paper). Because the logger performs that identical production function under contract, he steps into the paper company's shoes for credit purposes and can claim it on his own equipment.

The opinion draws one firm line: the equipment must be principally (more than 50%) used in production to qualify, and equipment used for transportation - such as trucks that haul the cut logs from the woods to a mill - does not qualify, since hauling logs isn't itself a production activity even though it's part of the overall logging operation.

What this means for you

Loggers and other production-service contractors

If you provide a production-type service under contract - cutting and delivering logs, custom farming, or similar work - to a business that would itself qualify for the investment tax credit on the equipment involved, you can generally claim the credit yourself on equipment principally used in that production work, even though you don't own the end product.

Business owners hiring contractors for production work

Whether your logging or farming contractor's equipment qualifies for the credit doesn't change your own tax picture, but it's useful to know the Department applies the same production-use test to a contractor's equipment as it would to your own - so a contractor cutting logs for your mill is treated, for credit purposes, as if your business did the cutting.

Accountants advising equipment-heavy service contractors

Split the client's equipment list by function: cutting/loading/production machinery can qualify for the investment tax credit if principally used in a production activity performed for a business that would itself have qualified, but transportation equipment (trucks moving the finished or raw product) does not qualify regardless of how central it is to the overall operation.

Common questions

Q: I cut and deliver logs to a paper mill under contract - can I claim New York's investment tax credit on my chain saws and skidders?
A: Yes, if that equipment is principally (more than 50%) used to cut and move the logs, because the paper company would itself qualify for the credit on that same equipment if it did the cutting in-house.

Q: Does the credit cover the trucks I use to haul logs to the mill?
A: No. Transportation equipment used to move logs from the logging site to a mill does not qualify, since hauling is not itself a production activity even though it happens as part of the logging operation.

Q: Does it matter that I'm providing a service to another business rather than manufacturing something myself?
A: No. Under TSB-M-80-(1)-I (following the Boadle decision), the credit extends to a contractor's equipment used to perform production work for another business, as long as that other business's own purchase of the same equipment would have qualified for the credit.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a86_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (2) I
Income Tax
April 17, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I840712B

On July 12, 1984, a Petition for Advisory Opinion was received from Emilio A. D'Argenio,
CPA, Globe Mall, P.O. Box 720, Watertown, New York 13601.
The issue raised is whether tangible personal property used in a logging operation under
circumstances described below qualifies for the investment tax credit provided under Article 22 of
the Tax Law.
Section 606(a) of the Tax Law allows an investment tax credit against the personal income
tax imposed by Article 22 of the Tax Law with respect to certain tangible personal property. Personal
Income Tax regulations section 103.1(c)(1) defines property which qualifies for such credit as
tangible personal property and other tangible property which:
"(i) is acquired, constructed, reconstructed or erected by the taxpayer
after December 31, 1968;
(ii) is depreciable pursuant to section 167 of the Internal Revenue
Code or is recovery property with respect to which a deduction is
allowable under section 168 of the Internal Revenue Code;
(iii) has a useful life of four years or more;
(iv) is acquired by the taxpayer by purchase as defined in
subsection(d) of section 179 of the Internal Revenue Code;
(v) has a situs in New York State; and
(vi) is principally used by the taxpayer in the production of goods by
manufacturing, processing, assembling, refining, mining, extracting,
farming, agriculture, horticulture, floriculture, viticulture or
commercial fishing."
Technical Services Bureau Memorandum TSB-M-80-(1)-I, citing In the Matter of John
Boadle, Decision of the State Tax Commission, February 13, 1980, TSB-H-80-(48)-I, states:
...The Investment Tax Credit will be allowed for equipment purchased and
principally utilized by a business in providing a service to another business
if the purchase of the equipment by the other business would have qualified
for the credit.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-86 (2) I
Income Tax
April 17, 1986

The Boadle decision involved an individual engaged in a custom farming operation. Mr.
Boadle purchased farm machinery such as combines, corn-chopping rigs and plows. He provided
various plowing and planting services to farmers in their fields.
Petitioner inquires whether this principle would also be applied to a logging operation under
circumstances where an individual purchases logging equipment such as chain saws, loaders and
skidders to cut logs and deliver them to a loading area. This service is performed for a paper
company which uses the logs as raw materials to produce various paper products. It is assumed,
although not stated, that the paper company either owns or rents the property upon which the trees
are being cut. It is also assumed, for purposes of this Advisory Opinion, that the property in question
meets each of the qualifications contained in paragraphs 103(c)(1)(i) through (v) of the personal
income tax regulations.
A paper company would qualify for the investment tax credit with respect to saws, skidders,
loaders and other equipment used to cut and move logs if it performed these operations itself since
such equipment is used in production. Accordingly, pursuant to TSB-M-80-(1)-I, the individual
described in Petitioner's petition will also be allowed the credit for such machinery used to perform
such operations for a paper company.
It should be noted that such equipment must be principally (more than 50%) used in
production to qualify for the credit. It should also be noted that transportation equipment, such as
trucks used to move logs from the logging operations to a mill, will not qualify for the investment
credit since such trucks are not used in production.

DATED: January 7, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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