New York Advisory Opinion TSB-A-88 (2)I: Issue raised is whether, under Article 22 of the Tax Law for taxable years 1984, 1985 and 1986, an investment tax credit is allowed for the equipment used in a frozen custard business.

Plain-English summary

Keith and Gloria Wilson made and sold frozen custard at retail. They claimed the Tax Law § 606(a) investment tax credit for 1984, 1985, and 1986 on the equipment they used to turn frozen custard mix into the finished product, arguing that the mix could not legally be sold at retail until it was "processed" with this equipment, and that the processing gave it a "new shape and new quality" that was essential to selling it. The Department disagreed and denied the credit.

Section 606(a) allows an income-tax credit for qualifying property that, among other requirements, is "principally used... in the production of goods by manufacturing, processing, assembling" or similar industrial or agricultural activity. The statute defines "manufacturing" as working raw materials into wares suitable for use, or giving new shape, quality, or combination to matter that has already gone through some artificial process, using machinery, tools, or similar equipment. The dispute here was whether making frozen custard for sale over the counter fits that definition.

The Department said no, relying on two pieces of its own precedent. First, in Matter of Anthony J. Pieragostini, TSB-A-86(12)I, it had already held that kitchen equipment used to prepare food served in a restaurant does not qualify, because "processing" refers to industrial activity related to manufacturing, not to preparing food for restaurant service - a rule that also extends to take-out restaurants and catering. Second, and directly on point, the State Tax Commission had already decided in Matter of JTR Specialties, Inc., TSB-H-87(12)C, that preparing a frozen custard product for retail sale is "preparation of food for retail sale," not "production of goods by processing," so equipment used for that purpose did not qualify for the analogous investment tax credit under Article 9-A (the corporate franchise tax), Tax Law § 210.12(b). Because § 606(a) of Article 22 is worded substantially the same as § 210.12, the Department reasoned that the two provisions should be construed the same way, and it applied the JTR Specialties holding directly to deny the Wilsons' Article 22 credit.

This opinion is one of three companion rulings from the same era applying the "production of goods by manufacturing/processing" test to unusual equipment, with sharply different results depending on the industry. One companion opinion held that diagnostic-imaging equipment used to produce X-ray film images DID qualify, treating the image-production process as analogous to manufacturing video tape. Another held that hydroelectric power-generation equipment did NOT qualify, because electricity isn't "goods" or "matter" at all. This opinion supplies a third data point squarely on the food-preparation side of the line: no matter how much a business's own equipment reshapes or transforms an ingredient, if the end result is food prepared for sale to the public - whether in a restaurant, a take-out counter, or an ice cream shop - it is not "manufacturing" or "processing" in the industrial sense the credit was designed to reward.

What this means for you

Food-service and restaurant businesses buying kitchen or prep equipment

If your business prepares food to be served or sold directly to customers - whether in a restaurant, a take-out counter, or a catering operation - the equipment you use for that preparation is not eligible for the Tax Law § 606(a) investment tax credit, regardless of how much the equipment transforms raw ingredients. The Department has consistently held that "processing" under this credit means industrial activity related to manufacturing, not food preparation for retail sale or restaurant service.

Ice cream and frozen-dessert retailers

This opinion is directly on point for any business that makes frozen custard, ice cream, soft-serve, or similar frozen desserts for retail sale. Even if your equipment gives the base mix a genuinely new texture, shape, or consistency, that transformation does not count as "manufacturing" or "processing" for investment-credit purposes if the end product is sold at retail as prepared food. Don't assume that dramatic physical transformation of an ingredient is enough on its own - the controlling question is whether the finished item is "food prepared for retail sale," not how much the equipment changes it.

Accountants and tax preparers distinguishing genuine industrial processing from retail food preparation

When a client in the food-service industry claims (or wants to claim) the investment tax credit, look past how much the equipment physically changes the ingredient and ask whether the output is food destined for direct sale to a consumer - through a restaurant, take-out counter, catering service, or retail food shop. If so, the credit is unavailable under both Article 22 (personal income tax, § 606(a)) and the parallel Article 9-A corporate franchise tax credit (§ 210.12(b)), since the Department construes the two provisions the same way. Save the credit analysis for equipment used in genuine industrial manufacturing or processing, not consumer-facing food preparation.

Common questions

Q: Does preparing food for retail sale (like custard, ice cream, or restaurant meals) qualify for the investment tax credit?
A: No. The Department has repeatedly held that preparing food to be served in a restaurant, sold take-out, provided through catering, or sold at retail (as with frozen custard) is not "production of goods by manufacturing, processing, assembling" under Tax Law § 606(a). "Processing" in this context means industrial activity related to manufacturing, not food preparation for consumer sale.

Q: The equipment gave the custard mix a "new shape and new quality" - why doesn't that count as "processing" under the statute's own definition?
A: The statutory definition of "manufacturing" (working raw materials into wares, or giving new shape, quality, or combination to already-processed matter) describes the type of physical transformation the credit is meant to reward, but the Department's precedent makes clear the credit is limited to industrial production of goods, not food preparation for retail sale. Even though the custard mix is physically transformed, the context - preparing food for sale directly to consumers - takes it outside the credit regardless of that transformation.

Q: Why did the Department apply an Article 9-A (corporate franchise tax) precedent to an Article 22 (personal income tax) case?
A: Because Tax Law § 606(a) (the Article 22 investment tax credit) and § 210.12 (the Article 9-A investment tax credit) are worded in substantially similar terms. The Department's general interpretive rule is that similarly worded statutes should be construed the same way, so a determination made under one - here, the JTR Specialties decision denying the Article 9-A credit for frozen custard equipment - carries over to the other.

Q: Is this opinion specific to frozen custard, or does it reach other food businesses too?
A: The immediate holding addresses frozen custard, but it rests on and reaffirms a broader rule already applied to restaurant kitchen equipment, take-out restaurants, and catering services. Any business that prepares food for direct retail sale to consumers - not just frozen-dessert makers - should expect the same result: preparation equipment for retail food sale does not qualify as "manufacturing" or "processing" under section 606(a).

Q: Does it matter that the credit was claimed for multiple years (1984-1986)?
A: No. The multi-year period reflects when the Wilsons acquired and used the equipment, but the Department's reasoning turns entirely on the nature of the activity (food preparation for retail sale versus industrial processing), not on the tax years involved. The same denial would apply in any year the equipment was used for the same purpose.

Citations and references

• Tax Law § 606(a) - defines the Article 22 investment tax credit and its "manufacturing"/"processing" requirement
• Matter of Anthony J. Pieragostini, TSB-A-86(12)I (Sept. 26, 1986) - restaurant kitchen equipment is ineligible because food preparation for restaurant service is not "production of goods"
• John F. and Sarah Mahoney, State Tax Commission Decision, April 1, 1976 - cited in Pieragostini for the restaurant-food-preparation rule
• General Mills Restaurant Group, Inc., State Tax Commission Decision, Nov. 9, 1984, TSB-H-84(55)C - cited in Pieragostini for the restaurant-food-preparation rule
• Technical Services Bureau Memorandum TSB-M-78(1)C, April 7, 1978 - extends the restaurant rule to take-out restaurants and catering services
• Matter of JTR Specialties, Inc., State Tax Commission Decision, March 13, 1987, TSB-H-87(12)C - frozen custard preparation for retail sale is "preparation of food for retail sale," not "production of goods by processing," under the parallel Article 9-A credit
• Tax Law § 210.12(b) - the Article 9-A investment tax credit provision the Department treats as "substantially similar" to section 606(a)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a88_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (2) I
Income Tax
March 21, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I871229A

On December 29, 1987, a Petition for Advisory Opinion was received from Keith and Gloria
Wilson, 1090 Atlantic Avenue, Rochester, New York 14609.
The issue raised is whether, under Article 22 of the Tax Law for taxable years 1984, 1985
and 1986, an investment tax credit is allowed for the equipment used in a frozen custard business.
Petitioner is in the business of making and selling at retail, frozen custard. Petitioner argues
that the frozen custard mix cannot be sold at retail until it is processed. This process includes the
use of the equipment on which Petitioner has claimed the investment tax credit. Petitioner asserts
that the equipment used gives the custard mix a new shape and a new quality that is an essential step
in selling the product.
Section 606(a) of the Tax Law provides for a credit against the personal income tax imposed
by Article 22 based upon a percentage of the cost or other basis for federal income tax purposes of
tangible personal property and other tangible property, including buildings and structural components
of buildings, which:

1. is acquired, constructed, reconstructed or erected by the taxpayer after December 31,
   1968;
2. is depreciable pursuant to section 167 of the Internal Revenue Code or recovery property
   with respect to which a deduction is allowable under section 168 of the Internal Revenue Code;
3. has a useful life of four years or more;
   4.
   is acquired by the taxpayer by purchase defined in section 179(d) of the Internal
   Revenue Code;
4. has a situs in New York State; and
5. is principally used by the taxpayer in the production of goods by manufacturing,
   processing, assembling or other specified activities.
   This section defines "manufacturing" for the purposes of the credit as, "the process of
   working raw materials into wares suitable for use or which gives new shapes, new quality or new
   combinations to matter which already has gone through some artificial process by the use of
   machinery, tools, appliances and other similar equipment."

-2­
TSB-A-88 (2) I
Income Tax
March 21, 1988

In an Advisory Opinion of the State Tax Commission issued to Anthony J. Pieragostini on
September 26, 1986 (TSB-A-86(12)I), the Tax Commission determined the following:
Kitchen equipment principally used to prepare food served in a
restaurant is ineligible for the investment tax credit because the
preparation of food in a restaurant does not constitute the production
of goods as contemplated by New York State Tax Law. The word
"processing" refers to a type of industrial activity related to
manufacturing and not to the preparation of food to be served in a
restaurant. See: John F. and Sarah Mahoney, Decision of the State
Tax Commission, April 1, 1976; General Mills Restaurant Group,
Inc., Decision of the State Tax Commission, November 9, 1984,
TSB-H-84(55)C. Take-out restaurants and catering services are
similarly ineligible for the investment tax credit. Technical Services
Bureau Memorandum TSB-M-78(1)C, April 7, 1978.
Specifically with respect to frozen custard, the State Tax Commission determined that, for
purposes of the investment tax credit under Article 9-A of the Tax Law, the preparation of a frozen
custard product for retail sale constituted the preparation of food for retail sale and, therefore, such
activity did not constitute the production of goods by processing within the meaning of section
210.12(b) of the Tax Law and the equipment principally used for such activity did not qualify for
the investment tax credit. Matter of JTR Specialties, Inc., Decision of the State Tax Commission,
March 13, 1987, TSB-H-87(12)C.
For purposes of the investment tax credit, section 606(a) of Article 22 is substantially similar
to section 210.12 of Article 9-A. Where, the language of statutes are similar, such statutes should
be construed the same and the determinations made thereunder should be construed the same.
Accordingly, it is clear that Petitioner is not allowed an investment tax credit, under Article
22 of the Tax Law, on the equipment used in the making of frozen custard for retail sale.

DATED: March 21, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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