Does an in-store 'eye examination unit' used by a retail optical chain to test customers' vision before filling eyeglass prescriptions qualify for New York's investment tax credit as manufacturing/processing equipment?

Plain-English summary

IPCO Corporation, operating Sterling Optical retail locations, equips each store with an "eye examination unit" that tests whether a customer needs a new or changed eyeglass prescription. Customers are billed separately for the exam and for the eyeglasses (different frames and lenses carry different prices), and either service can be purchased alone. IPCO asked whether the eye examination unit qualifies for New York's investment tax credit, a percentage-of-cost credit against the corporate franchise tax available for qualifying property used in manufacturing or processing.

The Department said no. To qualify, equipment must be principally used in the production of goods by manufacturing or processing -- bringing about a substantial or significant change in a material's shape, quality, or form. While most customers naturally get an exam before ordering glasses, that practical sequence doesn't make the exam an integral part of actually producing and assembling the eyeglasses. The exam is a separate, distinct diagnostic process from the manufacturing process itself, so the unit performing it falls outside the credit -- which the Legislature designed specifically to incentivize productive manufacturing facilities locating in New York, not general business equipment merely incidental to a manufacturing operation.

What this means for you

Retailers, optical chains, and similar businesses with diagnostic or service equipment alongside a production process

Equipment that supports or precedes a manufacturing process, but doesn't itself work a substantial change on the product, won't qualify for the investment tax credit -- even if customers almost always use both together and even if the two are billed separately to reflect that they're genuinely distinct services.

Accountants and tax professionals

The controlling test is whether the equipment brings about a "substantial or significant change" in the shape, quality, or form of tangible personal property (Regulations § 5-2.4(2); TSB-M-87(5)C). Diagnostic, testing, or preparatory equipment that doesn't itself transform the product is a recurring category likely to fail this test, regardless of how commercially integrated it feels with the production process.

Common questions

Q: Would eyeglass-lens-grinding or frame-assembly equipment at the same locations qualify?
A: This opinion doesn't address that equipment directly, but its reasoning suggests equipment that actually works a substantial change on the lenses or frames (unlike the diagnostic exam unit) would be analyzed differently.

Q: Does billing the exam and eyeglasses separately affect the outcome?
A: No -- the separate billing simply confirms the exam is a genuinely distinct service, reinforcing (not changing) the conclusion that the exam unit isn't part of the manufacturing process.

Q: Can another optical retailer rely on this ruling for its own equipment?
A: No. This opinion binds the Department only for IPCO's specific facts and equipment; other businesses should evaluate their own equipment against the manufacturing/processing test independently.

Citations and references

Statutes and regulations:

• Tax Law § 210.12(b) (investment tax credit)
• Business Corporation Franchise Tax Regulations § 5-2.4(2) (manufacturing definition)
• TSB-M-87(5)C (processing definition)
• IRC § 167, § 168, § 179(d)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a88_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (3)C
Corporation Tax
February 10, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C871204A

On December 4, 1987, a Petition for Advisory Opinion was received from IPCO Corporation,
1025 Westchester Avenue, White Plains, New York, 10604.
The issue presented is whether an "eye examination unit" qualifies for the investment tax
credit under section 210(12)(b) of the Tax Law.
IPCO Corporation operates retail optical locations under the name "Sterling Optical". Each
location utilizes an eye examination unit. The purpose of this unit is to give customers an eve
examination to determine whether a prescription or a change in prescription for eyeglasses is
required. The prescription, if needed, is usually filled at the location at which the examination takes
place.
Petitioner states that when a customer has an eye examination and doesn't purchase
eyeglasses, the customer is charged only for the examination. If a customer purchases eyeglasses
only, with no examination, the customer is charged only for the eyeglasses. If the customer has an
eye examination and purchases eyeglasses the customer is charged separately for each. Petitioner
states that there is a separate charge for the eye examination and the eyeglasses because customers
may choose their own frames and there are different prices for the frames and lenses.
Section 210(12) of the Tax Law provides for a credit against the corporate franchise tax
imposed by Article 9-A 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 as defined in section 179(d) of the Internal
   Revenue Code;
5. has a situs in New York State; and
6. is principally used by the taxpayer in the production of goods by manufacturing,
   processing, or other specified activities.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

FRANK J. PUCCIA, DIRECTOR

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

-2­
TSB-A-88 (3)C
Corporation Tax
February 10, 1988

To qualify for the investment tax credit, the taxpayer must establish that the property in
question is used in the production of goods by manufacturing or processing. The term
"manufacturing" is generally defined 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. (20 NYCRR 5-2.4(2)). A process must bring about a substantial or significant change
in the basic material to constitute manufacturing. The term "processing" has been defined as the
performance of any service on tangible personal property for the owner which effects a change in
the natural shape or form of the property (see, Technical Services Bureau Memorandum TSB-M­
87(5)C).
The investment tax credit as provided for in section 210(17)(b) of the Tax Law was intended
by the Legislature as a tax incentive designed to induce the location in New York of productive
facilities and make New York a more attractive place for manufacturers (see, Memorandum of Tax
Structure Study Committee, 1969 N.Y. Legis. Ann., at 447-449).
While it may be true that individuals ordinarily do not purchase prescription eyeglasses
without first obtaining an eye examination, it does not follow that the examination is an integral part
of the production and assembly procedure. To qualify for the investment tax credit, the property must
be principally used in the production of goods or effect a substantial or significant change in the
nature, shape or form of tangible personal property. The eye examination unit is not integrally
involved in the production or manufacture of goods. The eye examination is a separate process,
distinct from the production of eyeglasses. Accordingly, the eve examination unit does not qualify
for the investment tax credit.

DATED: February 10, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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