John Panos rebuilds old, non-working starters and alternators using a mix of original and new parts, and separately assembles brand-new starters and alternators from new parts, selling the finished units to retailers and trucking companies. Does the building, equipment, and tools he uses in this business qualify for New York's investment tax credit under Tax Law § 606(a), which requires the property to be principally used in "manufacturing" rather than mere repair?

Plain-English summary

John Panos operates an auto parts business that rebuilds and reconditions starters and alternators for motor vehicles. He asked the Department of Taxation and Finance whether the building, equipment, and tools he uses in that business qualify for New York's investment tax credit (ITC) under Tax Law § 606(a).

Panos ran two processes. First, he acquired old, non-working starters and alternators, dismantled them, and reassembled them into working units using new wire and armatures while reusing the old casing. Second, he acquired new parts in bulk and assembled them into brand-new working starters and alternators. Either way, the finished units were sold to retail businesses and large trucking companies for installation on vehicles. In 1988 and 1989, the property at issue was a building, equipment, and tools.

Section 606(a) allowed a 4% credit on property that was acquired after December 31, 1986, depreciable under IRC § 167, had a useful life of at least four years, was purchased (not leased) under IRC § 179(d), had a New York situs, and - critically - was principally (more than 50%) used in "manufacturing" or similar production activity. The statute defines "manufacturing" as working raw materials into wares suitable for use, or giving new shapes, new quality, or new combinations to matter that has already gone through some artificial process.

The key question was whether rebuilding old, broken starters and alternators counted as "manufacturing" or was just "mere repair," which wouldn't qualify. Drawing on a federal excise-tax case (United States v. J. Leslie Morris Co.) that judged this distinction by taking an overall view of the taxpayer's activities - from acquiring discarded parts to producing a useful article of commerce - and on a prior New York ruling that disassembling, reconditioning, and reassembling telephone sets was "manufacturing" (Western Electric Co.), the Department concluded that Panos's rebuilding process went well beyond mere repair: he dismantled the old units, removed and replaced all defective components, and reassembled them with a mix of original and brand-new parts, giving the units new quality. Both of his processes - rebuilding and new assembly - therefore qualified as manufacturing. As a result, Panos's building, equipment, and tools will be allowed the investment tax credit for the year they became qualifying property, provided they are principally used in this manufacturing activity and meet § 606(a)'s other requirements.

What this means for you

Auto parts rebuilders, remanufacturers, and similar repair-adjacent businesses

If your business takes broken or worn-out items, strips them down, replaces the defective parts, and reassembles them into working products for resale, this opinion supports treating that activity as "manufacturing" rather than "mere repair" - even though you're starting with used, non-working items rather than raw materials. The key facts the Department relied on were the extensiveness of the rework (full dismantling, wholesale replacement of defective components) and that the end product had "new quality" comparable to a freshly produced item. Simple cleaning, adjusting, or replacing a single worn part is far less likely to clear this bar.

Business owners claiming the investment tax credit on production property

Qualifying for the ITC requires more than showing your activity is "manufacturing" - the property itself (building, equipment, tools) must be principally used (more than 50%) in that manufacturing activity, and separately meet the acquisition-date, depreciability, useful-life, purchase-versus-lease, and New York-situs requirements of § 606(a). If any of your property is leased rather than purchased, § 606(a)(4) disqualifies it outright regardless of how the manufacturing question comes out.

Accountants and tax professionals

This opinion is a useful precedent for the "manufacturing versus mere repair" line under both Tax Law § 606(a) (Article 22, personal income tax) and its "substantially similar" corporate counterpart, § 210.12 (Article 9-A) - the Department expressly cross-referenced its own Article 9-A ruling on telephone-set reconditioning (Western Electric, TSB-H-81(60)C) as controlling authority. When advising remanufacturing or reconditioning clients on ITC eligibility, document the extent of dismantling and part replacement, since that overall-activities test (from J. Leslie Morris Co.) is what the Department and courts use to draw the line.

Common questions

Q: Does rebuilding a broken product from used parts count as "manufacturing" for New York's investment tax credit, or is it just repair?
A: It can count as manufacturing if the rework is extensive enough. Here, Panos dismantled old, non-working starters and alternators, removed and replaced all the defective components, and reassembled the units with a mix of original and new parts, which the Department found gave the units "new quality" and went well beyond mere repair.

Q: Does new assembly from new parts also qualify, or only the rebuilding of old units?
A: Both qualified here. Panos's second process - buying new parts in bulk and assembling them into new starters and alternators - was also held to be manufacturing under § 606(a)(2), alongside the rebuilding process.

Q: What property actually gets the credit?
A: The credit applies to the taxpayer's building, equipment, and tools, but only to the extent those items are principally (more than 50%, per Reg. § 103.1(d)) used in the qualifying manufacturing activity, and only if they separately meet § 606(a)'s other requirements: acquired after December 31, 1986, depreciable under IRC § 167, a useful life of four years or more, purchased (not leased) under IRC § 179(d), and situated in New York.

Q: Why did the Department compare this to a telephone-set reconditioning case?
A: Because Tax Law § 606(a) (the Article 22 personal income tax credit) is "substantially similar" to Tax Law § 210.12 (the Article 9-A corporate franchise tax credit), and the Department had already ruled, in Western Electric Co. (TSB-H-81(60)C), that disassembling, reconditioning, and reassembling telephone sets was "manufacturing" for purposes of that parallel corporate credit. The Department applied the same reasoning here.

Q: What test do courts and the Department use to decide if an activity is "production" rather than "mere repair"?
A: They take an overall view of the taxpayer's activities, from the acquisition of discarded or raw materials to the point a useful article of commerce emerges, as articulated in United States v. J. Leslie Morris Co., 124 F2d 371 (9th Cir. 1941), a federal manufacturers excise tax case that the Department relied on here.

Citations and references

• Tax Law § 606(a) - the investment tax credit provision, requiring property to be principally used in the production of goods by manufacturing or similar activity, plus acquisition-date, depreciability, useful-life, purchase, and situs requirements
• Tax Law § 606(a)(2) - defines "manufacturing" as working raw materials into wares suitable for use, or giving new shapes, new quality, or new combinations to already-processed matter, and extends "production of goods" property to repair/service machinery and related storage facilities
• Tax Law § 606(a)(4) - denies the credit for property leased to another person or corporation
• Reg. § 103.1(d) of the Personal Income Tax Regulations - defines "principally used" as more than 50 percent
• IRC § 167 - the federal depreciability requirement referenced by § 606(a)
• IRC § 179(d) - the federal definition of "purchase" referenced by § 606(a)
• United States v. J. Leslie Morris Co., 124 F2d 371 (9th Cir. 1941) - production versus mere repair is judged by an overall view of the taxpayer's activities, from acquiring discarded parts to producing a useful article of commerce
• Western Electric Co., Inc., TSB-H-81(60)C (Nov. 6, 1981) - held that disassembling, reconditioning, and reassembling telephone sets qualified as manufacturing under the parallel Article 9-A investment tax credit, Tax Law § 210.12

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a91_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-91 (6) I
Income Tax
April 29, 1991

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I910206B

A Petition for Advisory Opinion was received from John Panos, 5740 Sunset
Terrace, Clay, New York 13041.
The issue raised by Petitioner, John Panos, is whether a building and
machinery acquired and used in the business of rebuilding starters and
alternators qualifies for investment tax credit under section 606(a) of the Tax
Law.
Petitioner, John Panos, operates an auto parts business.
Petitioner
assembles and reconditions starters and alternators for use on motor vehicles.
Petitioner’s operations consist of two processes.
One process involves
rebuilding the starters and alternators. In this process, an old non-working
starter or alternator is acquired, dismantled and reassembled with new wire and
parts into a working item. The old casing of the item is used but new wire and
armatures are installed.
In the second process, new parts are acquired in
quantity and are assembled into new working starters and alternators.
After completion of either process, the working starters and alternators
are sold to retail businesses and to large trucking companies for installation
on their vehicles.
In 1988 and 1989 the property in question consisted of a building,
equipment and tools.
For the taxable years in question, section 606(a) of the Tax Law allowed
a creditequal to four percent 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) were acquired, constructed, reconstructed or erected after December 31,
1986;
(2) were depreciable pursuant to section 167 of the Internal Revenue Code
(hereinafter "IRC");
(3) had a useful life of four years or more;
(4) were acquired by purchase as defined in section 179(d) of the IRC;
(5) had a situs in New York State; and
(6) were 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.
TP-9 (9/88)

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TSB-A-91 (6) I
Income Tax
April 29, 1991

Section 606(a)(2) of the Tax Law provides that the term "manufacturing"
shall mean "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."
Additionally, section 606(a)(2)
provides that "[p]roperty used in the production of goods shall include
machinery, equipment or other tangible property which is principally used in the
repair and service of other machinery, equipment or other tangible property used
principally in the production of goods and shall include all facilities used in
the production operation, including storage of material to be used in production
and of the products that are produced." Section 103.1(d) of the Personal Income
Tax Regulations provides that the term "principally used" means more than 50
percent. Furthermore, section 606(a)(4) provides that "[a] taxpayer shall not be
allowed a credit under this subsection with respect to tangible personal property
and other tangible property, including buildings and structural components of
buildings, which it leases to any other person or corporation."
In
deciding
whether
Petitioner's
activities
of
rebuilding
and
reconditioning starters and alternators constitutes manufacturing, consideration
must be given to the extensiveness of the activities performed on the articles
and whether the end products were equivalent in usefulness and treated as freshly
and newly produced articles. The court in United States v. J Leslie Morris Co.,
124 F2d 371 (9th Cir 1941), with respect to the Federal manufacturers excise tax,
observed:
"[T]he question whether the process is essentially one of production
or merely of repair is to be resolved by an over-all view of
taxpayer's activities, beginning with its acquisition of discarded
parts and ending when a useful article of commerce emerges. . .".
Id. at 372.
For purposes of the investment tax credit, section 606(a) of Article 22 is
substantially similar to section 210.12 of Article 9-A. Under Article 9-A, the
disassembling, reconditioning and reassembling of telephone sets qualified as
manufacturing for purposes of the investment tax credit. Western Electric Co.,
Inc., Dec St Tax Comm, November 6, 1981, TSB-H-81(60)C.
In accordance with consideration of the factors discussed above and the
language of section 606(a)(2) of the Tax Law, the extensive activities performed
by Petitioner on the old non-working starters and alternators qualifies as
manufacturing for purposes of the investment tax credit. The starters and
alternators are clearly given new quality and Petitioner's activities go beyond
mere repair: the old starter or alternator is dismantled; all defective
components are removed and replaced and the set is reassembled with some of its
original parts and some brand-new parts.
Accordingly, both processes of Petitioner's operations constitutes
manufacturing for purposes of section 606(a)(2) of the Tax Law. If Petitioner's
building, equipment and tools are principally used in such manufacturing and the
building, equipment and tools meet all of the other requirements contained in

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TSB-A-91 (6) I
Income Tax
April 29, 1991

section 606(a) of the Tax Law, Petitioner will be allowed an investment tax
credit for such property for the taxable year during which such property became
qualifying property.

DATED:

April 29, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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