Is a paper recycler that grades, separates, fluffs, bales, and packs scrap paper for the repulping industry a manufacturer or processor whose equipment qualifies for the Article 9-A investment tax credit?

Plain-English summary

Empire Recycling Corporation runs a paper processing and recycling center serving the repulping paper-making industry. Scrap paper arrives mixed, is dumped on a tipping floor, moved by loaders onto sorting conveyors, separated by sorters into chambers by fibre, color, and type, chemically tested (acidic, groundwood, alkaline), visually inspected, then fluffed (oversize sheets cut to size) and baled to exacting weight, density, and banding specs -- producing fifteen graded products that meet each mill's specifications.

The question: is Empire a manufacturer or processor so its equipment qualifies for the Article 9-A investment tax credit (ITC) under section 210.12?

Yes. Section 210.12 gives a credit for property principally used in the production of goods by manufacturing, processing, assembling, refining, etc. "Manufacturing" (section 210.12(b)(ii)(A)) means working raw materials into wares suitable for use, or giving new shape, new quality, or new combinations to matter. Empire's grading, separating, fluffing, baling, and packing process constitutes production of goods by manufacturing or processing. So its machinery and equipment qualify for the ITC if they are principally used (more than 50%, per 20 NYCRR 5-2.4(c)) for that purpose and meet the other "qualified property" tests in section 210.12 and Subpart 5-2: depreciable under IRC section 167, four-year-plus useful life, acquired by purchase under IRC section 179(d), and situated in New York.

What this means for you

Sorting-and-baling recycling can be "processing"

Turning mixed scrap paper into uniform, graded, mill-spec bales gives the material new quality and combinations -- that is production by manufacturing or processing, which qualifies for the ITC.

"Principally used" means more than 50%

Equipment qualifies only if it is used in production more than half the time; dual-purpose machinery is judged by its operating time. Floor space used for offices, sales, or distribution does not count as production space.

The other qualified-property tests still apply

Even production equipment must be depreciable, have a four-year-plus life, be bought (not self-constructed for resale or leased in), and have a New York situs; the credit is claimed for the first year the property becomes qualified.

Common questions

Q: Is recycling scrap paper really "manufacturing or processing" for the ITC?
A: Yes -- grading, separating, fluffing, and baling to exacting mill specifications gives the paper new quality and combinations, which is production under section 210.12(b)(ii)(A).

Q: Does all my equipment qualify automatically?
A: No. Each item must be principally used (over 50%) in the production process and meet the depreciability, useful-life, purchase, and situs tests.

Q: What about my office or sales space?
A: Space used for offices, accounting, sales, and distribution is not production space and is excluded from the building/credit analysis.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.12 (Article 9-A investment tax credit for property used in production of goods)
- Tax Law section 210.12(b)(ii)(A) (definition of manufacturing -- working raw materials into wares or giving new shape, quality, or combination)
- 20 NYCRR 5-2.2 (qualified property requirements, including principal use in production by manufacturing or processing)
- 20 NYCRR 5-2.4(c) (principally used means more than 50 percent)
- 20 NYCRR 5-2.1 (credit claimed for the first year property becomes qualified)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a95_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (1) C
Corporation Tax
January 26, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C941003A

On October 3, 1994, a Petition for Advisory Opinion was received from Empire Recycling
Corporation, P.O. Box 353, Utica, New York 13503.
The issue raised by Petitioner, Empire Recycling Corporation, is whether it is considered a
manufacturer or processor for purposes of the New York State investment tax credit under section
210.12 of the Tax Law.
Petitioner has a division which operates a paper processing and recycling center. Its primary
market for the processed material is the repulping paper making industry. Each grade of paper must
fit exacting standards of quality and size as prescribed by the consuming mill. Each stage of the
grading, separating, fluffing, baling and packing process is designed to maximize output while
maintaining the highest fibre quality standards, thereby preventing downgrading or rejection.
The majority of the fifteen grades of paper processed by Petitioner arrives at the factory in
a mixed or combined state. When the material arrives at Petitioner's plant, it is dumped on a "tipping
floor". The material is then moved from the "tipping floor" to three sorting conveyors by use of
small loaders. The three sorting conveyors transport the material past sorters. The conveyor belts'
speed and carrying capacity are constantly maintained at the sorting control panel. The sorters' job
is to separate the material, often previously bound together, into various designated chambers
depending on fibre, color and type. Once the material has been sorted into its designated chamber
it is given a chemical test to determine if it is acidic, groundwood or alkaline. Material here is also
visually inspected to determine that it has been properly sorted and has the designated characteristics
of fiber, color and type. Once the paper has been properly graded, it is ready for fluffing and baling.
Bale integrity is as important as the fiber quality. Uniform dimensions, weight, density and
banding style are the key characteristics evaluated on a bale by bale basis. The material that passes
the fibre quality tests can and is rejected for poor bale characteristics.
The main components of the baling process are feeding, conditioning and baling. These
functions are automatically controlled by the baler computer to insure paper feed rate, conditioning,
compaction and bale strapping frequency.
The baling process is preceded by fluffing the material. The fluffer conditioner reduces
oversize sheets of paper stock to specified sizes by cutting the sheets of paper stock while on the bale
line. The fluffer/conditioner insures that the paper meets factory standards, and that maximum
TP-9 (9/88)

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TSB-A-95 (1) C
Corporation Tax
January 26, 1995
density and uniformity are achieved in each bale. This technology allows Petitioner to customize,
on a grade by grade basis, to match individual mill specifications without sacrificing quality or
output.
Section 210.12 of the Tax Law allows an investment tax credit against the tax imposed under
Article 9-A of the Tax Law. For taxable years beginning after 1990, section 210.12 allows an
investment tax credit equal to five percent with respect to the first $350 million of the investment
credit base and four percent with respect to the investment credit base in excess of $350 million. The
investment credit base is the cost or other basis for Federal income tax purposes of qualified tangible
personal property and other tangible property, including buildings and structural components of
buildings.
Section 5-2.1 of the Business Corporation Franchise Tax Regulations provides that the
taxpayer must claim the investment tax credit for the first taxable year in which the property
becomes qualified property.
Under section 5-2.2 of the Business Corporation Franchise Tax Regulations, the term
"qualified property" means 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;

(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, assembling, refining, mining,
extracting, farming, agriculture, horticulture, floriculture,
viticulture or commercial fishing.

Section £10.12(b)(ii)(A) 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."
Section 5-2.4(c) of the Business Corporation Franchise Tax Regulations provides that
[t]he term "principally used" means more than 50 percent. A building or
addition to a building is principally used in production where more than 50
percent of its usable business floor space is used in storage and production.
Floor space used for bathrooms, cafeterias and lounges is not usable

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Corporation Tax
January 26, 1995
business floor space. Space used for offices, accounting, sales and distribution is not
used in production. Dual purpose machinery is principally used in production when
it is used in production more than 50 percent of its operating time.
Petitioner operates a paper processing business for the repulping paper making
industry. Petitioner's paper grading, separating, fluffing, baling and packing process,
described herein, constitutes the production of goods by manufacturing or processing
pursuant to section 210.12(b)(ii)(A) of the Tax Law. If Petitioner's machinery and equipment
is principally used for such manufacturing or processing purpose, such machinery and
equipment will qualify for the investment tax credit if the machinery and equipment meets
all of the other requirements contained in section 210.12 of the Tax Law and Subpart 5-2 of
the Business Corporation Franchise Tax Regulations.

DATED: January 26, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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