Does a high-volume Xerox Docutech system that Kinko's uses to integrate, edit, and print customer materials qualify for New York's personal income tax investment tax credit?

Plain-English summary

Gordon S. Bagwell and Sandra R. Sunday, who operate Kinko's of Manhattan, asked whether their Xerox Docutech Publishing System qualifies for New York's personal income tax investment tax credit (ITC) under Tax Law § 606(a). A Docutech is a high-volume xerographic system that, unlike an ordinary photocopier, accepts input both electronically (via magnetic media) and through traditional "light lens" copying. Its distinctive feature is that it can take previously unrelated materials - photographs, charts, spreadsheets, pre-printed inserts, electronic media - and integrate, edit, crop, resize, and merge them using a computer-based interface, then print and often bind the result into a finished product such as a paperback book, manual, magazine, sales guide, or legal brief. Kinko's housed the Docutech in a separate, non-retail part of the store, staffed only by trained technicians on a normal production schedule, distinct from the conventional photocopiers used for straightforward customer duplicating.

The Department analyzed the Docutech against the ITC's "qualified property" test: tangible property principally used (more than 50% of operating time) in the production of goods by manufacturing, processing, or similar activity. Drawing on its own prior guidance for computer-related equipment (TSB-M-87(5)C) and on cases like Matter of Multimode (mailing-list processing that produced printed labels) and Matter of Continental Terminals (defining "processing" as transforming a raw material's form, state, or condition), the Department found that the Docutech's core function - integrating and editing unrelated raw materials into an assembled new work - is the kind of "processing" that produces goods, not merely a reformatting service. By contrast, equipment used only to reformat or duplicate a customer's existing material without that added transformation (plain photocopying, or simply transferring records onto tape or diskettes, as in Matter of Super Data Systems) does not count as production of goods.

Because Kinko's used the Docutech for both functions - sometimes for the integrating/editing/merging work, sometimes for straightforward photocopying - the Department issued a conditional ruling rather than a flat yes or no. If the Docutech is used more than 50% of its operating time for the integrating, editing, cropping, resizing, merging, and printing functions, it is principally used in the production of goods by processing and qualifies for the ITC, provided it also meets § 606(a)'s other requirements (New York situs, useful life of four years or more, acquired by purchase after December 31, 1986, and depreciable). If, instead, the Docutech is used 50% or more of the time simply to photocopy customers' existing materials without that integration and editing, it does not qualify.

What this means for you

Copy shop and print-services owners investing in digital publishing equipment

If you operate high-volume digital publishing or imaging equipment (like a Docutech-style system) alongside conventional photocopiers, whether that equipment qualifies for the investment tax credit depends on how it is actually used, not just what it is capable of doing. Time spent integrating, editing, cropping, resizing, and merging previously unrelated customer materials into a new finished product counts toward production of goods by processing. Time spent merely photocopying a customer's existing material does not. Businesses that want to claim the credit should be prepared to show that the qualifying, processing-type use exceeds 50% of the equipment's operating time.

Accountants and tax professionals applying the "principally used in production" test to office and print equipment

This opinion illustrates how the Department applies the qualified-property test to computer-related and printing equipment generally. The key distinction is between equipment that only superficially reformats or duplicates existing material (data processing, keypunching, and photocopying equipment, per TSB-M-87(5)C, and the facts of Matter of Super Data Systems and Matter of Brigar) and equipment that transforms raw materials into a new product (automatic newspaper typesetting, or - as in Matter of Multimode and the Corporation D example in TSB-M-87(5)C - printing mailing labels from processed customer data). When advising a client with dual-use equipment, confirm how operating time actually splits between the two kinds of use, since the 50%-of-operating-time threshold in 20 NYCRR 106.1(d)(3) is what determines eligibility, as it did in Matter of Reader's Digest, where processing-type use was found but the credit was still denied for falling under 50%.

Common questions

Q: Does plain photocopying ever qualify for the investment tax credit?
A: No. The opinion treats straightforward photocopying of a customer's existing material - without integrating, editing, cropping, resizing, or merging it with other materials - as the provision of a service, not the production of goods, so time spent on that function does not count toward the credit.

Q: What's the difference between "processing" and merely reformatting data?
A: "Processing" means subjecting raw material to treatment that transforms or alters its form, state, or condition (Matter of Continental Terminals, TSB-H-82(4)C), such as taking unrelated materials and merging them into a new assembled work. Merely reformatting data - for example, transferring a customer's records onto tape or diskettes without altering their substance, as in Matter of Super Data Systems - does not qualify because no transformation occurs.

Q: How is the 50% operating-time threshold measured?
A: Under 20 NYCRR 106.1(d)(3), "principally used" means used in production more than 50% of the equipment's operating time. For dual-purpose machinery like the Docutech, that means comparing time spent on integrating/editing/cropping/resizing/merging/printing against time spent on plain photocopying. Petitioners did not supply usage percentages, so the Department's ruling was conditional on which side of that 50% line their actual use fell.

Q: Why did the Department compare the Docutech to a mailing-label printer?
A: In Matter of Multimode and the Corporation D example from TSB-M-87(5)C, a business used a computer to process customer data (names, addresses, or other information) and print it onto blank mailing labels - transforming raw data into a finished printed product. The Department found the Docutech's function of taking raw materials like photographs, charts, and electronic media and integrating them into a finished printed, and sometimes bound, product to be analogous.

Q: If the Docutech qualifies as processing, is the credit automatic?
A: No. Meeting the "principally used in processing" test is only one requirement. The property must also meet the other conditions of Tax Law § 606(a)(2)(A): it must have been acquired, constructed, reconstructed, or erected after December 31, 1986; be depreciable under Internal Revenue Code § 167; have a useful life of four years or more; be acquired by purchase; and have a situs in New York State.

Q: Does it matter that the same store also had conventional photocopiers for retail customers?
A: The opinion distinguishes the Docutech, run by trained technicians in a separate non-retail area for corporate/publishing-type jobs, from Kinko's ordinary retail photocopying machines used for simple duplication. Only the Docutech's own operating time is measured against the 50% threshold; the existence of separate conventional copiers elsewhere in the store doesn't affect that calculation.

Citations and references

• Tax Law § 606(a) - allows a 4% investment tax credit against personal income tax on the cost basis of qualified property
• Tax Law § 606(a)(2)(A) - defines "qualified property" and its six requirements, including situs in New York, useful life of four years or more, and principal use in production of goods
• Tax Law § 606(a)(2)(B)(i) - defines "manufacturing" as working raw materials into wares or giving new shapes, quality, or combinations to matter
• 20 NYCRR 106.1(c)(1) - Personal Income Tax Regulations provision restating the qualified-property test
• 20 NYCRR 106.1(d)(3) - defines "principally used" as more than 50 percent of operating time
• TSB-M-87(5)C - Technical Services Bureau Memorandum on the investment tax credit for computers and computer-related equipment, including the Corporation A/B/D examples
• Matter of Continental Terminals, Inc., TSB-H-82(4)C - defines "processing" as an operation transforming or altering a raw material's form, state, or condition
• Matter of Multimode, Inc., TSB-H-83(23)C - computer used to process customer data into mailing lists and print labels qualified as production of goods by processing
• Matter of Reader's Digest Assoc. v. State Tax Commn, 103 AD2d 926 - computer personalization of promotional literature was processing in nature, but credit denied because used less than 50% of the time
• Matter of Super Data Systems, Inc., TSB-H-84(26)C - equipment used merely to transfer customer information into a more compact form (cards, diskettes, tapes) did not qualify
• Matter of Brigar, Inc. v. Chu, 105 AD2d 587 - labeling, addressing, and mail-inserting machines that merely affix mailing labels to already-printed material are not production of goods by processing or assembling

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a98_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(3)I
Income Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I971103A

On November 3, 1997, a Petition for Advisory Opinion was received from
Gordon S. Bagwell & Sandra R. Sunday, 529 W 42nd Street, #2-V, New York, New York
10036.
The issue raised by Petitioners, Gordon S. Bagwell & Sandra R. Sunday, is
whether the Docutech Publishing System is eligible for the investment tax credit
under section 606 of Article 22 of the Tax Law.
Petitioners submit the following facts as the basis for this Advisory
Opinion.
Petitioners state that a Xerox Docutech is a high volume xerographic
copier. It is different from conventional copiers in that it accepts originals
electronically (via magnetic media) in addition to accepting originals in the
conventional "light lens" method. It can run copy jobs as large as one million
plus and as small as one. Petitioners do not have percentages based on job size
or usage. Long print runs are the norm.
A Docutech Publishing System is capable of accepting previously unrelated
materials: photographs, charts, spread sheets, pre-printed inserts, electronic
media, et al.
Utilizing a computer-based interface, these materials are
integrated, edited, cropped, re-sized, merged, and printed, often-times using a
glue bind to assemble the finished work in book form.
Petitioners state that the Docutech Publishing System takes four raw
ingredients: paper, toner (plastic), developer (magnetic material), and spool-fed
binding tape. Pages are printed according to digitized optical input, and these
materials are then collated on-line, and are often bound on-line, to create a
variety of end-user applications. Among these applications are paperback books,
manuals, magazines, sales guides and legal briefs.
Petitioners operate Kinko’s of Manhattan and many of Kinko's professional
clients rely on these products for their final product, whether it be for an
internal or external customer.
Customers for the Docutech often require the
integration of previously unrelated materials such as computer disks,
transparencies, photographs, linotronic output, etc. Whereas in the past Kinko’s
customers were required to create their documents using non-photocopying machine
equipment, the Docutech is a technological break-through that allows this work
to be done in an integrated fashion, electronically.
Kinko’s houses the Docutech in a non-retail portion of its location. The
machine is in a separate part of the store reserved for corporate customers
requiring the features described above. It is organized in a fashion distinctly
different from the retail photocopying store. The machine is operated only by
highly-trained technicians, and is in operation during a normal production
schedule Monday through Friday.

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In contrast, customers that require “photocopying” at Kinko’s are
traditionally steered toward traditional “photocopying machines” that produce
faithful duplicates of the originals supplied. There is no reason to incur the
additional cost of Docutech production for this business.
Section 606(a) of the Tax Law allows an investment tax credit against the
tax imposed under Article 22 of the Tax Law. For taxable years beginning after
1986, section 606(a) allows an investment tax credit equal to four percent of the
investment credit base. The investment credit base is the cost or other basis,
for federal income tax purposes, of qualified property.
The term “qualified property”, under section 606(a)(2)(A) of the Tax Law
and section 106.1(c)(1) of the Personal Income Tax Regulations, means tangible
personal property and other tangible property, including buildings and structural
components of buildings, which:
(1) is acquired, constructed, reconstructed or erected after December 31,
1986;
(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 606(a)(2)(B)(i) 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." Processing has been
defined, by the former New York State Tax Commission, as an operation whereby raw
material is subjected to some special treatment, either artificially or
naturally, which results in a transformation or alteration of the raw material's
form, state or condition. (Matter of Continental Terminals, Inc., Dec St Tax
Commn, March 5, 1982, TSB-H-82(4)C.) Section 106.1(d)(3) of the Personal Income
Tax Regulations provides that the term "principally used" means more than 50
percent. Dual purpose machinery is principally used in production when it is
used in production more than 50 percent of its operating time.
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,
investment tax credit for computers and computer-related equipment was addressed
in Technical Services Bureau Memorandum TSB-M-87(5)C, May 15, 1987. It concluded
that computers and computer-related equipment used by taxpayers will qualify for
the investment tax credit if the property is principally used in the production

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of goods or if it effects a substantial or significant change in the nature,
shape or form of tangible personal property. Property which only superficially
changes the basic materials will not qualify for the credit. Such property
includes data processing, keypunching equipment, photocopying machines and other
similar office equipment.
The memorandum’s general guidelines provide that
computers used by the printing industry qualify for the investment tax credit if
they are principally used in the production of newspapers, magazines or
periodicals beginning at the inputting of printed or graphic material and
continuing through various processes such as printing, cutting, insertion and
bailing if such processes are in an assembly line set-up.
The memorandum
includes the following as general examples:
Corporation A operates a data processing service bureau.
It
receives information from its customers in the form of voluminous
records and transfers this information onto diskettes and computer
tapes. A's customers have various uses for the information on the
tapes depending on what type of business they are in, such as
printing mailing labels or making printouts of inventories,
payrolls, credit reports, etc.
Computers and related equipment
would not qualify for the investment tax credit since no change is
effected on A's property.
Corporation B is a newspaper publisher that used computerized
equipment exclusively for automatic typesetting.
This equipment
qualifies for the investment tax credit since it is directly used by
the taxpayer in the production of goods (newspapers).
Corporation D is a printer of mailing labels for various publishers
and advertisers. Data is supplied to Corporation D by its customers
in various forms, some of which must be keyed into the computer
prior to processing various mailing lists and labels, including
packaging labels. Corporation D processes the mailing lists and
prints mailing labels, which are returned to its customers who affix
the labels to the product and use the list as a check-off for their
mailing. Approximately 70 percent of total computer operating time
is used for list processing and printing of labels. The computer
and related equipment qualify for the investment tax credit since
Corporation D produces goods by processing the data onto blank
labels.
In the Matter of Multimode, Inc, Dec St Tax Commn, May 20, 1983, TSB-H­
83(23)C, the company was entitled to take an investment tax credit on its
purchase of a computer since the computer was principally used in the production
of goods by processing. About 70 percent of the company's business was comprised
of transferring names and addresses from "hard copy", including order blanks and
shipping invoices, into a list in the form of magnetic tape according to criteria
such as income or geography and used in printing mailing labels. The printing
of the mailing labels by using a computer printer which was hooked into the
computer was considered to be processing.

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In the Matter of Reader's Digest Assoc v State Tax Commn, 103 AD2d 926,
computer-printed personalization on promotional literature did change the
literature and constituted processing, however, it was denied an investment tax
credit for the cost of two computers because they were used in the production of
goods by processing less than 50 percent of the time.
In the Matter of Super Data Systems, Inc, Dec St Tax Commn, June 1, 1984,
TSB-H-84(26)C, the petitioner was denied an investment tax credit on the purchase
of data processing equipment because the equipment was not used in the production
of goods by processing, but was used merely to transfer its customer’s
information into a more compact form, such as cards, diskettes or tapes, for
later use by the customer for various purposes.
A taxpayer that was engaged in the business of preparing publications for
mailing was not entitled to an investment tax credit for its acquisition of
labeling and addressing machines, a typing machine, and a mail inserting machine
because the equipment used to affix the mailing labels on catalogs, magazines,
newspapers and other publications it received from its clients was not used in
the production of goods by processing or assembling. Matter of Brigar, Inc v
Chu, 105 AD2d 587.
In this case, the Docutech Publishing System takes previously unrelated
materials such as photographs, charts, spread sheets, preprinted inserts and
electronic media and integrates, edits, crops, re-sizes, merges and prints the
new material, sometimes also binding the material into books, manuals, magazines,
sales guides and legal briefs. This operation of the Docutech Publishing System
is similar to the activities performed by Corporation D in the general examples
in TSB-M-87(5)C, supra, and Multimode, supra, and constitutes the production of
goods by processing. However, the mere copying of a customer’s material without
the integrating, editing, cropping, re-sizing, and merging aspects of the
operation is the provision of a service and does not constitute the production
of goods.
Accordingly, if Petitioners’ operation of the Docutech Publishing System
is used more than 50 percent of its operating time in integrating, editing,
cropping, re-sizing and merging their customers’ materials as well as printing
the material, the Docutech Publishing System is principally used in the
production of goods by processing and will qualify for the investment tax credit
if the property also meets all of the other requirements contained in section

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606(a) of the Tax Law. If the Docutech is used
50 percent or more of its
operating time to photocopy customers’ materials without integrating, editing,
cropping, re-sizing or merging the material before printing, the Docutech
Publishing System is not principally used in the production of goods and will not
qualify for the investment tax credit under section 606(a) of the Tax Law.

DATED: February 25, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.