New York Advisory Opinion TSB-A-86 (12)I: Does machinery and equipment that turns foods, milk, and cheeses into finished foods qualify for the Tax Law § 606(a) investment tax credit, when the business both caters/serves prepared meals and sells processed food in bulk at retail?

Plain-English summary

Anthony J. Pieragostini owned "Cheese World," a business that combined a catering service with a retail food supply operation. He used machinery to process, refine, cook, beat, and mix natural products and other edibles - including turning milk and cheeses into finished foods and dinners - and asked whether that equipment qualified for the Tax Law § 606(a) investment tax credit, arguing that the machines created a genuinely different edible product for sale.

The Department explained that § 606(a) allows a credit for qualifying tangible property (meeting several threshold requirements: post-1968 acquisition, federal depreciability, at least a four-year useful life, purchase, and New York situs) that is "principally used ... in the production of goods by manufacturing, processing, assembling or other specified activities," with "manufacturing" defined as working raw materials into wares or giving new shape, quality, or combination to already-processed matter using machinery or similar equipment. Applying its own established precedent, the Department held that kitchen equipment principally used to prepare food actually served in a restaurant is NOT eligible, because "processing" in this context means industrial activity related to manufacturing, not preparing food for restaurant service (citing Matter of Mahoney and Matter of General Mills Restaurant Group) - and that same exclusion extends to take-out restaurants and catering services (per Technical Services Bureau Memorandum TSB-M-78(1)C).

But the Department drew a real distinction for Pieragostini's OTHER line of business: selling processed food in bulk at retail (as opposed to individual servings). Machinery and equipment principally used to produce food sold in bulk at retail WILL be deemed used in the production of goods by manufacturing, and can qualify for the credit if the property also meets the statute's other five requirements. "Principally" means more than 50% of the equipment's use falls into the qualifying category. So the answer for Pieragostini's Cheese World business turned entirely on how each piece of equipment was actually used: equipment principally (over 50%) used for restaurant meals, take-out meals, or catering does not qualify, while equipment principally used to produce bulk retail food does qualify (assuming the other five requirements are met).

This is the foundational opinion behind the restaurant/catering-equipment exclusion that the Department applied again roughly 18 months later in TSB-A-88(2)I (the "Wilson frozen custard" opinion), which cited this Pieragostini ruling by name (along with the Mahoney and General Mills Restaurant Group decisions) in denying the investment credit for equipment used to prepare frozen custard for retail sale - reinforcing that food prepared for direct consumer sale, whatever the format, sits outside the credit regardless of how much the equipment transforms the ingredients.

What this means for you

Businesses combining catering/restaurant operations with bulk retail food sales

Track how each piece of equipment is actually used. Under this opinion, equipment used more than 50% of the time to prepare meals for restaurant service, take-out, or catering does not qualify for the investment tax credit, but equipment used more than 50% of the time to produce food sold in bulk at retail (not as individual servings) can qualify if it also meets the credit's other requirements.

Food-processing and specialty-food retailers evaluating equipment purchases

If your equipment produces a genuinely different food product (through cooking, mixing, refining, etc.) that you then sell in bulk at retail - rather than serving it as a prepared meal or individual portion to a customer - you may have a stronger case for the investment tax credit than a restaurant or caterer would, even using similar-looking equipment.

Accountants advising food-industry clients with mixed business lines

When a client operates both a food-service (restaurant/catering/take-out) business and a bulk retail food-production business using overlapping equipment, apply the "principally used" (more than 50%) test separately to each piece of equipment rather than treating the business as a single category - this opinion shows the same taxpayer can get different credit outcomes for different equipment depending on its predominant use.

Common questions

Q: Does equipment used to prepare food for my restaurant or catering business qualify for the New York investment tax credit?
A: No. The Department has consistently held that "processing" for purposes of the section 606(a) credit means industrial activity related to manufacturing, not preparing food for restaurant service, take-out, or catering - regardless of how much the equipment transforms the ingredients.

Q: What if I sell processed food in bulk at retail instead of serving individual meals?
A: That's different. Machinery and equipment principally (more than 50% of its use) used to produce food sold in bulk at retail is treated as production of goods by manufacturing and can qualify for the credit, provided it also meets the statute's other requirements (post-1968 acquisition, depreciability, four-year useful life, purchase, New York situs).

Q: My business does both catering and bulk retail food sales using some of the same equipment - how do I know if it qualifies?
A: Look at how each piece of equipment is principally used - meaning more than 50% of its actual use. If it's principally used for restaurant, take-out, or catering food preparation, it doesn't qualify; if it's principally used to produce food sold in bulk at retail, it can qualify.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a86_12i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (12) I
Income Tax
September 26, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I860520A

On May 20, 1986, a Petition for Advisory Opinion was received from Anthony J.
Pieragostini, Box 120, Mt. Kisco, New York, 10549.
The issue raised is whether tangible personal property, such as machinery and equipment
used in the food service industry for turning foods, milk and cheeses into finished foods and dinners
for consumption by the general public, qualifies for an investment tax credit under section 606(a)
of Article 22 of the Tax Law.
Petitioner is the owner of "Cheese World," a combination catering service and retail supplier
of food. He asserts that since natural products or other edibles are processed, refined, cooked, beaten
or mixed by the machines at issue to form a different edible product sold at retail, he is eligible for
the investment credit.
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;
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 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."
   RODERICK G. W. CHU, COMMISSIONER
   TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-86 (12) I
Income Tax
September 26, 1986

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.
However, in addition to his catering business, Petitioner also sells processed food at retail.
Machinery and equipment principally used to produce foods sold in bulk (rather than as individual
servings) at retail will be deemed to be used in the production of goods by manufacturing. A machine
is "principally" used in the production of good by manufacturing if more than fifty percent of its use
is in a qualifying production process. If such machinery and equipment also meets criteria one
through five, listed above, it will qualify for the investment tax credit.
Accordingly, if Petitioner's machinery and equipment are principally (more than 50%) used
to produce restaurant meals, take-out meals or food used in a catering service, then the machinery
and equipment will not qualify for the investment tax credit. However, if Petitioner's machinery and
equipment is principally used to produce food sold in bulk at retail, then it is considered to be
principally used in the production of good by manufacturing and will qualify for the investment tax
credit if it also meets criteria one through five listed above.

DATED: September 26, 1986

s/Frank J. Puccia
Director
Technical Services Bureau

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