Does manufacturing equipment used to physically produce and reproduce computer hardware and software products (as opposed to just designing/developing them) qualify for New York's investment tax credit, and does a general-purpose office computer used for project management also qualify?

Plain-English summary

Protocom Devices, filed the same day as its companion R&D ruling (TSB-A-87(17)C), asked a related but distinct question: does the equipment it uses to actually MANUFACTURE (not just design/develop) its computer hardware and software data-communications products qualify for the investment tax credit. The equipment list here is production-oriented: circuit testers and desoldering tools for repairing printed circuit boards, a cable-assembly harness tool, meters and an oscilloscope for testing circuits, a "portable gang programmer" and a Kayro 10 computer used to reproduce software onto EPROMs and disks, an IBM computer for hardware schematics, a Bernoulli drive for software storage, Apple Macintosh PCs used for project management and general data processing, and a precision drill for assembly modifications.

The Department worked through whether Protocom's software reproduction process counts as "manufacturing" or "processing" of goods -- a question it had already answered favorably for video and audio tape production in prior rulings. Taking a blank tape or disk and imprinting a software program onto it, the Department reasoned, is directly analogous to taking a blank videotape and imprinting a commercial onto it to create a master tape -- both are "processing" in the sense of subjecting raw material (blank media) to treatment that transforms its form, state, or condition. This distinguishes Protocom's activity from mere "data processing services" (like a payroll-processing bureau that just repackages a customer's own data and hands it back), which prior rulings held does NOT count as manufacturing goods -- Protocom, by contrast, is producing and SELLING its own hardware and software products to customers, not just processing customer data. Its hardware manufacturing (producing the physical connector products) was more straightforwardly "manufacturing" under the statute.

Applying that conclusion, the Department found that all of Protocom's listed manufacturing equipment qualifies for the investment tax credit EXCEPT the Apple Macintosh PCs -- because those are used for project management and general data processing rather than the actual production process, following the same "management-use computers don't count" reasoning from a prior ruling (Epic Chemicals) that excluded computers used only for management decisions. As in the companion R&D ruling, qualifying for the investment credit also unlocks the follow-on employment incentive credit in the next three years (subject to the 101%-of-base-year employment test), and Protocom -- assuming it meets the statutory "new business" test -- may elect to have any investment credit carryforward refunded as a cash overpayment rather than carried forward, though the employment incentive credit itself is never refundable.

What this means for you

Software and hardware manufacturers reproducing products onto physical media

New York treats the physical reproduction/imprinting of software onto tape, disk, or EPROM as "manufacturing"/"processing," not merely a service -- following the same logic already applied to audio and video tape production. This is a meaningfully different question from whether R&D/development equipment qualifies (addressed in the companion ruling TSB-A-87(17)C) -- this ruling covers the PRODUCTION-side equipment.

Businesses with general-purpose computers used across departments

A computer used for project management, scheduling, or general data processing -- even at a manufacturing company, even if it happens to be used somewhere in the production workflow -- doesn't automatically qualify for the investment tax credit. The equipment must be used IN the actual production process itself, not merely to manage or administer around it.

Data processing service bureaus

This ruling reinforces a clear line: a company that takes customer data, transforms its FORMAT, and gives the same information back to the customer (payroll processing, for example) is providing a service, not manufacturing goods -- even though something is technically being "produced." Protocom's situation was different because it manufactures and sells its OWN products.

Common questions

Q: Why did the Apple Macintosh PCs not qualify when other computer equipment did?
A: Because they were used for project management and general data processing rather than the actual manufacturing/reproduction process -- the same "management use disqualifies" principle applied in the Epic Chemicals ruling.

Q: Is this the same ruling as Protocom's R&D equipment question?
A: No -- this is a companion ruling (same petitioner, same filing date, decided the same day) addressing MANUFACTURING equipment specifically; see TSB-A-87(17)C for the separate research and development equipment analysis.

Q: Can another software or hardware manufacturer rely on this specific ruling?
A: No. It binds the Department only for this petitioner's facts and can't be relied upon by other taxpayers, even similarly structured technology manufacturers.

Citations and references

Statutes and regulations:

• Tax Law § 210.12, § 210.12(e), § 210.12(j) (investment tax credit, carryforward/refund, new-business election); § 210.12-A (employment incentive credit)
• Tax Law § 606(a)(2) (personal income tax parallel); § 1087(a) (refund claim limitations period)
• Business Corporation Franchise Tax Regulations § 5-2.4(b)-(c), § 5-3.2(a); 20 NYCRR 527.4(d) (processing definition)
• TSB-H-81(57)I, Richard H. Roberts; TSB-A-85(5)C, Unitel Video Services (video/audio tape = manufacturing)
• TSB-H-82(4)C, Continental Terminals; TSB-H-83(23)C, Matter of Multimode, Inc.
• TSB-H-81(59)C, Matter of Epic Chemicals (management computers excluded)
• TSB-H-84(26)C, Super Data Systems; TSB-H-83(42)C, Quantum Computer Services (data processing services distinguished)

Related opinion:

• TSB-A-87(17)C (same petitioner, same date filed/decided) -- addresses Protocom's separate research and development equipment

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_14c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (14) C
Corporation Tax
May 29, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C861215B

On December 15, 1986, a Petition for Advisory Opinion was received from Protocom Devices,
Inc., 1666 Bathgate Avenue, Bronx, New York 10457.
The issue raised is whether Petitioner, an Article 9-A taxpayer, is allowed an investment tax
credit, pursuant to section 210.12 of the Tax Law, and an employment incentive credit, pursuant to
section 210.12-A of the Tax Law, with respect to manufacturing equipment used in the production of
computer hardware and software which is used in a data communications environment. Also, since
Petitioner has not earned any profits to date, can the investment tax credit be allowed in the current
taxable year, as a refund, rather than carrying the credit to future years.
Petitioner was incorporated in February 1983, and is engaged in the design, development and
manufacture of high performance communications processors that interface electronic data processing
equipment (both synchronous and asynchronous) to state of the art X.25 packet switched networks. (X.25
is an international standard that defines the operation of a packet switched network). Without such highly
sophisticated products, vendor specific electronic data processing equipment could not connect to nor
communicate over packet switched networks. Among Petitioner's developed products are packet
assembler/disassemblers that support the broadest variety of vendor specific synchronous equipment.
Petitioner designs, develops and manufactures software packages that provide network
management and permit network access to personal computers. Petitioner has expertise in network design
and consulting, as well as the production of customized interface products that satisfy unique
requirements dictated by non-standard operating environments or desired by customers.
Petitioner also designs, develops and manufactures hardware products that contain the software
products developed by Petitioner and function as the physical connective points between vendor specific
equipment and X.25 packet switched networks.
The equipment used in Petitioner's manufacturing process is depreciable and was acquired since
February 1983. The equipment consists of:
Fluke micro trouble shooter - used as circuit tester for repair of PCB's
Ungar desoldering system - used to repair damage electronic components
AMP harness tool - used in manufacturing of cable assemblies
Fluke meter - used for continuity tests of electronic circuits
Tektronic oscilloscope - used to measure signals on electronic circuits
Portable gang programmer - used for reproduction of software; EPROM's
Kayro 10 computer - used for software reproduction
IBM Computer - used for hardware design; schematics
Bernoulli 20 + 20 - used for software storage; all products
Apple Macintosh P.C.s - used for project management; data processing, etc.
Precision electric drill - used for assembly modifications.

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

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

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TSB-A-87 (14) C
Corporation Tax
May 29, 1987

Section 210.12 of the Tax Law allows an investment credit against the tax imposed under Article
9-A of the Tax Law equal to six percent of the cost or other basis of equipment which:
(1)

is acquired, constructed, reconstructed or erected after June 30, 1982;

(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 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, and other specified activities.

"Manufacturing" means 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(b) of the Business Corporation Franchise Tax regulations (hereinafter Article 9-A
regulations) provides, in pertinent part, that the term "property used in the production of goods" includes
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.
Section 5-2.4(c) of the Article 9-A regulations provides that the term "principally used" means
more than 50 percent.
The investment tax credit is not allowed for any property which is leased by the taxpayer to any
other person or corporation.
A similar investment tax credit is provided for in section 606 of the Tax Law with respect to
personal income tax. Section 606(a)(2) which requires that the property claimed as the basis for the credit
be "principally used by the taxpayer in the production of goods by manufacturing, processing..." follows
verbatim the terms of section 210.12(b)(2). In applying section 606(a)(2), the Tax Commission has ruled
that equipment used in the production of video tapes constitutes equipment used in the production of
goods by manufacturing so as to satisfy the production pre-requisite for the investment tax credit.
Richard H. Roberts, State Tax Commission Advisory Opinion, TSB-H-81(57)I. The same conclusion is
also appropriate with respect to the tax imposed under Article 9-A of the Tax Law. In fact, the Tax
Commission has made a similar ruling in Unitel Video Services, Inc., State Tax Commission Advisory
Opinion, TSB-A-85(5)C.

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TSB-A-87 (14) C
Corporation Tax
May 29, 1987

The term "processing," while not defined in the statutory provision or regulation here at issue, is
defined at 20 NYCRR 527.4(d) (a sales and use tax regulation) as "the performance of any service on
tangible personal property for the owner which effects a change in the nature, shape or form of the
property." In Continental Terminals, Decision of the State Tax Commission, TSB-H-82(4)C, the Tax
Commission held such definition to be applicable to determinations made under Article 9-A. It appears
clear from such definition that the transmutation of raw film to usable video tapes and films, and blank
tapes to usable radio tapes, constitutes "processing" within the meaning of section 210.12(b) of the Tax
Law. The conversion of raw film or tape into a form suitable for transmission is, in effect, a form of
imprinting. Such procedure has itself been held by the Tax Commission to constitute processing, defined
by the Commission as "an operation whereby raw material is subjected to some special treatment, by
artificial or natural means, which transforms or alters its form, state or condition." Matter of Multimode,
Inc., Decision of the State Tax Commission, May 20, 1983, TSB-H-83(23)C. See also Matter of Epic
Chemicals, Decision of the State Tax Commission, October 30, 1981, TSB-H-81(59)C. The view
represented herein is given further support by a consideration of the examples given in connection with
20 NYCRR 527.4(d). Thus, it is there held that the term "processing" applies to (1) the development of
film by a photographic laboratory, (2) cutting, editing, sound dubbing and the addition of titles to convert
exposed and developed film footage into a completed film and (3) changing existing computer programs
by rearranging, adding or removing metal pins, for the metal bar type or altering the imprint on tape for
the imprinted electronic tape type. The creation of television films and video tapes, as well as radio tapes
and the changing of existing computer programs, similarly effects changes in the nature and qualities of
film, tape, metal bar programs and imprinted tape programs and thus falls under the rubric of
"processing".
In two distinguishing Tax Commission decisions, Matter of Super Data Systems, Inc., State Tax
Commission, June 1, 1984, TSB-H-84(26)C and Matter of Quantum Computer Services, Inc., State Tax
Commission, September 9, 1983, TSB-H-83(42)C, it was determined that the conduct of data processing
services does not constitute the using of property in the production of goods or wares. In such instances,
the taxpayer received data, such as payroll records, from customers. Taxpayer's employees using
keypunch machines transfer the data onto tape or disk and either the computer reorganizes the data and
prints documents such as a payroll check or statement to be returned to the customer or the tape or disk
itself is returned to the customer for its use.
In the instant case, Petitioner produces, for sale to its customers, the hardware and software
products it has developed. When producing the software products, Petitioner's activities are in the nature
of taking a raw material and subjecting it to treatment that transforms or alters its form, state or
condition, i.e, the taking of a blank tape or disk and substantially changing it by imprinting it to create a
software program. Such process is similar to taking a blank video tape and imprinting a commercial on it
to create a master video tape. Therefore, Petitioner's activities of producing the software products for sale
to its customers constitutes "manufacturing" and "processing" as determined in Richard H. Roberts,
supra; Unitel Video Services, Inc., supra; Continental Terminals, supra; Matter of Multimode Inc. supra;
and Matter of Epic Chemicals, supra.

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TSB-A-87 (14) C
Corporation Tax
May 29, 1987

Since Petitioner's activities cannot be characterized as the mere taking of data from a customer
and packaging it in a different form and giving that same information back to the customer, Petitioner's
activities do not constitute data processing services as determined in Matter of Super Data Systems, Inc.,
supra; and Matter of Quantum Computer Services Inc., supra.
The production of Petitioner's hardware products, the physical connective points between vendor
specific equipment and X.25 packet switched networks, clearly constitutes manufacturing as defined in
section 210.12 of the Tax Law.
Accordingly, it is determined that all of Petitioner's equipment listed above, except the Apple
Macintosh P.C.s, that is used in producing the hardware and software products is used in the production
of goods by manufacturing and processing within the meaning and intent of section 210.12(b) of the Tax
Law. This includes the equipment used in the repair of equipment used in the manufacturing process. The
Apple Macintosh P.C's that are used for project management and data processing, do not constitute part
of the manufacturing process. Matter of Epic Chemical, Inc., supra. Therefore, such computers do not
qualify for the investment tax credit.
If Petitioner's equipment used in the production of goods meets the "principally used" test and
also meets the other requirements of section 210.12 of the Tax Law, such equipment will qualify for the
investment tax credit.
Section 210.12-A of the Tax Law allows an employment incentive tax credit against the tax
imposed under Article 9-A of the Tax Law in each of the three years succeeding the taxable year for
which an investment tax credit has been allowed under section 210.12 of the Tax Law. The amount of the
credit allowed in each of the three years is fifty percent of the investment tax credit allowed. However,
the credit is allowed only in taxable years when the average number of employees during each such year
is at least 101 percent of the average number of employees during the taxable year immediately preceding
the taxable year for which the investment tax credit is allowed.
Section 5-3.2(a) of the Article 9-A regulations provides:
The average number of employees in a taxable year as used in this Subpart is computed as
follows:
(1)

ascertain the number of employees within New York State, except general
executive officers, employed by the taxpayer on March 31st, June 30th,
September 30th, and December 31st in the taxable year;

(2)

add together the number of employees ascertained on each of such dates; and

(3)

divide the sum by the number of such dates occurring within the taxable year.
20 NYCRR 5-3.2.

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TSB-A-87 (14) C
Corporation Tax
May 29, 1987

Where a taxpayer qualifies for an investment tax credit with respect to eligible property, the
taxpayer may also qualify for an employment incentive tax credit for each of the three years next
succeeding the taxable year for which the taxpayer qualified for the investment tax credit. The taxpayer
will qualify for the credit in each of the years in which the average number of taxpayer's employees is at
least 101 percent of the average number of employees during the taxable year immediately preceding the
taxable year for which the investment was allowable (the base year). Each year's qualification is
determined separately. If a taxpayer fails to have a sufficient number of employees in one or two of the
three years, it will nevertheless qualify for the credit in the year or years in which is has a sufficient
number of employees.
Accordingly, if the Petitioner qualifies for the investment tax credit, it will also qualify for the
employment incentive tax credit in each of the next succeeding three years if the number of its employees
is at least 101 percent of the number of its employees in the base year. The amount of Petitioner's credit
in each of the three years will equal one-half of Petitioner's investment tax credit (i.e. one-half of six
percent) for a total of nine percent if Petitioner qualifies in all three years. This amount is in addition to
the six percent credit allowed for the investment tax credit. If Petitioner does not claim the investment tax
credit, Petitioner may not claim the employment incentive tax credit pursuant to section 210.12-A of the
Tax Law for the appropriate taxable years.
A taxpayer must claim the investment tax credit for the first taxable year in which the property
becomes eligible property. Section 210.12(e) of the Tax Law provides that the investment tax credit
allowed for any taxable year shall not reduce the tax due below the fixed minimum tax and that when a
taxpayer has an excess amount it may be carried over to the following year or years and may be deducted
from the taxpayer's tax for such succeeding year or years. In lieu of such carryover, a taxpayer which
qualifies as a new business may elect to treat the amount of such carryover as an overpayment of tax to
be refunded.
Pursuant to section 210.12(j) of the Tax Law, a "new business" includes any corporation, except
a corporation which:
(1)

over 50 percent of the number of shares of stock entitling the holders thereof to vote for
the election of directors or trustees is owned by a taxpayer subject to tax under Article 9A; section 183, 184, 185 or 186 of Article 9; Article 32 or Article 33 of the Tax Law; or

(2)

is substantially similar in operation and in ownership to a business entity (or entities)
taxable, or previously taxable, under Article 9-A; section 183, 184, 185 or 186 of Article
9; Article 32 or Article 33 of the Tax Law; Article 23 of the Tax Law or which would
have been subject to tax under such Article 23 (as such article was in effect on January 1,
1980) or the income (or losses) of which is (or was) includable under Article 22 of the
Tax Law whereby the intent and purpose of paragraph (j) and (e) of subdivision 12 of
section 210 of the Tax Law with respect to refunding of credit to new business would be
evaded; or

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TSB-A-87 (14) C
Corporation Tax
May 29, 1987

(3)

has been subject to tax under Article 9-A for more than four taxable years (excluding
short taxable years) prior to the taxable year during which the taxpayer first becomes
eligible for the investment tax credit.

Accordingly, Petitioner may elect to treat any allowable investment tax credit carryover as an
overpayment to be refunded for the taxable years that Petitioner qualifies as a new business pursuant to
section 210.12(j) of the Tax Law. The employment incentive tax credit is not refundable.
If a taxpayer fails to claim the investment tax credit or employment incentive tax credit for the
taxable year in which it first qualifies for the credit, it may not claim the credit in a subsequent year.
However, in such a case, the taxpayer may file amended returns for the taxable years in which the credits
should have been claimed (as long as the period for filing such amended returns has not expired) and
thereby claim the credit.
Section 1087(a) of the Tax Law provides that a claim for credit or refund of an overpayment of
tax must be filed by a taxpayer within three years from the date the return was filed or two years from the
date the tax was paid, whichever of such periods expires later. If a taxpayer files such an amended return,
it may claim a refund of taxes previously paid (subject to the limitations set forth in sections 210.12(e)
and 210.12-A(c) or it may carry over the credits to the following year or years and apply the credits
against taxes for such year or years.

DATED: May 29, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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