New York Advisory Opinion TSB-A-88 (10)I: Issue raised is whether advanced diagnostic imaging equipment purchased and owned by Petitioner and used for processing and producing X-rays, scans, images and related diagnostic information qualifies for the investment credit under section 606(a) of the Tax Law.

Plain-English summary

Albany Equipment Management Associates, a New York limited partnership, ran a diagnostic-imaging facility offering conventional X-rays, ultrasound, CAT scans, and MRI. In 1985 it bought a suite of advanced imaging equipment - a .5T Magneton MR System with a VAX 11-730 computer, a Somatom DRG CT Total Body Scanner, a Siregraph C Radiologic/Fluoroscopic Unit, a Mammomat B Mammography Unit, and a Technicare M8100 Auto Sector IV Ultrasound Unit - all used to produce X-rays, scans, images, and related diagnostic information from live patients. Petitioner supplied the ancillary materials (dyes, film) and hired, trained, and supervised all the technicians, administrators, receptionists, and clerical staff. Every procedure produced a tangible X-ray-film image: the original was kept by Petitioner and a copy went to the patient or treating physician. Petitioner asked whether this equipment qualified for the section 606(a) personal income tax investment credit.

For the 1985 tax year, section 606(a) allowed a credit equal to 6% of the cost or basis of tangible property that (among other requirements) had a New York situs, was depreciable, had a useful life of four or more years, was purchased (not leased in), and - the contested criterion here - was "principally used" (meaning used more than 50% of the time, per Personal Income Tax Regulations § 103.1(d)) in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, or a handful of other listed activities. Section 606(a)(4) separately denies the credit entirely for property the taxpayer leases out to others.

Section 606(a)(2) defines "manufacturing" as working raw materials into wares suitable for use, or giving new shape, quality, or combination to already-processed matter using machinery or tools. "Processing" isn't defined in the income tax statute itself, so the Department borrowed the definition from the sales-tax regulations at 20 NYCRR 527.4(d): performing a service on tangible personal property that changes its nature, shape, or form. The Tax Commission had already held that same sales-tax definition applicable to investment-credit determinations under the separate Article 9-A corporate franchise tax (Continental Terminals, TSB-H-82(4)C), and since the Article 9-A investment credit (Tax Law § 210.12) is similar to the personal income tax credit under section 606(a), the Department treated Article 9-A precedent as equally relevant here.

Drawing on prior rulings that treated producing video tapes as "manufacturing" (Richard H. Roberts, TSB-H-81(57)I) and that treated converting raw film or tape into usable form as "processing" (Matter of Multimode, Inc., TSB-H-83(23)C; Matter of Epic Chemicals, TSB-H-81(59)C) - and noting that the sales-tax regulation's own examples of "processing" include film development by a photo lab and cutting/editing/dubbing exposed film into a finished product - the Department concluded that producing diagnostic X-ray film images from a patient's body is analogous to producing video tapes, radio tapes, and television films. On that reasoning, the imaging equipment principally used to generate those X-ray films qualifies as property used in the production of goods by manufacturing and processing under section 606(a)(2). Accordingly, for tax year 1985, an individual partner of Petitioner is entitled to claim a distributive share of the section 606(a) investment credit against the tax imposed by section 601(a), so long as the equipment is principally used by Petitioner's own employees to produce the films. The Department flagged one caveat: if Petitioner had leased the equipment out 50% or more of the time, no credit would be allowed at all, since the equipment would then fail the "principally used" test and would separately trigger the section 606(a)(4) bar on credits for leased property.

What this means for you

Medical-imaging practices and partnerships buying diagnostic equipment

If your practice or partnership purchases MRI, CT, ultrasound, mammography, or radiologic/fluoroscopic equipment and uses it in-house to produce diagnostic images for patients, this opinion supports treating that equipment as qualifying for the New York investment tax credit - provided the other statutory requirements (New York situs, depreciability, useful life, purchase rather than lease-in) are also met. The key factual point the Department relied on was that the equipment produces a tangible end product (the X-ray film) through a process that changes the state of a physical input, not merely a diagnostic reading or report.

Accountants and tax preparers claiming the credit for service-industry equipment

This ruling illustrates how far the Department was willing to stretch "manufacturing" and "processing" outside of a traditional factory setting - all the way to a medical-imaging service business. When advising clients in service industries who use equipment that transforms a physical medium (film, tape, or similar), look to whether the process changes the "nature, shape, or form" of that medium, per the borrowed sales-tax definition at 20 NYCRR 527.4(d), and whether comparable Department precedent (like the video-tape and film-processing rulings cited here) already covers an analogous activity.

Businesses evaluating whether their equipment is used enough to qualify

Because the credit turns on the equipment being "principally used" - more than 50% of the time - in a qualifying production activity, keep records showing how the equipment is actually used. The Department's caveat here is a reminder that leasing equipment out (including any rental or license-to-use arrangement) counts against you twice: it can push your own qualifying use below 50%, and section 606(a)(4) independently bars the credit outright for leased property regardless of usage percentage.

Common questions

Q: Does producing X-ray films count as "manufacturing" or "processing" for investment tax credit purposes?
A: Yes, according to this opinion. The Department found that producing a tangible X-ray-film image from a live patient's body is analogous to producing video tapes, radio tapes, and television films - activities it had already recognized as "manufacturing" or "processing" in prior rulings. The reasoning rests on the idea that the equipment performs a service on a physical medium (X-ray film) that changes its nature, shape, or form, which is the sales-tax regulatory definition of "processing" that the Department applied here.

Q: What happens if I lease out my equipment part of the time?
A: It can cost you the credit. Section 606(a)(4) denies the credit entirely for property leased to any other person or corporation (any rental or license-to-use arrangement counts as a lease), and separately, if the equipment is leased out 50% or more of the time, it fails the "principally used" test under section 606(a) because it would no longer be principally used by the taxpayer itself. The Department noted this exact scenario as a caveat to its holding here.

Q: Where did the Department get its definition of "processing," since the personal income tax statute doesn't define it?
A: From the sales and use tax regulations at 20 NYCRR 527.4(d), which define "processing" as performing a service on tangible personal property that changes its nature, shape, or form. The Tax Commission had already ruled that same sales-tax definition applicable to investment tax credit determinations under the Article 9-A corporate franchise tax (Continental Terminals, TSB-H-82(4)C), and the Department treated Article 9-A investment-credit precedent as equally relevant to the personal income tax credit under section 606(a) because the two provisions are similar.

Q: Does this opinion mean all medical or diagnostic equipment automatically qualifies for the investment credit?
A: No. This opinion is limited to the specific facts presented - equipment principally used to produce a tangible X-ray-film image as the end product of the diagnostic procedure. It doesn't address equipment used only to generate a digital reading, verbal diagnosis, or other output that isn't itself a tangible processed good, and it doesn't relieve a taxpayer of separately satisfying the other section 606(a) requirements (situs, depreciability, useful life, purchase rather than lease-in).

Q: Who can claim the credit - the partnership itself or the individual partners?
A: Because Petitioner is a limited partnership, the credit passes through: the Department held that an individual partner of Petitioner is entitled to an investment credit under section 606(a) against the tax imposed by section 601(a), based on that partner's distributive share of the cost or basis of the qualifying diagnostic equipment.

Citations and references

• Tax Law § 606(a) - allows a 6% investment tax credit for qualifying tangible property principally used in manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing
• Tax Law § 606(a)(2) - defines "manufacturing" and the scope of "property used in the production of goods"
• Tax Law § 606(a)(4) - bars the credit for property leased to any other person or corporation, treating any rental or license-to-use arrangement as a lease
• Tax Law § 601(a) - the personal income tax against which the section 606(a) credit is claimed
• IRC § 167 - depreciation requirement for credit-eligible property
• IRC § 168 - recovery property (ACRS) alternative to the section 167 depreciation requirement
• IRC § 179(d) - defines "acquired by purchase" for credit-eligible property
• Personal Income Tax Regulations § 103.1(d) - defines "principally used" as more than 50 percent
• 20 NYCRR 527.4(d) (Sales and Use Tax Regulations) - defines "processing" as a service on tangible personal property that changes its nature, shape, or form; gives film development and film editing as examples
• Tax Law § 210.12 - the similar Article 9-A investment credit provision, whose determinations the Department treated as equally applicable to the personal income tax credit
• Richard H. Roberts, State Tax Commission Advisory Opinion, TSB-H-81(57)I - equipment used to produce video tapes constitutes equipment used in the production of goods by manufacturing
• Continental Terminals, State Tax Commission, TSB-H-82(4)C - the sales-tax "processing" definition applies to Article 9-A investment tax credit determinations
• Matter of Multimode, Inc., State Tax Commission, TSB-H-83(23)C (May 20, 1983) - converting raw film or tape into a form suitable for transmission is "processing"
• Matter of Epic Chemicals, State Tax Commission, TSB-H-81(59)C (October 30, 1981)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a88_10i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (10) I
Income Tax
June 24, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I871125B

On November 25, 1987, a Petition for Advisory Opinion was received from Albany
Equipment Management Associates, 1001 Loudon Road, Latham, New York 12110.
The issue raised is whether advanced diagnostic imaging equipment purchased and owned
by Petitioner and used for processing and producing X-rays, scans, images and related diagnostic
information qualifies for the investment credit under section 606(a) of the Tax Law.
Petitioner, a New York limited partnership, is engaged in the business of providing various
advanced diagnostic imaging modalities, including conventional X-rays, ultrasound, computerized
axial tomography (CAT) and magnetic resonance imaging (MRI).
Petitioner owns and maintains a facility for the conduct of its diagnostic activities. During
1985, Petitioner purchased various pieces of medical diagnostic equipment, including a .5T
Magneton MR System with a VAX 11-730 Computer and peripheral attachments, a Somotom DRG
CT Total Body Scanner, a Siregraph C Radiologic/Flouroscopic Unit, a Mammomat B
Mammography Unit, and a Technicare M8100 Auto Sector IV Ultrasound Unit. All of this
equipment is used to produce X-rays, scans, images and related diagnostic information from the live
human body. All ancillary supplies necessary for its medical imaging services (dyes, film, etc.) as
well as other equipment are provided by Petitioner at its expense.
Petitioner is also responsible for hiring, training and supervising administrators, receptionists,
technicians to operate its medical equipment and clerical personnel necessary for a medical imaging
service. Petitioner's service charges are fixed by a schedule based upon the number of procedures
performed. If payment is not received for a procedure performed, Petitioner receives no income.
If only a partial payment for a procedure performed is received, Petitioner and participating
radiologists each receive a pro rata portion of the payment. If no procedures are performed,
Petitioner receives no consideration.
In every instance where Petitioner performs a diagnostic procedure upon a patient, the final
product of the process is a tangible image on X-ray film. The original film produced by each
diagnostic procedure is retained by Petitioner and a copy of the film is provided to the patient or
directly to the patient's attending physician to use in treating the patient.
For the taxable year in question, section 606(a) of the Tax Law allowed a credit equal to six
percent of the cost or other basis for federal income tax purposes, of tangible personal property and
other tangible property which:

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Income Tax
June 24, 1988

(1) was acquired, constructed, reconstructed or erected after June 30, 1982;
(2) was depreciable pursuant to section 167 of the IRC or recovery property with respect to
which a deduction was allowable under section 168 of the IRC;
(3) had a useful life of four years or more;
(4) was acquired by purchase as defined in section 179(d) of the IRC;
(5) had a situs in New York State; and
(6) was 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) 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 "[al
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." Any contract or agreement to rent or for a license to use
property is considered a lease.
Petitioner states that the equipment in question was acquired during 1985, that it is
depreciable pursuant to section 167 of the IRC, that it has a useful life of ten years, that it was
purchased, as defined in section 179(d) of the IRC, and that it is located at Petitioner's place of
business in Latham, New York.
The criteria at issue herein is whether the equipment is principally used by Petitioner in the
production of goods by manufacturing, processing, etc.
In applying section 606(a)(2), the State 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 criteria. Richard H. Roberts, State Tax Commission
Advisory Opinion, TSB-H-81(57)I.

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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, State Tax Commission, TSB-H-82(4)C, the Tax
Commission held such definition to be applicable to investment tax credit determinations made
under Article 9-A. It appears clear from such definition of the term "processing" 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 Tax
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., State Tax Commission, May 20, 1983, TSB-H-83(23)C. See also Matter of Epic
Chemicals, 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, and (2) cutting, editing, sound dubbing and the addition of titles to
convert exposed and developed film footage into a completed film. The creation of television films
and video tapes, as well as radio tapes, similarly effects changes in the nature and qualities of film
and tape, and thus falls under the rubric of "processing".
The Article 9-A investment credit provisions contained in section 210.12 of the Tax Law are
similar to those provided under section 606(a) of the Tax Law. Therefore, the determinations made
under Article 9-A would also be appropriate with respect to personal income tax.
Herein, the diagnostic equipment is used to produce on X-ray film, the X-rays, scans, images
and related diagnostic information from the live human body. The creation of such films are similar
to the production of video tapes, radio tapes and television films.
Accordingly, the diagnostic equipment that is principally used in the production of the X-ray
films constitute property used in the production of goods by manufacturing and processing, within
the meaning and intent of section 606(a)(2) of the Tax Law.
Therefore, for taxable year 1985, an individual partner of Petitioner will be allowed an
investment credit pursuant to section 606(a) of the Tax Law against the tax imposed under section
601(a) for its distributive share of the cost or other basis of the diagnostic equipment if such
equipment is principally used by Petitioner's employees to produce the X-ray films.

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It should be noted that if Petitioner leased its equipment 50 percent or more of the time, an
investment tax credit would not be allowed because the equipment would not have been "principally
used" by Petitioner, itself.

DATED: June 24, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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