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March 4, 2024

New York Division of Tax Appeals finds out-of-state winery entitled to reduced tax rates as a qualified New York manufacturer

A California-headquartered winery that hired an independent land-management contractor to maintain and work vineyards the company owns in New York meets the requirements of a qualified New York manufacturer (QNYM), an Administrative Law Judge (ALJ) for the New York Division of Tax Appeals has found.

The winery principally used the New York property to produce goods during the 2016—2019 tax years and nothing in the law suggests an eligible property is not "used by the owner" if that owner contracts another entity to perform labor on the otherwise eligible property, the ALJ said in Matter of E. & J. Gallo Winery, DTA Nos. 830227 and 850146 (N.Y. Div. Tax App. Feb. 15, 2024).


The taxpayer, E. & J. Gallo Winery, is a California-headquartered multinational company, which, along with its affiliates, manufactures, markets, and distributes beverages, including table and sparkling wines, spirits and grape concentrate. The taxpayer owns and operates vineyards; to increase its grape supply, it routinely acquires established vineyards.

In December 2016, the taxpayer acquired Nutt Road Vineyard in New York State (NYS vineyard). Following a common practice among vineyards, the taxpayer entered into a service agreement with an unrelated land-management contractor to farm the NYS vineyard and maintain it in accordance with the company's objectives. The NYS vineyard was used to produce grapes, which were sold at fair-market prices.

The taxpayer computed the tax due on its NYS combined franchise tax returns for the 2016 through 2019 tax years, using the reduced rates for QNYMs under N.Y. Tax Law Section 210(1)(a)(vi). On these returns, the taxpayer checked the box for "qualification for preferential tax rates" to indicate it was using the higher of the following tax rates available to QNYMs: (1) business income base tax rate, which is currently zero percent;1 (2) fixed-dollar minimum tax amount; or (3) capital base tax rate. For these years, the capital tax base was the taxpayer's highest tax base.

Following an audit, the New York Division of Taxation (Division) took the position that the taxpayer did not meet all three of the QNYM requirements. The Division agreed the taxpayer met the first two requirements (i.e., derived more than 50% of its receipts from the production of goods by qualifying QNYM activities, and had NYS property whose adjusted basis exceeded $1 million at the end of each tax year at issue. The Division took the position, however, that the taxpayer did not meet the third requirement of principally using the property to produce goods. According to the Division, the taxpayer itself did not use the NYS vineyard property (i.e., grapevines, stakes and wires, drainage tiles and wind machines) in the production of goods upon outsourcing those activities to a land-management contractor. The Division's audit file referenced TSB-M-15(3)C "Real Property Tax Credit and Reduction of Tax Rates for Qualified New York Manufacturers" (the TSB-M), which precludes taxpayers from considering production activities they contract out to another entity when determining their eligibility as a manufacturer.

After finding the taxpayer was not a QNYM, the Division re-computed the taxpayer's franchise tax using the generally applicable tax rates. Applying these tax rates, instead of the reduced rates for QNYMs, the Division computed the taxpayer's highest tax under the business income base.

ALJ finds taxpayer is a QNYM

Regarding which party bears the burden of proof, the ALJ, relying on the New York Tax Appeals Tribunal decision in TransCanada,2 rejected the Division's argument that the special zero percent business income base tax rate for QNYMs "is an exemption and exclusion," which would have required the taxpayer to show its interpretation of QNYM qualification was the only reasonable construction. Rather, the ALJ agreed with the taxpayer that the statutory provision3 reducing rates for QNYMs "is to be construed most strongly against the government and in favor of the taxpayer," likening the reduced rates to a tax limitation. The ALJ noted that the evolution of adjusting the business income base rate to zero percent, coupled with the statutory language, "shows that it is not an exemption but a rate reduction."

The ALJ also rejected the Divisions reliance on its own TSB-M since a NYS Technical Service Bureau Memorandum is effectively an advisory statement without any legal force or effect. In determining whether the taxpayer principally used the property to produce goods, the ALJ determined the property was "used by" the taxpayer regardless of who worked and maintained the NYS vineyard. The taxpayer "employed its grapevines for a purpose and put the grapevines into service and … qualifies as a QNYM … for the years at issue," the ALJ said.

In reaching this conclusion, the ALJ found the taxpayer had title to and owned vineyards, noting that land-management contracts, which are common for vineyards, do not detract from the landowner still owing and using the land and attendant crops. Moreover, the ALJ found that "[n]othing in Tax Law [Sections] 210(a) or 210-B suggests that property is not 'used by' its owner if the owner contracts with another entity to perform labor on or related to the property."

The ALJ further found the Division's regulations and administrative guidance on the meaning of "used by the taxpayer" for the related investment tax credit (ITC)4 supported the taxpayer's eligibility as a QNYM. Under those regulations, eligibility to claim an ITC for property used to produce goods is limited if the taxpayer leases the property to another entity. The ALJ found no similar limitation for engaging a land-management contractor/service provider to produce goods under the QNYM provisions. In this case, the taxpayer did not lease the property to the land-management contractor.

The ALJ found additional support for taxpayer's QNYM eligibility in the Division's own Advisory Opinion, TSB-A-98(24)C, which found property was principally used in the production of goods by a taxpayer despite the use of subcontractors. The ALJ reasoned that the taxpayer would be considered the user of the NYS vineyard property under the related ITC regulations and the Division's prior interpretation of those regulations in TSB-A-98(24)C.

The ALJ rejected the Division's "very narrow interpretation" of "used," which stemmed from its view that the taxpayer's employees must service the NYS vineyard. The only employee requirement in the QNYM provisions, the ALJ noted, is in the alternative QNYM qualification test, which was not at issue. In the ALJ's view, the Division was "effectively rewriting the statute" to include an employee requirement.

The ALJ also found the Division's proposed recharacterization of the NYS vineyard acquisition to be "misguided," tracing it to NYS's empire zone program, which requires taxpayers to form a new business for a valid business purpose. According to the ALJ, those requirements are specific to empire zones and "have little to do with the QNYM provisions at issue in this case." Since the QNMY business income rate provisions are an "incentive," the ALJ said, it is "not surprising" that taxpayers would consider them and their tax benefits as part of a business transaction.

The ALJ summarily dismissed the Division's argument that the taxpayer and the land-management contractor could "double-dip" by both claiming QNYM benefits, noting that "nothing in the QNYM statute indicates that two taxpayers cannot independently qualify with respect to activities at a single manufacturing location … " Both entities would have to separately meet each of the three requirements of the QNYM.


Whether the Division will appeal the decision to the NYS Tax Appeals Tribunal is unknown. Many related cases are currently making their way through New York's audit and administrative hearing process.

While not precedential, this decision is instructive on the Division's position on a taxpayer's use of a contract manufacturer. Moreover, it is unclear if new regulation 20 NYCRR Section 9-1.3 on contract manufacturing,5 which was not discussed in this case, could be overturned on appeal of this case or a similar pending case. Taxpayers under audit or in administrative appeals for their QNYM classification should consider this case and monitor it for a potential appeal.

Based upon this decision, taxpayers should closely analyze whether they meet the QNYM requirements, although applicable NYS regulations may apply various narrow interpretations of these rules. Taxpayers believing they meet the requirements should consider filing amended returns and claiming a refund for open years within the statute of limitations.

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1 In 2014, NYS enacted legislation to enhance the QNYM provisions by making the business income base rate zero percent. This change was "designed to incentivize manufacturers to move their operations to, or expand their operations within, New York." As originally enacted in 2007, the business income base rate (formerly the entire net income base) for QNYM was 6.5%. It was reduced to 3.25% in 2012.

2  Matter of TransCanada Facility, USA, Inc., DTA No. 827332 (N.Y. Tax App. Trib. May, 1, 2020).

3 N.Y. Tax Law Section 210(1)(a).

4 N.Y. Tax Law Section 210-B(1)(b)(i)(A).

5 See Tax Alert 2024-0140.

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Contact Information

For additional information concerning this Alert, please contact:

State and Local Taxation Group

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor