On February 15, 2024, a New York state administrative law judge concluded that a winery “used” its property and qualified as a New York manufacturer under the state’s Qualified New York Manufacturer (QNYM) provisions, even though it had no employees at the winery and outsourced its land management operations to an independent land management contractor. 

The New York State Department of Taxation and Finance issued an assessment to the winery, asserting that it did not qualify as a QNYM. The QNYM program provides multiple benefits to corporate taxpayers in New York, including a 0% corporate franchise tax rate.  In order to qualify, taxpayers must satisfy at least one of two tests. The first test – at issue in this case – requires that taxpayers (1) be “principally engaged” in the production of goods by manufacturing, viticulture, etc., (2) owned at least $1,000,000 of qualifying property in New York, and (3) principally used the property in the production of goods by manufacturing, viticulture, etc. 

The Department argued that the winery was not entitled to the QNYM benefits on the basis that it did not principally use its qualifying property in the production of goods. But the ALJ rejected the Department’s argument that the taxpayer’s use of the third-party contractor was impermissible because nothing in the QNYM provisions suggested that property is not “used by” its owner if the owner contracts with a third-party to perform labor on or related to the property. The ALJ also rejected the Department’s argument that the property was not used in late December 2016 (and that the benefits were thus unavailable for that year). While the grapes were in a dormancy period at that time, it is still a “crucial part of the annual growth cycle for grapes.” 

In the Matter of the Petition of E. & J. Gallo Winery, DTA Nos. 830277, 850146 (N.Y. Div. Tax App. Feb. 15, 2024).