The New York State Division of Tax Appeals determined that E. & J. Gallo Winery is a qualified New York manufacturer (QNYM) even though its only property in New York that could allow it to qualify for QNYM classification – a vineyard – was operated by a third-party contractor and Gallo did not have any of its own employees involved in the operation of the vineyard.

Gallo is a multinational manufacturer of table wines that acquired a vineyard in New York and hired a third-party contractor to maintain and farm the vineyard “so as to produce the quantity and quality of grapes” that Gallo’s significant winemaking operations needed. “The service agreement [between Gallo and the third-party contractor] was not a lease,” but instead gave the contractor the responsibility of the “full and complete management, supervision and control of the development and operation of the . . . vineyard.” In this role, the contractor was required to hire employees and subcontractors. The service agreement with Gallo confirmed that the contractor was to be treated “in all respects [as] the sole employer of such persons, employer of such persons, employees, duly licensed contractors, or firms.”

Gallo claimed it was a QNYM during the years at issue (2016 to 2019) under New York Tax Law §§ 210(1)(a)(vi) and 210-B(1)(b)(i)(A), which the administrative law judge (ALJ) summarized as requiring a taxpayer or combined group to have:

• Been “principally engaged” (derived more than 50% of its gross receipts) in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing
• Owned property in New York that had an adjusted basis of at least $1 million at the close of each taxable year or had all of its real and personal property located in New York
• [Whereby] such property is principally used by the taxpayer in the production of goods by the same list of activities noted above, including manufacturing and viticulture.

The New York State Department of Taxation and Finance agreed that Gallo satisfied the first two requirements, but claimed, pursuant to TSB-M-15(3)C, that Gallo failed to meet the third requirement because it did not have any employees related to the vineyard and, therefore, it did not actually use the relevant New York-located property in the production of goods.

The ALJ, however, pointed out that “TSB-Ms are informational statements of the Division of Taxation’s policies” and “do not have legal force or effect.” And because the QNYM statute is a rate reduction and not an exemption, “it is to be construed most strongly against the government and in favor of the taxpayer.”

In analyzing the statute, the ALJ found that there was no “employee requirement” like that in the alternative test (i.e., having 2,500 manufacturing employees and $100 million of manufacturing property in New York) to be considered a QNYM. Therefore, the ALJ stated, “there is no basis to import the requirements from one test to the other when the Legislature could have easily done such itself.” Instead, the ALJ determined that the New York-located property was “‘used by’ [Gallo] under the ordinary meaning of that term” and “[r]regardless of who is subcontracted to perform day-to-day labor at the [vineyard, Gallo] employed its grapevines for a purpose, and put the grapevines into service and [thus Gallo] qualifies” as a QNYM.