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Volume 1 - Opinions of Counsel SBEA No. 117

Opinions of Counsel index

Special franchise property (street lighting by private concern under contract with town) - Real Property Tax Law, § 102 (17):

The grant by a town to a private concern of the right to install and to maintain street lights leased to the town under a contract is a special franchise, taxable as real property together with the tangible property owned by the private concern.

Our opinion has been requested as to whether the grants to Broadway Maintenance Corporation of the right to install and to maintain street lighting systems pursuant to contracts with the Town of Brookhaven constitute special franchises taxable under the Real Property Tax Law.

The Broadway Maintenance Corporation (hereinafter called “Corporation”) has entered into two contracts with the Town of Brookhaven (hereinafter called “Town”) under which the Corporation agrees to install, maintain and lease street lighting systems in the Hammond Lighting District and in the Dawn Estates Lighting District located in the town.

Under the contracts, the Corporation is obligated to install and to maintain the street lights on poles owned by Long Island Lighting Company (“Lilco”) at its own expense for a ten year contract period. The town is obligated to pay an annual rent based upon a stipulated amount per street light, and, in addition, the town agrees to pay Lilco’s charges for the electrical energy used by the lighting systems.

The town also is given an option to purchase some or all of the lights installed under the contracts. According to our interpretation of the formula set forth in the contracts, the option purchase price for each light is seven times the annual rental amount stipulated in the contracts for each light with an annual declining balance depreciation factor. Under our calculations, at the end of the ten year contract period, the option price will have declined to about three percent of the first year option price.

On September 7, 1971, the town granted franchises to the corporation for the use of the streets, lanes, avenues and sidewalks within each district for the installation and maintenance of the lights. Such franchises are to terminate simultaneously with the termination of the contracts.

The issue is whether a town’s grant to a private corporation of the use of its streets for the installation and maintenance of street lights under a contract with the town is a special franchise as defined in subdivision 17 of section 102 of the Real Property Tax Law.

Town boards are authorized by various provisions of the General Municipal Law to contract for street lighting for a term not exceeding ten years (Town Law, §§ 64(19) and 198(6)). They are further empowered to “grant rights, franchises, permissions or consents for the use of streets, highways and public places. . .” for any specific purposes authorized, except as otherwise provided by law (Id. § 264(7)).

Subdivision 12(h) of section 102 of the Real Property Tax Law classifies a “special franchise” as real property for taxation purposes.

Subdivision 17 of section 102 defines a “special franchise” as follows:

“‘Special franchise’ means the franchise, right, authority or permission to construct, maintain or operate in, under, above, upon or through any public street, highway, water or other public place mains, pipes, tanks, conduits, wires or transformers, with their appurtenances, for conducting water, steam, light, power, electricity, gas or other substance. For purposes of assessment and taxation a special franchise shall include the value of the tangible property situated in, under, above, upon or through any public street, highway, water or other public place in connection therewith. The term special franchise shall not include property of a municipal corporation or special district. . .”. (emphasis supplied)

All real property within the State is subject to real property taxation unless exempt therefrom by law (Real Property Tax Law, § 300).

Interrelating the various provisions cited above, it is our opinion that the franchises given the Corporation to install and to maintain street lights on poles owned by Lilco located in the public streets of the town are special franchises taxable as real property together with the tangible property installed on said poles.

It is apparently conceded that the street lights will be owned by the corporation, and a fair construction of the contract bears this out. In other words, if title to the lights were in the town, there would be no reason to give the town an option to purchase.

Furthermore, it is our opinion that the corporation could not install the lights in the public streets without an express or implied franchise from the town any more than a private company could install gas or water pipes servicing the general public in public places without becoming subject to special franchise taxes (People ex rel. United Natural Gas Co. v. Priest, 70 Misc. 69, 126 N.Y.S. 472, aff’d. 152 App. Div 249, 136 N.Y.S. 575; 43 State Dept. Rep. 282, (1933)).

The corporation maintains that the grant given by the town is not a special franchise under the decision rendered in Cohen v. Village of Kensington, 61 Misc.2d 122, 304 N.Y.S.2d 660, and an opinion of the State Comptroller (69 Op.St. Compt. 49) involving an identical lighting contract entered into by the corporation with the Village of Kensington. Briefly, the reasoning of the court decision and opinion is that (1) no franchise was necessary since the corporation had leased its property to a municipality for a public purpose; (2) the statute does not contain limiting language as respects “property of a municipal corporation” so as to exclude a lease of equipment installed on municipally owned realty and (3) any tax levied would be passed on to the municipality in the rent charge, thereby defeating the legislative intent in creating additional local revenue through making special franchises taxable.

In our opinion, the reasoning is fallacious in several respects.

First, the special franchise definition imposes no condition that the use made in a public place must be “private” as distinguished from “public”. On the contrary, the use must be public in nature and a special franchise has been held not to exist where the use is purely private. People ex rel. Retsof Mining Co. v. Priest, 75 App. Div. 131, 77 N.Y.S. 382, aff’d 175 N.Y. 511, 67 N.E. 1088; People ex rel. Abraham v. Perley, 67 Misc. 471, 123 N.Y.S. 436, aff’d, 143 App. Div. 915, 127 N.Y.S. 1137, aff’d 202 N.Y. 620, 96 N.E. 1125; 1915 Op.Atty.Gen. 213; People ex rel. Peter Cooper’s Glue Factory v. State Board of Tax Commissioners, 143 App. Div. 174, 127 N.Y.S. 992.

Second, the apparent assumption from the definition of “special franchise” that the exclusion of “property of a municipal corporation” includes property leased by a municipality from a private company is contrary to the holding in People ex rel. Interborough Rapid Transit Co. v. State Board of Tax Comrs., 126 App. Div. 610, 110 N.Y.S. 577, aff’d 195 N.Y. 618, 89 N.E. 1109. In that case, a statute enacted in 1894 permitted a referendum to determine whether a subway system in New York City should be constructed for and at the expense of the city and if so “remain the absolute property of the city,” but to be operated by a private concern. This same statute also contained a provision exempting the operator’s interest under any contract with the further provision that “this exemption shall not extend to any real property owned by the operator in connection with operation of the subway.” A prior statute had contemplated the issuance of a franchise to construct, maintain and operate a subway. The people voted that the subway should be constructed for and at the expense of the city. A private person constructed the subway, leased it from the city and thereafter assigned the lease to the relator who was operating the system at an annual rental.

The court held that the road and franchise were exempt by the provision which is now contained in subdivision 17 of section 102, exempting the property of a municipality from a special franchise tax. In the course of the decision, however, the court said with respect to the special exemption provision (at pp. 581-582):

“The taxation provided for is upon the real estate actually owned by the operator. The statute draws the proper distinction between the real estate owned by the operator and the property, real or personal, not owned by him but operated under the contract with the City.”

We believe that this language clearly indicates that the “exemption” of municipal property from the special franchise definition was intended to apply only to property owned by a municipality.

See also, In Matter of Tentative Special Franchise Assessment v. Brooklyn Eastern District Terminal, 56 State Dept. Rep. 81, (1937) involving whether a grant under a contract by New York City to a terminal company of the right to construct, maintain and operate a freight terminal for ten years at a public market owned by it was a taxable special franchise. Deputy Commissioner Cole of the Department of Taxation and Finance assumed for the purposes of his opinion that the only issue was whether the terminal company or the city owned the terminal under the terms of the contract. After finding that ownership was in the city, it was his opinion that the terminal company was not subject to a special franchise assessment.

Third, the suggestion by the court in the Cohen case that to impose a special franchise tax would not produce a benefit for the municipality or the taxpayers (i.e., a “wash transaction”) is not precisely accurate. For example, in the Village of Kensington case, a special franchise assessment on the street lights in the Village of Kensington would also have been subject to county, town and school district taxes, thereby reducing the tax burden on taxpayers who are not necessarily village residents.

However, even if this were not so, no cases have been found which establish as a criteria of tax liability the fact that the tax will be passed on to a municipality, thereby increasing the general tax burden. This same argument could be made with respect to water lines, electrical poles, etc. owned by public utilities located in public streets which furnish water and electricity exclusively to public buildings.

A point which has not been raised by anyone up to now is that all property constituting street lighting systems (poles, wires, light standards and appurtenances) has specifically been made taxable real property by paragraphs (d) and (e) of subdivision 12 of section 102 of the Real Property Tax Law. Under such paragraphs “supports and inclosures for electrical conductors and other appurtenances, upon, above and underground” and “Mains, pipes and tanks permitted or authorized to be made, laid or placed in, upon, above or under any public or private street or place for conducting steam, heat, water, oil, electricity or any property, substance or product capable of transportation or conveyance therein or that is protected thereby” are specifically classified as real property. Accordingly, the lighting systems owned by the corporation are subject to assessment as taxable property by the assessor of the Town of Brookhaven if they are not assessable as part of a special franchise. (Herkimer County Light and Power Co. v. Johnson, 37 App. Div. 257, 55 N.Y. S. 924).

The grant by a town to a private concern of the right to install and maintain street lights leased to the town under a contract is a special franchise, taxable as real property together with the tangible property owned by the private concern.

October 21, 1971

Updated: