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Volume 11 - Opinions of Counsel SBRPS No. 47

Opinions of Counsel index

Real property, definition of (movable machinery and equipment of 9 A corporations) - Real Property Tax Law, § 102(12)(f):

In general, movable machinery and equipment, other than movable energy generation/distribution and miscellaneous equipment, owned by public utility companies made subject to Article 9-A of the Tax Law by chapter 63 of the Laws of 2000 is subject to a 10 year phased-in real property tax exemption. Likewise, and again in general, movable energy generation/ distribution and miscellaneous equipment that was fully taxable prior to the enactment of chapter 63 remains fully taxable. Based on judicial precedent, however, within that area of the State comprising the Fourth Department of the Appellate Division, all such property is already fully tax exempt.

Our opinion has been requested concerning the taxable status of certain compressors owned by an interstate gas pipeline corporation, the Tax Director of which states “is now an Article 9 A Corporation in New York State.” We assume the word “now” is indicative of the fact that the status of this corporation, like that of a number of public utility corporations - for State corporate/franchise taxes - was changed by amendments to the Tax Law enacted as chapter 63 of the Laws of 2000 (Part Y).

As part of an overhaul of various aspects of the taxation of public utilities, chapter 63 of the Laws of 2000 provided that “waterworks companies, gas companies, electric or steam heating, lighting and power companies” would henceforth be subject to State taxation pursuant to Article 9-A of the Tax Law. Previously, such corporations had all been subject to State tax pursuant to Article 9 (more specifically, §186) of the Tax Law. Chapter 63 was enacted in connection with the ongoing (and continuing) phenomenon of the divestiture by electric utility companies of their generating plants and attendant equipment.

The reclassification of these companies for purposes of the Tax Law had real property tax implications as well, because there is a real property tax exemption for certain equipment owned by “9-A corporations,” as they are often called. Evidently, the State Legislature was concerned about the impact upon local tax bases if the qualifying equipment of these companies were to abruptly become wholly exempt. Accordingly, it included in chapter 63 a provision for a gradual phase-in of the exemptions that were expected to result from the reclassification of these companies as 9-A corporations.

The terms of the phase-in are relatively easy to describe: Rather than becoming wholly exempt immediately, qualifying equipment will become exempt over a 10 year period, beginning with a 10 percent exemption on 2002 assessment rolls, increasing by an additional 10 percent each year, until fully exempt in 2011 and thereafter. The task of describing the equipment that qualifies for this exemption, however, is considerably more complex.

The source of the 9-A exemption is section 102(12)(f) of the Real Property Tax Law. That provision (which, not so incidentally, has a rather intriguing history {1} defines “real property” for purposes of the }RPTL as follows:

(f) Boilers, ventilating apparatus, elevators, plumbing, heating, lighting and power generating apparatus, shafting other than counter-shafting and equipment for the distribution of heat, light, power, gases and liquids, but shall not include movable machinery or equipment consisting of structures, erections to the operation of which machinery is essential, owned by a corporation taxable under article nine-a of the tax law, used for trade or manufacture and not essential for the support of the building, structure or superstructure, and removable without material injury thereto;

Although subdivision 12 of section 102 is otherwise a statute of classification or definition, this particular provision (i.e., §102(12)(f)) has been construed by the Court of Appeals as providing an exemption from taxation for movable machinery and equipment of 9-A corporations (City of Lackawanna v. SBEA, 16 N.Y.2d 222, 212 N.E.2d 42, 254 N.Y.S.2d 528 (1965)). Moreover, according to that same decision (and subsequent opinions of this office construing the same, such as 9 Op.Counsel SBEA No. 42, and 6 id. No. 121), this exemption is somewhat limited in scope in that it generally does not apply to: “Boilers, ventilating apparatus, elevators, plumbing, heating, lighting and power generating apparatus ... and equipment for the distribution of heat, light, power, gases and liquids....” For ease of reference, in the remainder of this opinion we refer to this latter category of property as “movable energy generation/distribution and miscellaneous equipment.”

Thus, one might reasonably draw two conclusions from the above analysis:

First, by virtue of chapter 63 of the Laws of 2000, movable machinery and equipment other than movable energy generation/ distribution and miscellaneous equipment, if now owned by a 9-A corporation under the circumstances described in chapter 63, is exempt from taxation to the extent allowed by chapter 63. Thus, such equipment would be subject to a 10 percent exemption on the 2002 roll, a 20 percent exemption on the 2003 roll, and so on, through a 90 percent exemption on the 2010 roll, after which it shall be wholly exempt.

Second, movable energy generation/distribution and miscellaneous equipment was fully taxable prior to the enactment of chapter 63, and it remains fully taxable thereafter.

Indeed, these two statements do represent the law in most of the State. However, in the case of equipment located in the western portion of New York State, there is an additional factor which must be also considered. That is the seemingly contrary decision of the Fourth Department of the Appellate Division in Honeoye Storage Corp. v. Board of Assessors, 77 A.D.2d 468, 433 N.Y.S.2d 943 (4th Dept., 1980) mot lv. app. den., 53 N.Y.2d 601, 420 N.E.2d 981, 438 N.Y.S.2d 1026 (1981).

In Honeoye, the court found certain equipment, including “compressor station equipment, purification equipment and measuring and regulating equipment,” to be exempt from taxation under section 102(12)(f), despite the characterization of that equipment by the assessor (and by this agency) as “equipment for the distribution of ... gases.” This conclusion seems to have been based, at least in part, upon reasoning that was worded as follows (77 A.D.2d at 471, 433 N.Y.S.2d at 945):

This portion of the statute including within the definition of real property “equipment for the distribution of heat, light, power, gases and liquids” encompasses only such facilities as would be common to all manufacturing structures, such as the usual plumbing, sewage and heating facilities, and not those present due to the particular manufacturing process involved (Matter of City of Lackawanna v. State Bd. of Equalization and Assessment of State of N.Y., 21 A.D.2d 318, 250 N.Y.S.2d 369, mod. on other grds., 16 N.Y.2d 222, 264 N.Y.S.2d 528, 212 N.E.2d 42).

This quotation presents something of an anomaly, in that the Honeoye court cited the opinion of the Appellate Division in Lackawanna as standing for this proposition, while indicating that said opinion had been modified on other grounds by the Court of Appeals. In fact, as a reading of the Court of Appeals’ Lackawanna decision will confirm, the Court of Appeals reversed the Appellate Division decision on that very ground. In other words, the State’s highest court rejected the notion that there was a distinction between what we might call “common” energy distribution equipment on the one hand, and energy distribution equipment that is part of the unique manufacturing process involved, on the other hand.

Honeoye was a decision on the merits by the Fourth Department and as such, must be followed within the Fourth Department. (Since the Court of Appeals declined to take the Honeoye appeal, no such obligation exists outside the Fourth Department.) Even so, in light of its mischaracterization of, and seeming inconsistency with, the Court of Appeals’ Lackawanna decision, it would seem appropriate for the time being to read Honeoye as being limited to its specific facts.

In other words, pending legislative or judicial clarification, it is still the general rule (as stated above) that movable energy generation/distribution and miscellaneous equipment is fully taxable. However, that general rule would seem to be subject to the following qualification: if such equipment (1) is located within the Fourth Department, (2) is the same type of equipment that was under consideration in Honeoye, and (3) is owned by a corporation which became subject to taxation under Article 9-A of the Tax Law by virtue of chapter 63 of the Laws of 2000, such equipment is exempt from taxation, in accordance with the phase-in schedule prescribed by chapter 63.

February 5, 2002

{1}  Although beyond the scope of this inquiry, we note that some of the confusion about the scope of this statute derives from its historic antecedents. In 1917, the State first imposed a “franchise tax” on “manufacturing and mercantile corporations” (L.1917, c.726), adding an Article 9-A to the State’s Tax Law. This enactment included an exemption from the State’s then-existent personal property tax (former §219-j [renumbered, §219 l, by L.1918, c.271] of the Tax Law). As originally written, said exemption included “such machinery and equipment affixed to the building as would not pass between grantor and grantee as a part of the premises if not specifically mentioned or referred to in the deed, or as would, if the building were vacated or sold, or the nature of the work carried on therein changed, be moved, except boilers, ventilating apparatus, elevators, gas, electric and water power generating apparatus and shafting” (emphasis added).

In 1933, the State abolished the personal property tax (L.1933, c.470), and the previous exemption afforded to certain movable machinery and equipment was recast as a definition of “real property.” In fact, then-section 219-l of the Tax Law, was revised to distinguish between what was and was not to be included in the definition of real property. “Included” were:

[B]oilers, ventilating apparatus, elevators, plumbing, heating, lighting and power generating apparatus, shafting other than counter-shafting, equipment for the distribution of heat, light, power, gases and liquids, and any equipment consisting of structures or erections to the operation of which machinery is essential.

“Excluded” were:

[A]ny movable machinery and equipment used for trade or manufacture and not essential for the support of the building, structure or superstructure, and removable without material injury thereto.

When the RPTL was codified in 1958 (L.1958, c.959), the definition of “real property” included section 102(12)(f), as described above, but a “saving clause” in the enactment (added as §1602(5), since renumbered as §2002(5) by chapter 39 of the Laws of 1973) provided, in essence, that the 9-A exemption, as written in the new RPTL, meant what it had in the former Tax Law, notwithstanding any change in the language itself.

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