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Volume 4 - Opinions of Counsel SBEA No. 117

Opinions of Counsel index

Special franchise assessment (tax credit) (value of services) - Real Property Tax Law, § 626:

The value of services rendered in return for a franchise is not deductible from taxes levied on special franchise assessments pursuant to section 626 of the Real Property Tax Law.

We have received an inquiry concerning deductions allowed against taxes on special franchises pursuant to subdivision 1 of section 626 of the Real Property Tax Law. The question is whether the value of services delivered pursuant to a permit or agreement rather than under a, “formal franchise” is deductible from taxes levied against a special franchise.

A “special franchise” in general terms consists of tangible real property of a utility which is situated in public places together with the value of the intangible right or franchise to operate in the public place. Specifically, a special franchise is defined in subdivision 17 of section 102 of the Real Property Tax Law as:

. . . 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, nor shall it include a crossing less than two hundred fifty feet in length of a public street, highway, water or other public place outside a city or village, unless such crossing be the continuation of an occupancy of another public street, highway, water or other public place. (emphasis added)

Thus, where a utility has the authority to operate and maintain its property in the public way, whether such authority is designated a “franchise,” “permit” or by whatever term, such authority or permission would be included in the term “special franchise.”

The assessment of special franchise property is not done locally. Rather, subdivision 1 of section 600 of the Real Property Tax Law requires the State Board of Equalization and Assessment to annually determine “. . . the assessment of each special franchise subject to assessment in each assessing unit.” Subdivision 1 of section 616 requires the State Board to file a certificate of the amount of the final assessment of a special franchise “. . . with the assessors of the assessing unit in which such special franchise is subject to assessment,” for entry on the assessment roll for taxation locally. Such assessments then become a part of said roll with the same force and effect as if they had been originally made by the local assessors.

However, pursuant to subdivision 1 of section 626 of the Real Property Tax Law, a special franchise owner is entitled to a deduction from the tax based on the special franchise assessment made for an assessing unit, of the amount paid by the owner to such locality during the past year pursuant to an agreement or statute requiring the same, on the basis of a percentage of gross earnings or other income, or a license fee, or other amount of a tax, but not money, paid for paving or repairing the pavement of a highway or public place, and (in a city having a population of 175,000 or more) not car license fees or tolls paid for the privilege of crossing a bridge owned by the city.

Thus, we have previously stated that an annual fee payable by a utility under an agreement with a locality or pursuant to a local statute for the right to use public streets or places is a payment made “on account of [a] special franchise” and “is in the nature of a tax” as those phrases are used in section 626 and that therefore such annual fee is deductible from the tax based on the special franchise assessment made by the State Board (4 Op.Counsel SBEA No. 33).

However, case law clearly indicates that to be deductible under this statute, credits must arise from cash payments, and not merely from services rendered (Consolidated Telegraph and Electrical Subway Co. v. Metz, 119 App. Div. 835, 104 N.Y.S. 922, aff’d, 189 N.Y. 549, 82 N.E. 1125).

In that case the subway company argued that since it was compelled to furnish the city space in its subway without charge, the giving of this free space was a license fee and was equivalent to “a payment on account of its special franchise” and was “in the nature of a tax.” The court indicated, however, that there was nothing in the statute which would justify the assumption that the term “license fee” as used meant anything else than a payment in cash. The court stated (at p. 924):

This section, taken as a whole, is susceptible of but one interpretation, and that is that it applies only to payments made in cash. It does not contemplate any deduction on account of free service rendered as a condition for the enjoyment of the franchise. (emphasis added)

The court concluded by saying that, if the statute as it then read created an inequitable distinction between companies paying a license fee and companies rendering services in return for their franchise, it was the responsibility of the Legislature to remedy the situation. The Legislature, however, has not acted to amend this statute in this regard, and therefore the law is still that the value of services rendered in return for a franchise is not deductible from taxes levied on special franchise assessments under section 626 of the Real Property Tax Law.

April 25, 1975

Updated: