New York: Taxpayer Engaged in Generating Electricity was a Qualified New York Manufacturer

The New York Tax Appeals Tribunal recently overturned an Administrative Law Judge (ALJ) decision and in doing so held that a taxpayer engaged in generating electricity at a plant in New York was a “qualified New York manufacturer” whose capital tax base was capped at $350,000 for the tax years at issue (2010-2012).  Under New York law for the relevant period, corporate taxpayers paid tax on the highest of four alternative bases. The capital base, which was the highest base for the taxpayer, was capped at $350,000 per year for qualified New York manufacturers.  Thus, the key issue was whether the taxpayer, an entity engaged in generating electricity, was a “qualified New York manufacturer.”  To be considered a  “qualified New York manufacturer” entitled to the capital base liability cap, the taxpayer had to establish  that (1) it was a manufacturer principally engaged in the production of goods by manufacturing; (2) it had property in New York that was described in New York Tax Law § 210 (12) (b)(i) (A); and (3) either the adjusted basis of that property for federal income tax purposes was at least equal to $1 million or all of its real and personal property was located in New York. Before the ALJ, the open questions were whether generating electricity qualified as manufacturing, and whether the taxpayer’s New York property was of the type described in the relevant statute. With respect to the first question, the ALJ rejected the Division’s argument that the taxpayer was not a manufacturer. Next, the ALJ addressed the Division’s argument that even if the taxpayer met the definition of a “manufacturer” it was not a “qualified New York manufacturer” because it did not have property described in New York Tax Law § 210 (12) (b)(i) (A). This is the statute incorporating the requirements for the Investment Tax Credit (ITC) and the language of the statute provided that “goods shall not include electricity.” Because the qualifying property (1) had to be used to manufacture goods and (2) goods did not include electricity, the ALJ concluded that the property of a manufacturer principally engaged in the production of electricity did not meet the property requirements for a “qualified New York manufacturer.”

On appeal, the Tax Appeals Tribunal first agreed with the ALJ that the taxpayer was a manufacturer. The next question, which was one of pure statutory interpretation, was whether the taxpayer was a “qualified New York manufacturer” because it had property in New York described in New York Tax Law § 210 (12) (b)(i) (A). The taxpayer argued that the ITC limitation applied only for purposes of determining eligibility for the ITC and was not intended to limit it from being classified as a qualified New York manufacturer for purposes of the capital base cap.  The Tribunal, relying on legislative intent, agreed with the taxpayer. The legislative history of the ITC limitation sentence demonstrated that it was enacted to exclude property used in the generation of electricity from eligibility for the manufacturing ITC. The enactment of the relevant statutory language was necessary solely to “correct” the law by clarifying that property used in the generation of electricity was not eligible for the ITC. In the Tribunal’s view, if the legislature had intended to exclude generators of electricity from the definition of a qualified New York manufacturer, it would have referred more broadly to the ITC subdivision in general (rather than simply referring to clause A) or required the property of a qualified New York manufacturer to be ITC eligible. Further, in drafting the statute that provides special benefits for qualified New York manufacturers under the entire net income base, the Legislature expressly excluded electricity generators from the definition of manufacturer. The Legislature’s failure to do the same thing for the capital base tax cap, in the Tribunal’s view, was deliberate. The Tribunal also noted that attempts to amend the tax law to specifically exclude generating electricity as a qualifying activity for a manufacturer for purposes of the capital tax base cap were not acted on. Those proposals, in the Tribunal’s view, were instructive in interpreting the existing statutory language. As a State Tribunal decision, the case is final, binding precedent; the Division of Taxation is not allowed to appeal Tribunal decisions to the intermediate appellate court. Please contact Russ Levitt at 212-872-6717 with questions on Matter of TransCanada Facility USA, Inc.