TransCanada: New York franchise taxes
A New York electricity generator qualified for a $350,000 cap on part of the annual franchise taxes it had to pay in the state.
The decision turned in part on whether generating electricity is “manufacturing.” A tax tribunal said that it is. Manufacturers are given tax breaks in many states, including New York.
TransCanada owned two large gas-fired power plants in the United States during the period 2010 through 2012. One was the 2,480-megawatt Ravenswood generating station on Long Island in New York. The other was a 575-megawatt power plant in Coolidge, Arizona.
It owned both through a common US holding corporation. More than 50% of the annual gross income from the two power plants came from the Ravenswood power sales in New York.
New York collects annual franchise taxes from companies doing business in the state. The tax is calculated mainly on a company’s capital base.
The tax on capital base is capped at $350,000 for “New York manufacturers.”
The state audited the company in 2015 and sent a bill for back tax liability for the period 2010 through 2012 of $3.3 million, plus interest of $1.2 million and another $328,165 in penalties. Any company that substantially understates its tax liability is subject to a 10% penalty.
An administrative law judge said the company is a manufacturer, but not a “New York manufacturer” as defined in the tax statute. On appeal, the Tax Appeals Tribunal said it is also a New York manufacturer.
To qualify for the cap, a company must show three things: it is a manufacturer, it has property in New York described in a state investment tax credit statute, and either that property has an adjusted tax basis for federal income tax purposes of at least $1 million or else all of the company’s tangible property is in New York.
The state treats electricity generation as a form of manufacturing, and the Ravenswood power plant that TransCanada owned in the state had an adjusted tax basis well above $1 million.
The issue came down to how to read the requirement that TransCanada must have property in the state of a type described in the state investment tax credit statute. Power plants to do not qualify for the investment tax credit.
The appeals tribunal read an exclusion for power plants in the investment tax credit statute to apply just for the investment tax credit and not also for the franchise tax cap.
It was swayed in part by the fact that the governor proposed in 2008 and 2009 — just before the tax years at issue — to exclude electricity generators, among others, from the cap. The legislature failed to act on the proposal.
The case is TransCanada Facility USA, Inc. The appeals tribunal released its decision in May.