Brooklyn Union Gas Co. v. N.Y. State Tax Appeals Tribunal

• Decision Date: 06 June 2013
• Citation: 967 N.Y.S.2d 174,107 A.D.3d 1080,2013 N.Y. Slip Op. 04067
• Parties: In the Matter of BROOKLYN UNION GAS COMPANY et al., Petitioners, v. NEW YORK STATE TAX APPEALS TRIBUNAL et al., Respondents.
• Court: New York Supreme Court — Appellate Division

107 A.D.3d 1080

967 N.Y.S.2d 174

2013 N.Y. Slip Op. 04067

In the Matter of BROOKLYN UNION GAS COMPANY et al., Petitioners,

v.NEW YORK STATE TAX APPEALS TRIBUNAL et al., Respondents.

Supreme Court, Appellate Division, Third Department, New York.

June 6, 2013.

McDermott, Will & Emery, LLP, New York City (Peter L. Faber of counsel), for petitioners.

Eric T. Schneiderman, Attorney General, Albany (Kathleen M. Arnold of counsel), for respondents.

Before: PETERS, P.J., LAHTINEN, STEIN and GARRY, JJ.

LAHTINEN, J.

Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law § 2016) to review a determination of respondent Tax Appeals Tribunal which, among other things, denied petitioners' application for a refund of an investment tax credit under Tax Law article 9–A.

Petitioners are regulated public utilities engaged in the business of providing natural gas to customers in New York City and Long Island. Starting in 2000, petitioners were subject to a corporate franchise tax pursuant to Tax Law article 9–A and, unlike Tax Law article 9 under which they had been previously taxed, article 9–A permits an investment tax credit (hereinafter ITC) for property that meets various criteria including, as relevant here, that the property is “principally used by the taxpayer in the production of goods by manufacturing [or] processing” (Tax Law § 210[12][b][i] ). Petitioners sought an ITC for the tax years 2000 to 2006 for their integrated system (or components thereof), contending that their system was principally used to process natural gas from an unstable state in which it arrived from their suppliers to a safe and usable product for their customers. Following a hearing, an Administrative Law Judge and, later, respondent Tax Appeals Tribunal found that petitioners were not entitled to an ITC.

The Tribunal determined, among other things, that petitioners had failed to meet their burden of proof in that the evidence established that petitioners' equipment was principally used to distribute and deliver natural gas, and not to produce a product by manufacturing or processing as those terms are construed for purposes of an ITC. This proceeding ensued with petitioners contending, first, that their entire integrated system (i.e., regulators, scrubbers, heaters, odorizers, pipes, mains and other equipment) qualified for an ITC as manufacturing or processing natural gas, and, alternatively, that each of four individual assets of that system (i.e., regulators, heaters, scrubbers and odorizers) qualified separately for an ITC.

For purposes of an ITC under Tax Law article 9–A, “manufacturing” means “the process of working raw materials into wares suitable for use or which gives new shapes, new quality or new combinations to matter which already has gone through some artificial process by the use of machinery ... and other similar equipment” (Tax Law § 210[12] [b][ii][A]; see20 NYCRR 5–2.4[a] ), and we have previously upheld the Tribunal's position that “ ‘processing’ speaks to an industrial activity related to manufacturing” (Matter of General Mills Rest. Group v. Chu, 125 A.D.2d 762, 764, 509 N.Y.S.2d 184 [1986] ). Precedent supports the assertion of respondent Commissioner of Taxation and Finance that the Tribunal's interpretation and application of the provisions providing for an ITC are accorded deference and will be upheld if reasonable ( see id. at 763, 509 N.Y.S.2d 184;see also Matter of Astoria Fin. Corp. v. Tax Appeals Trib. of State of N.Y., 63 A.D.3d 1316, 1318, 880 N.Y.S.2d 389 [2009];Matter of Gropper v. Tax Appeals Trib. of State of N.Y., 9 A.D.3d 796, 798, 780 N.Y.S.2d 678 [2004];Matter of Leisure Vue v. Commissioner of Taxation & Fin., 172 A.D.2d 872, 872, 568 N.Y.S.2d 175 [1991] ). “Ultimately, the ‘issue is whether the Tribunal's determination has a rational basis,’ not whether petitioner[s'] alternative interpretation of the statute is reasonable” (Matter of Astoria Fin. Corp. v. Tax Appeals Trib. of State of N.Y., 63 A.D.3d at 1318, 880 N.Y.S.2d 389, quoting Matter of Muraskin v. Tax Appeals Trib., 213 A.D.2d 91, 94, 630 N.Y.S.2d 119 [1995],lv. denied87 N.Y.2d 806, 641 N.Y.S.2d 597, 664 N.E.2d 508 [1996];see Matter of CS Integrated, LLC v. Tax Appeals Trib. of State of N.Y., 19 A.D.3d 886, 889, 798 N.Y.S.2d 166 [2005] ).

During the pertinent time, petitioners reportedly had 1.9 million customers and owned and maintained 11,000 miles of pipes and related equipment to provide...