Veolia Energy Bos., Inc. v. Bd. of Assessors of Bos.

• Decision Date: 11 September 2019
• Docket Number: SJC-12634
• Citation: 483 Mass. 108,130 N.E.3d 767
• Parties: VEOLIA ENERGY BOSTON, INC. v. BOARD OF ASSESSORS OF BOSTON.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

483 Mass. 108

130 N.E.3d 767

VEOLIA ENERGY BOSTON, INC.

v.BOARD OF ASSESSORS OF BOSTON.

SJC-12634

Supreme Judicial Court of Massachusetts, Suffolk..

Argued May 6, 2019

Decided September 11, 2019

Anthony M. Ambriano, Boston, for board of assessors of Boston.

Kathleen S. Gregor (Erin R. Macgowan also present), Boston, for the taxpayer.

Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

CYPHER, J.

This is an appeal by the board of assessors of Boston (assessors) from a decision of the Appellate Tax Board (board) abating taxes on certain personal property in Boston owned by and assessed to Veolia Energy Boston, Inc. (Veolia), for fiscal year (FY) 2014. The question presented is whether the taxed personal property, "consisting principally of pipes" that Veolia used to produce, store, and distribute steam, is exempt from local taxation in accordance with G. L. c. 59, § 5, Sixteenth (3) (clause 16 [3] ), which provides in pertinent part that all property owned by a manufacturing corporation, "other than real estate, poles and underground conduits, wires and pipes," is exempt from local taxation (emphasis added).

Veolia produces and distributes steam through networks of pipes and appurtenant equipment. The board found that these networks, including the pipes at issue here, operate in concert as a single, integrated machine, and, as a result, concluded that the pipes constituted machinery exempt from local taxation in accordance with clause 16 (3). On appeal, the assessors argue that the board erroneously relied on the so-called "great integral machine" doctrine, stated for the first time by this court in Commonwealth v. Lowell Gas Light Co., 12 Allen 75, 78 (1866), in concluding that the pipes constituted exempt machinery because such a conclusion is belied by the plain language of clause 16 (3), which explicitly excepts "pipes" from the exemption.

For the reasons that follow, we conclude that pipes that constitute machinery are exempt from local taxation in accordance with clause 16 (3). We further conclude that the great integral machine doctrine, which has endured without legislative interference for well over one hundred years, remains an appropriate means by which to determine whether certain property constitutes machinery. Accordingly, we affirm the decision of the board.

Background. The dispute between the parties began when Veolia was assessed a personal property tax of approximately $2 million on certain pipes it used to produce, store, and distribute steam for FY 2014.¹ Veolia paid the tax due and timely filed an application for abatement with the assessors, arguing that the pipes at issue were in fact machinery, and therefore exempt from local taxation in accordance with clause 16 (3).² The assessors denied the application for abatement, and Veolia appealed to the board, which reversed.

The board held an evidentiary hearing over two days and considered testimony from four witnesses: the director of system operations for Veolia North America, an affiliate of Veolia, who testified about Veolia's operations; a managing director of the energy practice at Navigant Consulting, who gave expert testimony regarding Veolia's operating systems; the vice-president and head of finance for Veolia North America, who discussed Veolia's financial reporting; and a director of personal property for the assessing department of the city of Boston, who testified about the contested assessment. The board also considered exhibits entered into evidence and a statement of agreed facts with attachments. We summarize the board's findings.³

Veolia owns and operates a "district energy network" in Boston and assists in the operation of a similar network in Cambridge. The Boston network converts chemical energy from natural gas and fuel oil into high-pressure steam and then distributes the high-pressure steam to approximately 250 commercial, healthcare, government, institutional, and hospitality customers. Veolia's customers use the steam at customized pressures for various purposes, including power generation, sterilization, heating, and cooling.

Veolia's steam manufacturing process begins at one of three generation facilities: the Kneeland Facility, located on Kneeland Street in Boston; the Scotia Facility, located on Scotia Street in Boston; and the Kendall Station Facility, located in Cambridge. These generation facilities perform a number of functions, including water treatment, fuel treatment and storage, and high-pressure steam generation. The equipment varies from facility to facility, with two using boilers and one using boilers as well as a heat recovery steam generator as means to generate steam.

Once one of the facilities generates steam, it enters a pressure-regulated network of distribution mains and appurtenant equipment. The networks operate together to balance customer load and steam generation across the generation facilities to ensure equivalent rates of production and consumption. The steam is stored and transported through pipes within the networks. By design, these pipes expand, contract, and move to withstand pressure and heat fluctuations. Also, they are equipped with valves to control pressure, to shed condensate (steam that has returned to liquid state), and to direct the flow of steam.

The pressure of the steam is highest at the point of generation. Once steam reaches a customer's site, a pressure reduction valve reduces that pressure to assure safety, to comply with regulatory requirements, and to conform to customer equipment compatibility and use requirements. After a customer uses the steam, the networks condense it into condensate, some of which the networks return to the generation facilities through condensate-return lines for further steam production.

The networks employ a centralized supervisory control and data acquisition (SCADA) system to monitor their activity. The SCADA system is accessible via the Internet and at several places in the networks. Each of the generation facilities also has an internal control system that feeds data to the master SCADA system. A system shift supervisor directs operations of the entire SCADA system, monitoring the networks, the status of the generation facilities, the status of multiple monitoring points in the networks, and the status at key customer sites.

Veolia's system operations expert opined that the networks, including the pipes at issue, functioned as a single, integrated machine. He noted the importance of the storage and system flow pressure functions served by the pipes, stating that "steam is not like an instantaneous product, like electricity. When you flip a switch, you just don't have instant steam. You have to build up pressure in the system, and so you have to have that stored amount of energy in the system to really operate it." He emphasized also that the steam "is not a finished product until it's delivered to the customer through their control valves and provided to them for use in their energy services."

The board found the expert's testimony credible and agreed with his determination that the networks, including the pipes at issue, constituted and operated as a "single, integrated machine." Relying on Lowell Gas Light Co., 12 Allen 75, and Lowell Gas Co. v. Commissioner of Corps. & Taxation, 377 Mass. 255, 385 N.E.2d 991 (1979), for the proposition that property that would otherwise be regarded as taxable personal or real property will be exempt "when incorporated as an integral part of exempt machinery," the board concluded that the pipes were in fact machinery exempt from taxation pursuant to clause 16 (3).

Discussion. 1. Standard of review. "We accord the board's decision great deference and will not disturb its decision if [it] is based on both substantial evidence and a correct application of the law" (quotation and citation omitted). AA Transp. Co. v. Commissioner of Revenue, 454 Mass. 114, 118, 907 N.E.2d 1090 (2009). A question of statutory interpretation is a question of law for us to resolve. Id. See WorldWide TechServices, LLC v. Commissioner of Revenue, 479 Mass. 20, 26, 91 N.E.3d 650 (2018) (board's conclusions of law reviewed de novo). Nevertheless, "because the board is an agency charged with administering the tax law and has expertise in tax matters, we give weight to its interpretation of tax statutes, and will affirm its statutory interpretation if that interpretation is reasonable" (quotation and citations omitted). AA Transp. Co., supra at 119, 907 N.E.2d 1090. See Northeast Petroleum Corp. v. Commissioner of Revenue, 395 Mass. 207, 213, 479 N.E.2d 163 (1985) (noting court's "traditional deference to the expertise of the board in tax matters involving interpretation of the laws of the Commonwealth"); French v. Assessors of Boston, 383 Mass. 481, 482, 419 N.E.2d 1372 (1981) ("We have long recognized the board's expertise in tax matters"). "[T]he decision of the board is ‘final as to findings of fact’ " (quotation omitted). Commissioner of Corps. & Taxation v. Boston Edison Co., 310 Mass. 674, 676, 39 N.E.2d 584 (1942), citing G. L. (Ter. Ed.) c. 58A, § 13. See Rosse v. Commissioner of Revenue, 430 Mass. 431, 433, 720 N.E.2d 791 (1999) (" [G. L.] c. 58A, § 13, limits the scope of our review of the board's findings of fact"). In addition, the board's expertise is given due weight when mixed questions of fact and law are considered. Raytheon Co. v. Commissioner of Revenue, 455 Mass. 334, 338, 916 N.E.2d 372 (2009). See, e.g., Massachusetts Inst. of Tech. v. Assessors of Cambridge, 422 Mass. 447, 452, 663 N.E.2d 567 (1996) ; McCarthy v. Commissioner of Revenue, 391 Mass. 630, 632, 462 N.E.2d 1357 (1984).

The assessors argue that the board erroneously relied on the great integral machine doctrine stated in Lowell Gas Light Co., supra, in concluding that the pipes constituted exempt machinery because the plain language of clause 16 (3) explicitly excepting "pipes" from exemption belies such a conclusion. In the...