A New York State Administrative Law Judge has upheld the denial by the Department of Taxation and Finance of a Qualified Empire Zone Enterprise ("QEZE") tax reduction credit, finding that application of statutory amendments to the tax year in which the amendments were enacted was not impermissible retroactivity. Matter of NRG Energy, Inc., DTA No. 826921 (N.Y.S. Div. of Tax App., Mar. 30, 2017). The ALJ rejected the taxpayer's argument that the decision of the New York Court of Appeals in James Square Associates LP, et al. v. Mullen, 21 N.Y.3d 233 (2013), which found unconstitutional the retroactive application of statutory amendments enacted in 2009 to the year beginning January 1, 2008, had any application to the 2009 tax year.

Facts. NRG Energy, Inc. ("NRG") owns and operates power plants that generate power from various fuel sources, including coal, natural gas, solar, and wind. It is the sole owner and member of Oswego Harbor Power LLC, which owns and operates the Oswego Generating Station in Oswego County, New York (the "Plant"). NRG and Oswego Harbor Power LLC originally were certified as eligible under the New York State Empire Zones Act for the Plant effective in 2002. As an eligible participant in the Empire Zones Program, NRG was entitled to apply for QEZE credits against its New York State corporate franchise taxes, including a refundable credit for real property taxes.

On April 7, 2009, the Empire Zones Act was amended to impose new criteria for continued certification under the Empire Zones Program. In 2010, the statute was further amended to explicitly provide that the 2009 changes were retroactive to years beginning on or after January 1, 2008. On or about June 29, 2009, the Department of Economic Development ("DED"), which administers the Empire Zones Program, notified NRG and Oswego Harbor Power LLP that their certifications were being revoked, effective January 1, 2008, for failure to meet the new criteria.

Litigation brought by other taxpayers then challenged the retroactive application of the 2009 amendments. In 2013, the New York Court of Appeals held in James Square that retroactive application of the 2009 amendments to the year beginning January 1, 2008, violated the Due Process Clause and was unconstitutional. Applying a three-factor test, the Court of Appeals found that the taxpayers had not been forewarned of the legislative change, but were instead being "punished . . . more harshly for behavior that had already occurred and that they could not alter"; that the period of retroactivity was excessive; and that the retroactive application did not serve an important public purpose, since "raising money for the state budget is not a particularly compelling justification." Id. at 250.

In August 2013, after the decision in James Square, the Department of Taxation and Finance issued a refund to NRG for the 2008 QEZE tax credits.

NRG's original 2009 tax return claimed QEZE credits with regard to different facilities, located in the Town of Tonawanda Empire Zone and the Sheridan Empire Zone, and NRG received those refunds of approximately $24 million. In August 2013, NRG filed an amended 2009 return claiming an additional credit of approximately $5.8 million for the Plant in the Oswego County Empire Zone. The Department denied the credit because the certificate of eligibility for the Plant had been revoked in reliance on the 2009 amendments to the statute. NRG challenged the denial, arguing that the retroactive application of the 2009 amendments was impermissible under James Square and that the Department's "selective enforcement" of the statute violates its rights to equal protection.

Decision. The ALJ rejected NRG's arguments. First, she found that application of amendments enacted in 2009 to the 2009 tax year was not retroactive application of the law, noting that the DED had notified NRG in June 2009 that it did not meet the new criteria well before the end of the tax year. According to the ALJ, since the statute provided that a business enterprise would cease to be qualified on the first day of the taxable year during which the revocation occurs, decertification to January 1, 2009, was not due to a retroactive application of the 2009 amendments.

The ALJ also rejected NRG's argument that the Department had violated NRG's equal protection rights, finding that NRG had failed to demonstrate any "selectivity of enforcement" arising from "`an intentional invidious plan of discrimination'" on the part of the Department as required by previous Tribunal decisions, such as Matter of Goetz Energy Corp., DTA No. 815558 (N.Y.S. Tax App. Trib., Nov. 18, 1999), particularly since the statute requires decertification as of the beginning of the tax year in which certification was revoked.

Additional Insights

Retroactive application of statutory amendments is a growing and contentious issue in the state tax area. In James Square, New York's highest court did find the retroactive application unconstitutional, but in Burton v. New York State Department of Taxation & Finance. et al., 25 N.Y.3d 732 (2015), and Caprio v. New York State Department of Taxation & Finance et al., 25 N.Y.3d 744 (2015), the Court of Appeals rejected challenges to the validity of a 2010 statutory amendment that changed the treatment of gains recognized by a nonresident on the sale of S corporation stock. Petitions for certiorari are pending at the U.S. Supreme Court in cases challenging retroactive application of tax statutes in Washington state and in Michigan. See Dot Foods, Inc. v. Dep't of Revenue of the State of Washington, No. 16-308 (filed Sept. 9, 2016); Gillette Commercial Operations N. Am. and Subsidiaries v. Michigan Dep't of Treasury, No. 16697 (filed Nov. 21, 2016).

However, the facts of NRG--where the statute was changed just over three months into the year in which it was being applied--present a particularly difficult argument for the proposition that a taxpayer's rights have been unconstitutionally abrogated. While there is very little Supreme Court precedent, the case most commonly cited, United States v. Carlton, 512 U.S. 26 (1994), allowed retroactive application of a statute when there was a "modest period of retroactivity" of slightly greater than a year.