The New York State Tax Appeals Tribunal reversed the decision of an Administrative Law Judge denying a Qualified Empire Zone Enterprise (“QEZE”) tax credit, finding that statutory amendments that restricted the credit had been retroactively applied, and that further consideration of the retroactivity issue was required. Matter of NRG Energy, Inc., DTA No. 826921 (N.Y.S. Tax App. Trib., Mar. 14, 2018). The Tribunal remanded the case to the ALJ to consider whether the retroactive application of statutory amendments enacted in April 2009 to the year beginning January 1, 2009, was a violation of the petitioner’s rights under the Due Process Clause of the U.S. Constitution.

Facts. NRG Energy, Inc. (“NRG”) owns and operates power plants that generate power from various fuel sources, including coal, natural gas, solar, and wind. NRG 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 challenged the retroactive application of the 2009 amendments, and in 2013, the New York Court of Appeals held that retroactive application of the 2009 amendments to the year beginning January 1, 2008, violated the Due Process Clause and was unconstitutional. James Square Assocs. LP, et al. v. Mullen, 21 N.Y.3d 233 (2013). 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 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 claimed 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 under the Constitution.

ALJ Determination. The ALJ rejected NRG’s arguments, finding that application of amendments enacted in 2009 to the 2009 tax year itself was not retroactive application of the law. The ALJ also rejected NRG’s argument that there was any violation of 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).

Tribunal Decision. The Tribunal reversed the ALJ’s determination that no retroactive application of a statute had occurred. While seeing the “common sense” in the ALJ’s conclusion, the Tribunal found that “there is no rule” that a statute adopted during an open tax year and made effective as of the beginning of the year “automatically is determined not to have a retroactive effect.” Here, the application of the new amendments rendered NRG unqualified to participate in the QEZE program as of January 1, 2009, based upon program requirements that were not in effect until April of that year. Therefore, the Tribunal found that application of the amendments attached “new legal consequences” to events that had occurred prior to their enactment, and were therefore retroactive in application, citing Landgraf v. USI Film Prod., 511 U.S. 244 (1994). 

After determining that the application of the amendments was indeed retroactive, the Tribunal turned to the question of whether that retroactive application was constitutional, under the factors set forth, most recently in James Square, 21 N.Y.3d at 246, and in Matter of Replan Development v. Department of Housing Preservation & Development, 70 N.Y.2d 451, 456 (1987). However, this issue had not been reached by the ALJ, because she had found that there was no retroactive application at all. The Tribunal therefore remanded the case to the ALJ for consideration of this issue, which had already been the subject of evidence and argument. 


Retroactive application of statutory amendments continues to be a 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. The Court of Appeals in James Square has already found that application of these exact 2009 amendments to the 2008 year was unconstitutional, rejecting the Department’s arguments that the change, for example, served an important public purpose, and determining that the taxpayers were “being punished” for behavior that had already occurred and they could not alter. The only new consideration is whether the shorter period of retroactive application—which had been over a year in James Square, but in NRG is only a little more than three months—will lead to a different determination on constitutionality.