The Tax Appeals Tribunal has affirmed the determination of an ALJ that various assets used in the operation of a pair of nuclear power plants to produce steam used to generate electricity did not qualify for the investment tax credit (“ITC”) for manufacturing under Article 9-A. Matter of Constellation Nuclear Power Plants LLC, DTA No. 823553 (N.Y.S. Tax App. Trib., June 18, 2014).

The taxpayer owned and operated two nuclear power plants in New York State.  Both plants created steam from water, which was then used to generate electricity.  As part of the same process, the steam was condensed back into water so the cycle could be repeated.  Although different methods were used to create the steam, both plants used the steam to generate electricity that they sold.  Both of the plants sold only electricity, and did not sell steam or water.

An ITC is allowed under Article 9-A for tangible personal property and other tangible property that is “principally used” by the taxpayer in the production of “goods” by manufacturing. Tax Law § 210(12)(b)(i)(A). Under the case law, “goods” constitute “tangible movable personal property having intrinsic value.” Matter of Leisure Vue v. Comm’r of Taxation & Fin., 172 A.D.2d 872, 873 (3d Dep’t 1991). The term “goods” does not include electricity. Tax Law § 210.12(b)(i)(A).

While the taxpayer did not claim the ITC for equipment that was clearly used to produce electricity, the taxpayer did claim the ITC for the equipment it used to turn steam into water  and water into steam on the grounds that the equipment was principally engaged in the production of steam from water and water from steam, not in the production of electricity, and both water and steam qualify as “goods.”

The ALJ had rejected the taxpayer’s argument, finding that the relevant equipment was part of “an integrated and continuous system that must operate in a synchronized and harmonious manner,” and that the subject assets were used to produce electricity for 99% of their operating time.  The ALJ did not reach  the issue of whether the process of changing steam into water and water into steam constituted the manufacture of “goods.”

The Tribunal affirmed the ALJ’s determination, concluding that the assets were principally used in the production of electricity, and therefore did not qualify for the ITC.  Relying on the Appellate Division decision in Matter of Brooklyn Union Gas Company v. Tax Appeals Trib., 107 A.D.3d 1080 (3d Dep’t 2013), the Tribunal held that when determining whether the ITC should apply, “the key inquiry is whether the claimed equipment is principally used to manufacture a usable product that substantially differs from the beginning inputs.” The Tribunal found the taxpayer’s argument that it produced “steam from water and water from steam” was unpersuasive, as the steam produced from the water is condensed back into water to repeat the cycle, and the beginning water therefore did not differ materially from the ending water.

The Tribunal also rejected the taxpayer’s argument that Brooklyn Union Gas stood for the proposition that the claimed manufacturing equipment should be viewed on an “asset-by-asset” basis, under which the assets, although part of the electricity production process, might qualify for the manufacturing ITC because when viewed in isolation, they produced steam and water.  Citing to Niagara Mohawk Power Corp. v. Wanamaker, 286 A.D. 446 (4th Dep’t 1955), aff’d 2 N.Y.2d 764 (1956), the Tribunal explained that “it is inappropriate to artificially divide a unitary process when the facts show that the parts and steps operate interdependently and indivisibly in accomplishing a singular task.”

Unlike the ALJ, the Tribunal addressed the issue of whether the taxpayer was principally engaged in producing a “good” suitable for use, but concluded that the taxpayer failed to carry its burden of establishing the water or steam was a “good” suitable for use because they were incapable of either leaving the system or being used for any process other than producing electricity.

Additional Insights

The Tribunal noted that part of the reason it rejected an “asset-by-asset” approach was because it “did not comport with the facts of this case.”  This leaves open the possibility that there may be facts and circumstances under which an asset-by-asset approach would be appropriate in determining whether the ITC applies.  However, to employ such an approach, a taxpayer would presumably need to manufacture “goods” that are themselves eligible for the ITC, even if those goods are not for sale.