A New York State Administrative Law Judge has held that various assets operated by a pair of nuclear power plants to produce steam used to generate electricity did not qualify for the investment tax credit (“ITC”) allowed under Article 9-A. Matter of Constellation Nuclear Power Plants LLC, DTA No. 823553, (N.Y.S. Div. of Tax App., Apr. 11, 2013).

The taxpayer owned and operated two nuclear power plants in New York State. Both nuclear power plants created steam from water, which was then used to generate electricity. Although different methods were used to create the steam in each plant, both plants used the steam to turn turbines attached to a generator, generating electricity that was sold by the plants. Both of the plants sold only electricity, and did not sell steam or water.

An investment tax credit ("ITC") is allowed against the tax imposed under Article 9-A for tangible personal property, and other tangible property, including buildings and structural components of buildings, that meets various criteria, and that is “principally used” by the taxpayer in the production of “goods” by manufacturing. Tax Law § 210(12)(b)(i)(A). The statute specifically provides that the term “goods” does not included electricity. “Principally used” is defined by regulation as meaning more than 50 percent. 20 NYCRR 5-2.4(c).

Consistent with the ITC law, the taxpayer did not claim the ITC for equipment, such as the turbines and electrical generator, that was clearly used to produce electricity. The taxpayer did claim the ITC for equipment used to turn steam into water and water into steam. The taxpayer contended that this equipment was eligible for the ITC because it 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 taxpayer filed refund claims attributable to the ITC totaling more than $22 million.

The ALJ disagreed with the taxpayer, finding that the equipment was part of “an integrated and continuous system that must operate in a synchronized and harmonious manner” to produce electricity. In reaching his determination, the ALJ relied on Matter of Brooklyn Union Gas Company, DTA No. 822692 & 892693 (N.Y.S. Tax App. Trib., Mar. 8, 2012) in which the Tax Appeals Tribunal held that “the relationship of the individual components of equipment to the primary function with which the equipment is involved” should be examined when determining whether the ITC applies to production equipment.

Applying that test, the ALJ was unwilling to classify different types of equipment here as being involved in theoretically distinct steps of production — production of steam versus production of electricity — and instead found that the primary function of the steam‑producing equipment was the generation of electricity, a non-qualifying activity. The ALJ also noted that the fact that the plants did not sell steam, or even have the necessary infrastructure or equipment to sell steam, further reinforced his conclusion that the primary purpose of the steam generation was the production of electricity.

Additional Insights

The decision, which is not binding precedent and is subject to appeal, makes clear that when examining whether certain equipment qualifies for the ITC, the primary function with which the equipment is involved is a key factor. In this case, the ALJ found that the equipment’s primary function was to produce electricity and that, in fact, electricity was the product sold by the plants, not steam. However, it is worth noting that nothing in the ITC law requires that the product being manufactured be sold by the taxpayer for the ITC to apply. For example, as noted by the ALJ, in Matter of Plattekill Mountain Ski Center, Inc., (State Tax. Comm. Aug. 1, 1985), the former State Tax Commission held that the ITC was available to a ski resort operator for its snow-making equipment.