In a unanimous decision, the Appellate Division has affirmed a New York State Tax Appeals Tribunal decision holding that certain 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 v. Tax Appeals Trib. of the State of N.Y., 2015 N.Y. Slip Op. 06183 (3d Dep’t, July 16, 2015).

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

At issue was whether the taxpayer was entitled to an ITC for the specific equipment used solely to create steam and to condense it back into 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, Inc. v. Comm’r of Taxation & Fin., 172 A.D.2d 872 (3d Dep’t, 1991). The term “goods” does not include electricity. Tax Law § 210(12)(b)(i)(A).

The taxpayer did not claim the ITC for equipment that was directly used to produce electricity. However, it did claim the ITC for the equipment engaged in producing steam from water and water from steam on the grounds that such equipment was not used to produce electricity, but rather to manufacture or process “goods” in the form of steam and water.

The Tribunal had rejected the taxpayer’s argument, finding that the power plants utilized “unified, integrated processes that harnessed the energy from nuclear fission and produced electricity” and 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.” Accordingly, the Tribunal determined that the equipment was principally used in the production of electricity and did not qualify for the ITC.

The Tribunal also rejected the taxpayer’s argument that it was principally engaged in producing a “good,” concluding that the taxpayer failed to carry its burden of establishing that either the water or steam was a “good” suitable for use.

Court Decision. On appeal, the Appellate Division, Third Department, affirmed the Tribunal’s decision in its entirety. The court concluded that the equipment was principally used in the production of electricity because all of the disputed assets were necessary to the ultimate purpose of producing electricity, and that the water and steam were produced only to serve the purpose of manufacturing electricity. The Appellate Division distinguished its decision in Matter of Brooklyn Union Gas Company v. N.Y. State Tax Appeals Trib., 107 A.D.3d 1080 (3d Dep’t, 2013), noting that, in that case, the individual analysis of certain component parts of a taxpayer’s integrated gas delivery system was undertaken to determine whether those assets were used for the separate purpose of manufacturing rather than distribution, and that ultimately it was found that those parts were not used in manufacturing because they did not significantly change the nature of the gas delivered.

The Third Department also held that even when the equipment used to produce water and steam was viewed in isolation, the Tribunal correctly determined that such equipment was not engaged in manufacturing. The court noted that the equipment served to convert water into steam, and steam into water again, in an ongoing continuous cycle that made no permanent change in the water and yielded no final product. Accordingly, it concluded that such assets were not principally engaged in producing any tangible property other than electricity.

Additional Insights

Although the Appellate Division expressly rejected the idea that Brooklyn Union Gas “mandate[s] an asset- by-asset approach,” it also expressly rejected the idea that Brooklyn Union Gas mandates “any other specific form of inquiry as the prescribed method by which the Tribunal must determine eligibility for investment tax credits.” This is significant because it suggests that there could 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 at least be able to demonstrate that the equipment is used to manufacture a good that is itself eligible for the ITC, and that the good is not produced solely for the ultimate purpose of producing another good that is not eligible for the ITC.