Are a gas seller's receipts from selling natural gas to the New York Power Authority taxable under the section 186-a utility tax?

Plain-English summary

Sempra Energy Trading Corp., a foreign corporation that buys and sells natural gas across North America including New York, made in-state sales of natural gas to the Power Authority of the State of New York for the Authority's own consumption. It asked whether those receipts are exempt from the section 186-a utility tax because the Power Authority is a state instrumentality.

The Department held the receipts are taxable:

• Sempra is a utility subject to section 186-a (whether taxed on gross income or gross operating income), and receipts from gas sold for ultimate consumption or use in New York are taxable receipts.
• The Power Authority itself cannot be taxed under section 186-a (Public Authorities Law sections 1012 and 1014), so it is not treated as a utility.
• But following New York Telephone Co. v. County of Nassau, the section 186-a tax is an operating expense of the seller that it may include in (and separately state on) its price; passing it through is not the equivalent of directly taxing the buyer.
• Therefore Sempra's receipts from gas sales to the Power Authority are taxable, on the total charge, with no deduction for the section 186-a tax built into the price.

What this means for you

Selling to a tax-exempt buyer does not exempt the seller

The Power Authority's own tax immunity does not flow up to its suppliers. A gas or electric seller is a utility taxed on its receipts under section 186-a, even when the customer is a state instrumentality.

Passing the tax through is an expense, not a buyer tax

A utility may build its section 186-a tax into the price and separately state it. Courts treat that as recovering an operating cost -- not as imposing the tax on the customer -- so it does not make the exempt buyer taxable.

No deduction for the embedded tax

The taxable receipts are the total charge, including the portion attributable to the passed-through section 186-a tax. The seller cannot deduct that amount.

Common questions

Q: Are sales of gas to the Power Authority taxable to the seller under section 186-a?
A: Yes. The seller's receipts from gas sold for the Authority's consumption in New York are taxable.

Q: Is the Power Authority itself taxed?
A: No. Public Authorities Law sections 1012 and 1014 bar imposing the section 186-a tax on the Power Authority.

Q: Can the seller deduct the tax it passes through in the price?
A: No. The taxable receipts include the full charge, with no deduction for the embedded section 186-a tax.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186-a (tax on utilities furnishing gas, electricity, and similar services)
- Tax Law section 186-a.2(a) (utility defined; includes sellers of gas through pipes)
- Public Authorities Law sections 1012 and 1014 (Power Authority exemption from taxation)
- New York Telephone Company v. County of Nassau, 122 AD2d 124
- Sempra Energy Trading Corp., TSB-A-02(23)C (Dec. 18, 2002)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a02_23c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(23)C
Corporation Tax
December 18, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C020624A

On June 24, 2002, a Petition for Advisory Opinion was received from Sempra Energy
Trading Corp., c/o Hodgson Russ LLP, James R. Maloney, One M&T Plaza, Suite 2000, Buffalo,
New York 14203.
The issue raised by Petitioner, Sempra Energy Trading Corp., is whether receipts from the
sale of natural gas to the Power Authority are exempt from the tax imposed under section 186-a of
Article 9 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a foreign corporation principally engaged in the purchase and sale of natural gas
throughout North America, including New York State. Petitioner’s sales include sales to the Power
Authority of the State of New York for the Power Authority’s consumption in New York State. All
sales by Petitioner to the Power Authority are in-state sales, i.e., transfer of title, possession and risk­
of-loss take place in New York State. The Power Authority is a corporate instrumentality of
New York State.
Applicable Law
Section 186-a of Article 9 of the Tax Law imposes an excise tax on the furnishing of utility
services. The tax is imposed on the “gross income” of “every utility ... doing business in [New
York State] which is subject to the supervision of the state department of public service,” and on the
“gross operating income” of “every other utility doing business in [New York State] which has a
gross operating income for the year ending December thirty-first in excess of five hundred dollars,
which taxes shall be in addition to any and all other taxes and fees imposed by any other provision
of law for the same period.” (Section 186-a.1)
Section 186-a.2 of the Tax Law contains definitions and provides, in part:
(a) the word “utility” includes every person ... subject to the supervision of
the state department of public service ... and also includes every person (whether or
not such person is subject to such supervision) who sells gas ... delivered through
mains [or] pipes ... or furnishes gas ... service, by means of mains [or] pipes ...
regardless of whether such activities are the main business of such person or are only
incidental thereto ...

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(b) the word “person” means persons, corporations, companies, associations,
joint-stock companies or associations, partnerships and limited liability companies
... except the state; municipalities, political and civil subdivisions of the state or
municipality and public districts (provided, however, that with respect to gas,
electricity and gas or electric service, including the sale of the transportation,
transmission or distribution of gas or electricity, such municipalities, political and
civil subdivisions and public districts shall be excluded from the definition of
“person” if they own and operate facilities which are used to generate or distribute
electricity or distribute gas and they distribute and sell such gas or electricity solely
at retail, solely within their respective jurisdiction; or provided, further, with respect
to the sale of electricity or the transportation, transmission or distribution of
electricity, a municipality shall be excluded from the definition of “person” if it sells
electricity at retail where all such electricity (excluding temporary substitution power
during outages or periods of reduced output) has been generated solely by and
purchased solely from the state or a public authority of the state) ...
(c) the words “gross income” mean and include receipts received in or by
reason of any sale, conditional or otherwise, (except sales hereinafter referred to with
respect to which it is provided that profits from the sale shall be included in gross
income) made or service rendered for ultimate consumption or use by the purchaser
in this state ... without any deduction therefrom on account of the cost of the property
sold, the cost of materials used, labor or services or other costs, interest or discount
paid, or any other expense whatsoever.
*

*

*

(5) “Gross income” also includes profits from the sale of securities; also
profits from the sale of real property growing out of the ownership or use of or
interest in such property; also profit from the sale of personal property (other than
property of a kind which would properly be included in the inventory of the taxpayer
if on hand at the close of the period for which a return is made); also receipts from
interest, dividends, and royalties, derived from sources within this state ... also profits
from any transaction (except sales for resale and rentals) within this state
whatsoever;
(d) the words “gross operating income” mean and include receipts received
in or by reason of any sale, conditional or otherwise, made for ultimate consumption
or use by the purchaser of gas ... or in or by reason of the furnishing for such
consumption or use of gas ... service in this state ....
Section 186-a.6 of the Tax Law provides that: “The tax imposed by this section shall be
charged against and be paid by the utility and may be added as a separate item to bills rendered by

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the utility to customers. Upon request the utility shall furnish a statement of the amount of tax
imposed by this section to its customers for bills rendered on or after January first, two thousand.”
Section 1002.1 of the Public Authorities Law (PAL) provides for the creation of the Power
Authority of the State of New York (Power Authority) which is “a corporate municipal
instrumentality of the state ... which shall be a body corporate and politic, a political subdivision of
the state, exercising governmental and public powers, perpetual in duration, capable of suing and
being sued, and having a seal, and which shall have the powers and duties hereinafter enumerated,
together with such others as may hereafter be conferred upon it by law.”
Section 1012 of the PAL contains an exemption from taxation for the Power Authority, and
provides, in part:
... the authority shall be regarded as performing a governmental function in
undertaking such projects and in carrying out the provisions of this title, and shall be
required to pay no taxes or assessments upon any of the property acquired by it for
such projects or upon its activities in the operation and maintenance thereof ....
Section 1014 of the PAL provides, in part:
The rates, services and practices relating to the generation, transmission,
distribution and sale by the authority, of power to be generated from the projects
authorized by this title shall not be subject to the provisions of the public service law
nor to regulation by, nor the jurisdiction of the department of public service.... and
wherever any provision of law shall be found in conflict with the provisions of this
title or inconsistent with the purposes thereof, it shall be deemed to be superseded,
modified or repealed as the case may require.
Opinion
In New York Telephone Company v County of Nassau, 122 AD2d 124, the defendant,
Nassau County, did not pay that portion of its telephone bills attributable to three taxes imposed
upon the plaintiff, New York Telephone Company, by New York State and local governments,
asserting that the policy of allowing the plaintiff to recover these tax payments from the consumer
as an operating expense was impermissible since New York State municipalities are exempt from
taxation unless otherwise stated. The Appellate Division held that the tax imposed under section
186-a on a utility constitutes a part of the operating costs of the utility, and held that the “imposition
of surcharges upon the defendant to recover these additional operating expenses is not the equivalent
of directly taxing the municipality.”
Pursuant to sections 1012 and 1014 of the PAL, the tax imposed under section 186-a of the
Tax Law may not be imposed on the Power Authority. This means that for purposes of section 186-a

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of the Tax Law, the Power Authority would not be treated as a utility under section 186-a.2(a) and
it would not be subject to the tax imposed under such section 186-a of the Tax Law.
In this case, Petitioner is a utility subject to the tax imposed under section 186-a of the Tax
Law. It is not clear from the facts, whether Petitioner is taxable on its gross income or its gross
operating income. However, in either case, its receipts from sales of natural gas for ultimate
consumption or use in New York State are taxable receipts. Petitioner’s sales of natural gas include
sales to the Power Authority for consumption or use by the Power Authority in New York State.
Following New York Telephone, supra, the tax imposed under section 186-a on the receipts
of a utility selling gas to end users, is an expense of the utility that may be included in the price that
the utility charges for the sale of the gas, and may be separately stated on the bill rendered to the
purchaser. However, the inclusion of such expense in the amount charged for the gas sold is not the
equivalent of directly taxing the purchaser of such gas.
Accordingly, the tax imposed under section 186-a of the Tax Law on Petitioner is an expense
of Petitioner that may be included in the amount charged for the sale of natural gas that is sold to the
Power Authority. However, the inclusion of such expense does not result in the imposition of such
section 186-a tax on the Power Authority itself. Therefore, Petitioner’s receipts from the sales of
natural gas to the Power Authority for the Power Authority’s consumption or use in New York State
are taxable under section 186-a of the Tax Law. The taxable receipts include the total charge for the
sale of such natural gas, without any deduction or exclusion for the expense of Petitioner attributable
to the tax imposed on Petitioner under section 186-a of the Tax Law that is included in such total
charge.

DATED: December 18, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.