A Delaware corporation exists purely as a passive title-transfer conduit at the US-Canada border -- taking momentary title to imported natural gas and instantly passing it to its own shareholders, with an escrow agent (not the corporation) handling the money, no office or employees in New York, and no profit earned on the gas. Does it owe New York's utility franchise tax or utility services tax if some shareholders end up consuming some of that gas themselves rather than reselling it?

Plain-English summary

This opinion follows up on an earlier one issued to the same petitioner, Boundary Gas, Inc. -- TSB-H-81(24)C, actually DATED April 9, 1981 per that ruling's own original text (the "1982" appearing in this ruling's citation below and in its own body text appears to be a citation typo or extraction artifact, not a second, later ruling) -- which had already concluded Boundary wasn't subject to the Tax Law § 186 utility franchise tax on gas companies. Boundary's entire function is to sit at the US-Canada border pipeline crossing, take instantaneous title to natural gas as it enters the country, and immediately pass that title along to Boundary's own stockholders -- who, per the original facts, purchase the gas mainly to resell it. Boundary has no New York office, doesn't advertise or hold a telephone listing here, has no employees or agents here (apart from an escrow agent), and owns no New York property. Payments for the gas don't even flow through Boundary -- they go to an escrow agent, who passes them directly to the Canadian seller, TransCanada. The Department had already described Boundary, aptly, as "a purely passive conduit."

The new wrinkle: two of Boundary's stockholders would now use accounting methods to attribute a PORTION of their gas purchases to their own consumption, rather than 100% resale, since the physical gas itself can't be traced to a specific source. The Department held this doesn't change Boundary's own nature and activities, so it doesn't disturb the prior conclusion that § 186 (which taxes companies "formed for or principally engaged in" supplying gas) doesn't reach Boundary.

But the new facts DID require analyzing a second tax for the first time: § 186-a, the tax on furnishing utility services, which (unlike § 186) reaches gas sold for the BUYER's ultimate consumption -- exactly the scenario the stockholders' new accounting would create for a slice of their purchases. Even so, the Department held Boundary still isn't "doing business" in New York, a threshold requirement for either statute (and a constitutional one, per National Bellas Hess v. Illinois). Boundary has no New York office, no employees or agents besides the escrow agent, no property, and doesn't control either the physical gas or the sale proceeds -- with respect to the money, the Department said Boundary "acts as a purely passive conduit," citing Ford Dealers Advertising Fund, Inc. v. Commissioner, a Federal tax case involving a similarly structured pass-through fund. Because Boundary itself isn't doing business in New York, neither the change in the stockholders' consumption accounting nor the § 186-a "ultimate consumption" test changes the bottom line: no New York utility tax liability.

What this means for you

Passive pass-through/conduit entities in multi-state supply chains

If your entity's ENTIRE function is to take and instantly transfer title (and never touch the money, which flows through an independent escrow or paying agent), the "doing business in New York" nexus threshold may not be met even where an underlying product ultimately reaches New York consumers -- because the ENTITY, not the product's path, is what's being tested for nexus.

Watch how buyer-side changes can raise a DIFFERENT tax even when the seller-side answer stays the same

This is a good illustration of how a single set of updated facts (some stockholders now self-consuming some gas) can leave one tax analysis unchanged (§ 186, based on the entity's own business) while triggering a fresh analysis under a DIFFERENT, related statute (§ 186-a, keyed to the buyer's ultimate use) -- both need to be checked whenever the buyer's use of a product changes, even if your own operations haven't.

Common questions

Q: Does a passive title-transfer entity avoid New York utility tax even if the product it passes through eventually gets consumed in New York?
A: Under this ruling's facts -- no New York office, employees, property, or control over funds -- yes: the entity itself isn't "doing business" in New York, which is the threshold nexus requirement for both the section 186 and section 186-a utility taxes.

Q: Why did the Department have to look at a different statute (186-a) here, when the original 1982 opinion only addressed section 186?
A: Because section 186-a specifically reaches gas sold for the buyer's ultimate consumption, which became a live question only once some stockholders' accounting began attributing part of their purchases to their own use rather than resale -- a fact pattern the earlier opinion didn't address.

Q: Can another passive conduit entity in a similar cross-border supply arrangement rely on this Opinion?
A: No. It binds the Department only as to Boundary Gas's own facts and can't be relied upon by other taxpayers, even those with a similarly structured pass-through arrangement.

Citations and references

Statutes and cases:

• Tax Law § 186 (utility franchise tax)
• Tax Law § 186-a (utility services tax; "gross operating income" and "doing business" requirements)
• Ford Dealers Advertising Fund, Inc. v. Commissioner, 55 T.C. 761, aff'd 456 F.2d 955 (5th Cir. 1972)
• National Bellas Hess v. Illinois, 380 U.S. 753
• Ammex Warehouse v. Procaccino, 85 Misc. 2d 327, aff'd 55 A.D.2d 535

Related ruling:

• TSB-H-81(24)C -- the original Advisory Opinion to the same petitioner (April 9, 1981), which first concluded Boundary wasn't subject to the section 186 utility franchise tax

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a82_16c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(16)C
Corporation Tax
December 9, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810903A

On September 3, 1981 a Petition for Advisory Opinion was received from Dickstein, Shapiro
and Morin on behalf of Boundary Gas, Inc., 2101 L Street, N.W., Washington, D.C. 20337.
The issue raised by Petitioner is whether Boundary Gas, Inc., under the circumstances
described below, would be subject to the franchise tax on water-works companies, gas companies,
electric or steam heating, lighting and power companies imposed under section 186 of the Tax Law,
or the tax on the furnishing of utility services imposed under section 186-a of the Tax Law. It is
concluded herein that it would not be subject to either of these taxes.
The facts set forth by Petitioner, and upon which this Advisory Opinion is based are, with
one exception, those set forth in Dickstein, Shapiro and Morin on behalf of Boundary Gas, Inc.,
Advisory Opinion, April 9, 1982, TSB-H-81(24)C. In addition to the facts set forth in such Advisory
Opinion, it is indicated that two of the Boundary stockholders will use accounting procedures which
will result in a portion of their purchases of natural gas from Boundary being allocated to
consumption by such stockholders, rather than to resale.
Section 186 of the Tax Law, contained in Article 9 thereof, imposes a franchise tax on "Every
corporation, joint-stock company or association, formed for or principally engaged in the business
of supplying water, steam or gas, when delivered through mains or pipes . . . " In the previous
Advisory Opinion issued to Petitioner it was determined that Boundary would not be subject to the
tax imposed under section 186 because the nature of its purposes and activities were not those
described in the quoted statutory provision. The fact that the two Boundary stockholders in question
may purchase gas from Boundary for their own use and consumption rather than for resale would
not change the nature of Boundary's purposes and activities and, accordingly, does not warrant
disturbing the conclusion reached in the previous Advisory Opinion.
Section 186-a of the Tax Law, also contained in Article 9 thereof, imposes a tax on the
furnishing of utility services. In the case of utilities not subject to the supervision of the Department
of Public Service, as is the case with respect to Boundary, the tax is equal to three per cent of the
"gross operating income" of every such utility doing business in New York which has an annual
gross operating income in excess of five hundred dollars. The term "utility" includes every "person,"
including every corporation, " . . . who sells gas . . . delivered through mains, pipes . . . .
regardless of whether such activities are the main business of such person or are only incidental
thereto . . . . " The term "gross operating income" means and includes " . . . receipts received in
or by reason of any sale, conditional or otherwise, made for ultimate consumption or use by the
purchaser . . . of gas . . . . "

ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-82(16)C
Corporation Tax
December 9, 1982

The previous Advisory Opinion held in effect that whatever else might be the case, Boundary
would have no liability under Section 186-a because it would have no operating income, "operating
income" being that income arising from sales of gas to ultimate consumers. It was understood from
Petitioner's initial statement of facts that all of the gas purchased by Boundary's stockholders would
be purchased for resale. It is now indicated that two of Boundary's stockholders purchase gas from
a number of sources, one of which will be Boundary, and utilize some of that gas for their own
purposes. It is stated that inasmuch as the gas so used cannot be identified as being derived from any
specific source, certain accounting methods are utilized in order to ascribe portions of it to specific
sources. Where gas sold by Boundary to a stockholder is used by such stockholder for its own use
or consumption (whether or not that customer's specific accounting methods indicate the same) the
revenue derived therefrom would constitute "operating income," within the meaning of section 186-a
of the Tax Law.
It is therefore necessary to make a determination, which it was not necessary to make in the
previous Advisory Opinion (with regard either to section 186 or 186-a of the Tax Law), as to
whether Boundary, a Delaware Corporation, could, under the described facts, be said to be "doing
business" in New York, as required by both statutory and constitutional considerations. A
consideration of this question in light of the unique set of facts set forth in the text of the previous
Advisory Opinion compels the conclusion that Boundary's activities would not constitute the doing
of business in New York. Thus, Boundary will not have an office in New York, will not advertise
or secure a telephone listing in New York, will not maintain any employees or agents (other than the
escrow agent) in New York, and will not own any facility or other property within New York.
Rather, as described, its sole function will be to take title to the gas sold by TransCanada on the
boundary between the United States and Canada and instantaneously to transfer title to such gas to
the Boundary shareholders, such transfers occurring entirely within the confines of a pipeline owned,
operated and controlled by a common carrier. Payments to Boundary are to be made not to Boundary
itself but to an escrow agent whose function is thereupon to transmit such payments directly to
TransCanada. Boundary is thus not only prohibited from deriving any profit from the sale of gas, it
has direct control of neither the gas nor the funds. With regard to the funds, indeed, it acts as a purely
passive conduit. See in this regard Ford Dealers Advertising Fund, Inc. v. Commission 55 T.C. 761,
aff'd 456 F.2d 955 (5th Cir., 1972). Accordingly, it is here concluded that Boundary's described
activities would not constitute "doing business" within the meaning of section 186-a of the Tax Law,
and Boundary would thus not be subject to the tax imposed thereunder. National Bellas Hess v.
Illinois, 380 U.S. 753, 18 L. Ed. 2d 505; Ammex Warehouse v. Procaccino, 85 Misc. 2d 327, aff'd
55 AD 2d 535.

DATED: December 2, 1982

s/FRANK J. PUCCIA
Director
Technical Services Bureau