When a gas utility transports natural gas that a customer or producer already owns or has under contract, under New York's 'contract carriage' program, do the utility franchise tax, the gross-income utility tax, MCTD surcharges, and sales tax apply to the fees the utility charges for that transport service?

Plain-English summary

The New York City Energy Office asked the Department how New York's utility taxes apply to "contract carriage" -- a Public Service Law § 66-d arrangement under which a gas utility transports natural gas that a consumer already owns, or that a producer has under contract to sell to a consumer, rather than selling the gas itself. The utility charges a fee for the transport, with terms set by the Public Service Commission. Four taxes were at issue:

1. Section 186 franchise tax (utility companies): applies to ALL contract-carriage fees, because "gross earnings" under Section 186 means all receipts from the employment of capital without deduction, and contract-carriage fees are receipts of the gas utility regardless of how the arrangement is structured.
2. Section 186-a tax (gross income of PSC-regulated utilities): applies differently depending on WHO does the transporting. If the utility itself moves the gas through its own pipelines, that's a "service rendered for ultimate consumption," so the full receipts count as taxable gross income (apportioned to New York State pipeline use if the utility's system crosses state lines). But if the utility instead CONTRACTS WITH OTHERS to transport the gas on the consumer's behalf, that's not a service "for ultimate consumption" in the statutory sense -- it's incidental to the utility's main business, so only the utility's PROFIT on the arrangement (not the gross receipts) is taxable, and only to the extent the service is rendered for a New York State consumer.
3. Sections 186-b/186-c MCTD surcharges: apply proportionally to any utility already subject to Section 186 or 186-a tax that does business within the 12-county Metropolitan Commuter Transportation District (New York, Bronx, Kings, Queens, Richmond, Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester counties), based on the ratio of the taxpayer's MCTD earnings/income to its statewide earnings/income.
4. Sales tax (Sections 1105, 1107, 1109): does NOT apply. No sale of gas takes place under contract carriage -- the utility is providing a transportation service, and transportation of goods isn't among the services subject to sales tax under those sections. The utility need not collect sales tax on contract-carriage fees.

This ruling became a foundational precedent. It is cited as the "direct precedent" in the later TSB-A-86(22)C, (49)S (Con Edison / NYC Public Utility Service Agency, 1986), which in turn is the direct precedent for the twin 1987 Westchester County preference-power rulings TSB-A-87(1)C, (4)S and TSB-A-87(2)C, (5)S -- a four-ruling citation chain spanning 1985 to 1987 on how New York taxes a utility's fee-for-service transport/distribution arrangements that fall short of an outright sale.

What this means for you

Gas utilities offering contract carriage

Expect the Section 186 franchise tax to apply to all contract-carriage fees regardless of structure. Whether the broader Section 186-a gross-income tax hits your FULL receipts or only your PROFIT turns on whether you transport the gas yourself through your own pipelines, or subcontract the transport to someone else on the customer's behalf. And you do not need to collect sales tax on contract-carriage fees, since it's a transportation service rather than a gas sale.

Utilities and municipal energy offices doing business in the MCTD

If you're already subject to Section 186 or 186-a tax and do business in the 12-county Metropolitan Commuter Transportation District, expect a proportional Section 186-b or 186-c surcharge on top, based on your MCTD share of earnings or income.

Accountants and tax professionals

This ruling's "self-transport vs. contract-with-others" distinction under Section 186-a recurs in this Department's later contract-carriage and preference-power rulings -- see the citation chain in Related rulings below, which traces essentially the same reasoning through 1986 and 1987.

Common questions

Q: Does sales tax apply when a gas utility just transports gas that the customer already owns?
A: No. Contract carriage is a transportation service, not a sale of gas, and transportation of goods isn't a taxable service under Sections 1105, 1107, or 1109.

Q: Does it matter whether the utility itself transports the gas versus hiring someone else to do it?
A: Yes, for the Section 186-a gross-income tax. Self-transport through the utility's own pipelines makes the full receipts taxable; contracting with others to transport on the consumer's behalf makes only the utility's profit on the arrangement taxable.

Q: Can a different utility or municipality rely on this Opinion?
A: No. It binds the Department only as to the facts presented by the New York City Energy Office and cannot be relied upon by another petitioner, even for a similar contract-carriage arrangement.

Citations and references

Statutes:

• Tax Law § 186, § 186-a, § 186-b, § 186-c
• Tax Law § 1105(b), § 1107, § 1109
• Public Service Law § 66-d

Related rulings (citation chain):

• TSB-A-86(22)C, (49)S -- Con Edison / NYC Public Utility Service Agency, cites this ruling as its direct precedent
• TSB-A-87(1)C, (4)S and TSB-A-87(2)C, (5)S -- twin 1987 Westchester County preference-power rulings tracing back to this same line of reasoning

Date note: The document header repeats "October 16, 1985" four times, but the sign-off line reads "DATED: October 15, 1985." This one-day gap is consistent with internal signing before the header/publication date; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a85_23c_49s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (23) C
Corporation Tax
TSB-A-85 (49) S
Sales Tax
October 16, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S841220A

On December 20, 1984, a Petition for Advisory Opinion was received from the New York
City Energy Office, 49 Chambers Street - Suite 720, New York, New York 10007.
Issues
At issue is whether and to what extent the (1) franchise tax on utility companies, (2) tax on
the furnishing of utility services, (3) temporary metropolitan transportation business tax surcharges,
and (4) sales tax apply to a "contract carriage" arrangement to transport natural gas owned by a
consumer or under contract for sale by a producer to a consumer.
Facts
Section 66-d of the Public Service Law requires a gas utility, under an arrangement called
"contract carriage," to transport or to contract with others to transport natural gas owned by a
consumer or under contract for sale by a producer to a consumer, under certain conditions. The gas
utility is permitted to charge a fee for the transport of natural gas under such contract carriage. The
Public Service Commission is authorized to establish the terms and conditions for contract carriage
and to fix the fee charged therefor.
Opinion
Issue (1)
Section 186 of the Tax Law imposes a 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, or electricity, or principally engaged in two or more such
businesses." The tax is based, in part, upon gross earnings from all sources within this state. The
term "gross earnings" as used in this section means all receipts from the employment of capital
without any deduction. Thus, the fees charged to a gas producer or a customer by a gas utility are
receipts of the gas utility and are included in the utility's gross earnings. Accordingly, the utility is
subject to the tax imposed under section 186 of the Tax Law on the fees imposed for such contract
carriage.
Issue (2)
The tax imposed by Section 186-a of Article 9 of the Tax Law relies heavily on the uniform
system of accounting prescribed by the Public Service Commission. It was the intent of the
legislature to tax:
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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Sales Tax
October 16, 1985

1. Receipts from sales made and services rendered (revenue accounts).
2. Receipts from the sale of inventory without reduction for cost of good sold.
3. Profits from any other transactions.
   We must, therefore, determine the proper classification of the receipts of a gas utility required
   to transport or to contract with others to transport natural gas owned by a consumer or under contract
   for sale by a producer to a consumer.
   Section 186-a provides in part:
   . . . . a tax equal to 3% of its gross income is hereby imposed on every utility doing business
   in this state which is subject to the supervision of the state department of public service. . .
   . . . . The word "utility" includes every person subject to the supervision of the state
   department of public service,. . . .
   . . . . The word "person" means persons, corporations, companies, associations, joint-stock
   associations, etc. . . .
   . . . . The words "gross income" mean and include receipts received in or by reason of any
   sale, conditional, or otherwise,. . . . made or service rendered for ultimate consumption or use
   by the purchaser in this state, . . . .
   . . . . Also profit from any transaction (except for sales for resale and rentals) within this State
   whatsoever. . . .
   Generally, "sales made and services rendered for ultimate consumption or use within this
   state" means sales of gas, electricity, steam, water, refrigeration, telephony or telegraph when
   delivered through mains, pipes or wires, sale of merchandise which are part of stock in trade, charges
   for transportation of passengers and/or goods, toll charges and service charges such as charges for
   installation and moving of telephones and for the delivery of messages. Thus, "sales made and
   services rendered" has been defined to include sale and services which are the principal business of
   the taxpayer and which are made to customers.
   In order to be included under the heading "profit from any other transaction whatsoever,
   except the profit on sales for resale and rentals," the profits must be from labor not performed in the
   conduct of the taxpayer's principal business and from the sales of materials and supplies, other than
   such as are purchased for resale. Isolated transactions also come under this item such as when a
   water company, which does not make a practice of furnishing this service, lays pipes and mains for
   a customer with title vesting in such customer.
   In one instance, the gas utility renders a service whereby it transports natural gas owned and
   ultimately consumed by the purchaser of the service. If the pipelines of the utility which renders the

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Corporation Tax
TSB-A-85 (49) S
Sales Tax
October 16, 1985
service are located entirely within New York State, the total gross income received by the utility as
a result of contract carriage is taxable to the utility under section 186-a of the Tax Law. If the
pipelines of the utility which renders the contract carriage service are located within and without
New York State and the natural gas is shipped in intrastate, interstate or foreign commerce, the gross
income received by the utility as a result of contract carriage from the use of New York State
pipelines is taxable to the utility under section 186-a of the Tax Law.
In the other instance where the utility contracts with others to transport the natural gas,
although a service is rendered , it is not a service "for ultimate consumption or use by the purchaser",
within the meaning intended so that the total "receipts" for such services does not constitute gross
income as defined. Contracting with others to transport natural gas owned by a consumer on behalf
of such consumer, is a service rendered but is incidental to the conduct of the utility's principal
business. As such, the service rendered is properly a transaction taxable on the profits derived
therefrom. To the extent that such service is rendered on behalf of a New York State consumer, such
profits would be subject to tax in their entirety.
Issue (3)
Section 186-b of the Tax Law imposes a temporary metropolitan transportation business tax
surcharge on any company subject to tax under section 186 of the Tax Law and exercising its
corporate franchise or carrying on its business in such corporate or organized capacity within the
metropolitan commuter transportation district (hereinafter "MCTD"). The surcharge is imposed
upon that portion of the taxpayer's section 186 tax which is attributable to the taxpayer's business
within the MCTD. Such district includes the counties of New York, Bronx, Kings, Queens,
Richmond, Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester.
Section 186-c of the Tax Law imposes a tax surcharge on every utility subject to tax under
section 186-a of the Tax Law and doing business in the MCTD. The surcharge is imposed upon the
portion of the taxpayer's section 186-a tax which is attributable to the taxpayer's business activity
within the MCTD.
In the case of a utility subject to tax under section 186 of the Tax Law, the portion of the tax
attributable to business activity carried on within the MCTD is determined by multiplying the tax
by the ratio of the taxpayer's gross earnings from business activities carried on within the MCTD to
its gross earnings from business activities carried on within New York State.
In the case of a utility subject to tax under section 186-a and subject to the supervision
of the State Public Service Commission, the portion of the tax attributable to gross income from
business activity carried on within the MCTD is the ratio of the taxpayer's gross income from all
sources within the MCTD to the gross income from all sources within New York State.
Thus, for corporations subject to tax under sections 186 and 186-a, and carrying on
business in the MCTD, a tax under sections 186-b and 186-c would be due.

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Corporation Tax
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October 16, 1985
Issue (4)
Section 1105(b) of the Tax Law imposes a sales tax on "the receipts from every sale, other
than sales for resale, of gas, electric refrigeration and steam service of whatever nature. . . ."
Section 1107 of the Tax Law imposes a temporary municipal assistance tax within the City
of New York on the same receipts subject to tax under section 1105 of the Tax Law.
Section 1109 of the Tax Law imposes an additional tax within the MCTD on the same
receipts subject to tax under section 1105 of the Tax Law.
As stated above, no sale of the gas takes place under a contract carriage. Rather, the
gas utility is providing the service of transportation of goods. Such service is not among the services
subject to sales tax pursuant to the provisions of sections 1105, 1107 and 1109 of the Tax Law.
Accordingly, a gas utility engaged in contract carriage is not required to collect sales tax on the fees
paid for such contract carriage.

DATED: October 15, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.