NY TSB-A-94(7)C Corporation Tax 1994-05-12

Is a new telephone-service provider a first- or second-class utility under section 186-a, and is it taxed under Article 9 (sections 183/184) or Article 9-A?

Short answer: It starts under Article 9-A and may shift to Article 9. RCN of New York, a new provider of local and long-distance telephone service over leased cable lines, is subject to Article 9-A franchise tax from its December 29, 1993 incorporation. It stays under Article 9-A unless and until it becomes principally engaged (more than 50% of receipts) in a telephone or transmission business, at which point it falls under sections 183 and 184 of Article 9 and out of Article 9-A (section 209.4). Separately, it will also owe the section 186-a tax (3.5%) whenever it furnishes telephone service with gross income over $500, regardless of whether that is its main or only an incidental activity; whether it is a first-class or second-class utility depends on whether it is subject to Public Service Commission supervision. The 186-a tax is in addition to Article 9-A or sections 183/184.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

RCN of New York, Inc. was incorporated in New York on December 29, 1993, to provide local and long-distance telephone service over leased lines of cable-TV companies; it had not yet begun business. It asked two things: (1) is it a "first-class" or "second-class" utility under section 186-a, and (2) is it taxed under Article 9 (sections 183/184) or Article 9-A?

On the franchise tax: Section 209.1 imposes the Article 9-A tax on every corporation for the privilege of having a franchise or doing business. Section 209.4 removes from Article 9-A any corporation taxable under sections 183-186 of Article 9. Sections 183/184 reach corporations principally engaged in a telephone, telegraph, or transmission business -- and "principally engaged" means more than 50% of receipts (Bucciero). Because RCN had not yet begun business, it is subject to Article 9-A from incorporation, and stays there unless and until it becomes principally engaged in a telephone or transmission business, at which point it moves to sections 183/184 and out of Article 9-A.

On the section 186-a utility tax: Section 186-a imposes a 3.5% tax on the gross income of utilities (defined broadly to include any person who sells telephony/telegraphy or furnishes telephone/telegraph service, whether that is the main business or only incidental). So RCN will also owe 186-a whenever it furnishes telephone service and has gross income over $500. Whether it is a first-class utility (subject to Public Service Commission supervision, taxed on gross income) or a second-class utility (not PSC-supervised, taxed on gross operating income) depends on whether it is subject to PSC supervision. The 186-a tax is in addition to Article 9-A or sections 183/184.

What this means for you

Telephone companies can sit in either franchise-tax article

A telecom corporation is under Article 9-A until it is principally engaged (over 50% of receipts) in a telephone/transmission business, then it shifts to sections 183/184 of Article 9 and leaves 9-A.

Section 186-a is a separate, additional tax

The 186-a utility tax applies on top of the franchise tax whenever the company furnishes telephone service with gross income over $500 -- even if telephony is only incidental to its main business.

PSC supervision sets the utility "class"

A utility subject to Public Service Commission supervision is first-class (taxed on gross income); one not supervised is second-class (taxed on gross operating income).

Common questions

Q: My new phone company hasn't started operating -- which franchise tax applies?
A: Article 9-A, from incorporation. You move to sections 183/184 only once you are principally engaged (over 50% of receipts) in a telephone or transmission business.

Q: Do I owe the 186-a utility tax too?
A: Yes, whenever you furnish telephone service with gross income over $500 -- it is in addition to your franchise tax, even if telephony is incidental.

Q: How do I know if I am a first- or second-class utility?
A: It turns on whether you are subject to Public Service Commission supervision. Supervised = first class; not supervised = second class.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax on every corporation)
- Tax Law section 209.4 (corporations taxable under sections 183-186 of Article 9 are not subject to Article 9-A)
- Tax Law section 183 (franchise tax on corporations principally engaged in a telephone, telegraph, or transmission business)
- Tax Law section 186-a (3.5% tax on the gross income of utilities, including any person furnishing telephone or telegraph service)
- Joseph Bucciero Contracting Inc., TSB-A-81(5)C (principally engaged = more than 50% of receipts)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (7) C
Corporation Tax
May 12, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C940224B

On February 24, 1994, a Petition for Advisory Opinion was received from RCN of New
York, Inc., 46 Public Square, Wilkes-Barre, Pennsylvania 18703.
The issues raised by Petitioner, RCN of New York, Inc., are whether it is a "first" or "second"
class utility for purposes of section 186-a of the Tax Law and whether it is subject to franchise tax
under Article 9 or Article 9-A of the Tax Law.
Petitioner will be a provider of both local and long distance telephone services. These
services will be provided in the future through the leased lines of affiliated and non-affiliated cable
television companies. Petitioner was incorporated in New York as of December 29, 1993 and has
not yet begun business.
Section 209.1 of Article 9-A of the Tax Law imposes the business corporation franchise tax
on every corporation, unless specifically exempt, for the privilege of exercising its franchise, or of
doing business, or of employing capital, or of owning or leasing property in New York State in a
corporate or organized capacity, or of maintaining an office in New York State.
Section 209.4 of the Tax Law provides that corporations liable to tax under sections 183
through 186, inclusive, of Article 9 of the Tax Law are not subject to tax under Article 9-A of the
Tax Law.
Section 183 of the Tax Law imposes a franchise tax on corporations formed for or principally
engaged in the conduct of a telephone or telegraph business, or formed for or principally engaged
in the conduct of two or more of such businesses or principally engaged in the conduct of a
transmission business. The tax is imposed on domestic corporations and corporations organized,
incorporated or formed under the laws of any other state for the privilege of exercising its corporate
franchise, or of doing business, or of employing capital, or of owning or leasing property in New
York State in a corporate or organized capacity, or of maintaining an office in New York State. The
tax is computed on the basis of the amount of the corporation's capital stock within New York State
during the preceding year, and upon each dollar of such amount.
Section 184 of the Tax Law imposes an additional franchise tax on corporations formed for
or principally engaged in the conduct of a telephone or telegraph business, or formed for or
principally engaged in the conduct of two or more of such businesses or principally engaged in the
conduct of a transmission business. The tax is imposed on domestic corporations and corporations
organized, incorporated or formed under the laws of any other state for the privilege of exercising
its corporate franchise, or .of doing business, or of employing capital, or of owning or leasing
property in New York State in a corporate or organized capacity, or of maintaining an office in New
York State. The tax is equal to three-quarters of one per centum on the corporation's gross earnings
from all sources within New York State.
TP-9 (9/88)

-2
TSB-A-94 (7) C
Corporation Tax
May 12, 1994

The determination of whether a corporation is subject to tax under Article 9-A or Article 9
of the Tax Law, depends on what activity the taxpayer is principally engaged in. Ordinarily, a
corporation is deemed to be principally engaged in the activity from which more than 50% of its
receipts are derived. See, e.g. Re Joseph Bucciero Contracting Inc., Adv Op St Tax Comm, July 23,
1981, TSB-A-81(5)C.
Section 186-a of the Tax Law imposes a tax equal to three and one-half percent of gross
income of utilities doing business in New York State which are subject to the supervision of the New
York State Department of Public Service which has gross income in excess of $500, and three and
one-half percent of the gross operating income of utilities, not subject to the supervision of the New
York State Department of Public Service, that is doing business in New York State which has gross
operating income in excess of $500. The word "utility" includes "every person ... who sells ...
telephony or telegraphy ... or furnishes ... telephone or telegraph service ... regardless of whether
such activities are the main business of such person or are only incidental thereto " The word
"person" means "persons, corporations, companies, associations " The imposition of this tax is in
addition to any tax that may be imposed under Article 9-A or sections 183 and 184 of Article 9 of
the Tax Law.
Pursuant to section 209.1 of the Tax Law, Petitioner is subject to franchise tax under Article
9-A of the Tax Law from the date of incorporation in New York State, December 29, 1993.
Petitioner will continue to be subject to tax under Article 9-A unless Petitioner becomes principally
engaged in the conduct of a telephone or transmission business. At such time, Petitioner would
become subject to tax under sections 183 and 184 of Article 9 of the Tax Law and cease to be subject
to tax under Article 9-A pursuant to section 209.4 of the Tax Law.
Petitioner will also be subject to tax under section 186-a of the Tax Law whenever Petitioner
sells telephony or telegraphy or furnishes telephone or telegraph service and is a utility of the first
class and has gross income in excess of $500, or is a utility of the second class and has gross
operating income in excess of $500, regardless of whether such activities are the main business of
Petitioner or are only incidental thereto. The tax imposed under section 186-a of the Tax Law is
imposed in addition to any tax imposed under Article 9-A or sections 183 and 184 of the Tax Law.
The determination of whether Petitioner would be a utility of the first class or a utility of the second
class will depend on whether Petitioner is subject to the supervision of the New York State Public
Service Commission.

DATED: May 12, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer-Services Division

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