Are a New York shortline railroad's gross earnings from hauling freight wholly within New York, as a connecting carrier on a trip that begins or ends outside the state, included in section 184 gross earnings?

Plain-English summary

Pasquale & Bowers (an accounting firm) asked about a New York "shortline" railroad -- a corporation that owns, say, 25 miles of track entirely within New York, between Points B and C, with 100% of its property and payroll in New York. It hauls freight only on its own in-state track, but as a connecting carrier: the through trips it participates in begin or end outside New York, handed off to or from other railroads that own the out-of-state track.

The question: are the railroad's gross receipts from those in-state hauls includible in gross earnings under section 184 of the Tax Law?

No. Section 184.1 imposes an additional franchise tax on a corporation principally engaged in operating a surface railroad, measured by its gross earnings from all sources within New York, but it excludes earnings derived from business of an interstate or foreign character. Because the railroad's in-state leg is part of a single interstate journey (origin or destination outside New York, moving across state lines via connecting railroads), the receipts are of an interstate character and are not included in section 184 gross earnings. Citing New York Cent. & Hudson Riv. R.R. Co., the Department treated the connecting in-state portion of an interstate trip as interstate business.

The statute's special mileage-ratio allocation (in-state mileage over total mileage) applies only where transportation both originates and terminates within New York while traversing another state -- not to the connecting-carrier situation here.

What this means for you

Interstate character follows the whole journey, not just your track

Even if your railroad's physical haul is entirely inside New York, when that haul is one leg of a through trip that begins or ends out of state, the receipts are interstate and excluded from section 184 gross earnings.

The mileage allocation has a narrow trigger

Section 184's in-state/total mileage ratio is for trips that both start and end in New York but pass through another state. It does not pull in connecting-carrier receipts from interstate journeys.

Property and payroll location does not change the result

Having 100% of property and payroll in New York did not make the interstate hauling receipts taxable under section 184; the interstate-character exclusion controls.

Common questions

Q: My shortline is all in New York. Aren't all my earnings New York earnings for section 184?
A: No. Earnings from the in-state leg of an interstate trip are excluded as interstate-character business, even though your track is entirely in New York.

Q: When does the mileage-ratio allocation apply?
A: Only to transportation that both originates and terminates within New York while crossing another state.

Q: Does being a connecting carrier (not the originating railroad) matter?
A: Yes -- that is exactly why the haul is part of an interstate journey and the receipts are excluded.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 184.1 (additional franchise tax on a surface railroad's gross earnings from sources within the state, excluding interstate or foreign earnings)
- New York Cent. & Hudson Riv. R.R. Co. (interstate journey earnings are of interstate character)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a95_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (2) C
Corporation Tax
February 24, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C941031A

On October 31, 1994, a Petition for Advisory Opinion was received from Pasquale &
Bowers, 90 Presidential Plaza, Suite 210, Syracuse, New York 13202.
The issue raised by Petitioner, Pasquale & Bowers, is whether the gross receipts generated
by a New York State "Shortline" railroad corporation on the transportation of freight solely within
New York State as a connecting carrier, for a trip whose origin is outside New York State or whose
destination is outside New York State, is includible in gross earnings under section 184 of the Tax
Law.
The corporation is incorporated under the laws of New York State. The origin and
destination points of the entire trip (including the other railroads) are never both within New York
State. The corporation provides connecting services to other railroads in which this corporations's
trip is solely within New York State. The corporation has 100% of its property and payroll within
New York State.
For example, XYZ corporation, a New York State railroad corporation, owns 25 miles of
track (the "Shortline"), all within New York State and located between Points B and C. Forty percent
of XYZ's gross earnings is from transportation of freight that originates outside of New York at Point
A, travels through Point B and terminates within New York State at Point C. Another 40% of its
gross earnings is from the transportation of freight that originates within New York State at Point
B, travels through Point C and terminates outside New York State at Point D. The final 20% of its
gross earnings is from the transportation of freight that originates outside of New York State at Point
A, travels through Points B and C in New York State and terminates outside of New York State at
Point D. XYZ does not own the railroad track between Points A and B or the railroad track between
Points C and D. All of XYZ's payroll is allocated to New York State.
Section 184.1 of the Tax Law imposes an additional franchise tax on:
...Every corporation principally engaged in the conduct of surface railroad..upon its
gross earnings from all sources within this state, excluding earnings derived from
business of an interstate or foreign character. Provided, however, with respect to
railroad ... business ... where the gross earnings from such transportation business
both originating and terminating within this state and traversing both this state and
another state ... such earnings shall be allocated to this state in the same ratio that the
mileage within the state bears to the total mileage of such business.
TP-9 (9/88)

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TSB-A-95 (2) C
Corporation Tax
February 24, 1995

In People ex rel New York Cent. & Hudson Riv. R.R. Co. v Miller, 94 App Div 587 (1904),
the taxpayer carried, wholly within New York State, express freights which were shipped from
points within New York State for delivery without the State or from points without New York State
for delivery within the State. The Court held that the taxpayer's business was of an interstate
character and that it was not subject to the franchise tax under section 184 of the Tax Law because
of the exclusion for business of an interstate character.
A comparable situation involving the shipment of grain and other products through the City
of Buffalo was presented in People ex rel Connecting Term. R.R. Co. v Miller, 178 NY 194 (1904).
The Court of Appeals held that the operations in question were a "mere link" in the transportation
of various goods in interstate commerce and that, as such, they were not subject to the franchise tax
under section 184 of the Tax Law.
In Matter of M & G Convoy, Inc., v State Tax Commission, 55 AD2d 204 (1976), a New
York corporation was engaged in transporting vehicles to dealers in the northeastern part of the
United States. The corporation maintained three terminals in New York State to which vehicles
were brought from out of State and then reloaded on the corporation's convoys and transported to
dealers in New York and throughout the Northeast. The Court held that the receipts from convoy
movements originating at one of the New York terminals and terminating within New York State
are not subject to the franchise tax imposed under section 184 of the Tax Law since the convoy
movements in question were part of the interstate flow of traffic and the receipts therefor fall within
the statutory exclusion for business of an interstate character. The Court stated that in reading New
York Cent. & Hudson Riv. R.R. Co., supra, and Connecting Term. R.R. Co., supra,
it is the long-settled law of this State not to tax operations such as petitioner's under
section 184 of the Tax Law. Moreover, that constitutional restraints upon the
taxation of interstate commerce by the State were lifted subsequent to those decisions
(see Western Live Stock v Bureau of Revenue, 303 US 250) does not alter our result
here because the statutory exclusion remains and the Legislature's numerous re­
enactments thereof in recent years without change serve clearly to establish the
continued validity of said exclusion as it has previously been interpreted and
construed by the courts.
Accordingly, pursuant to section 184 of the Tax Law and New York Cent. & Hudson Riv.
R.R. Co., supra, Connecting Term. R.R. Co., supra and M & G Convoy, Inc., supra, the gross
receipts generated by a New York State "Shortline" railroad corporation on the transportation of
freight, that transports solely within New York State as a connecting carrier, for a trip whose origin
is other than New York State via a different railroad corporation and/or whose final destination is
outside of New York State via a different railroad corporation, is not includible

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TSB-A-95 (2) C
Corporation Tax
February 24, 1995

in gross earnings from all sources within this State under section 184 of the Tax Law because such
gross receipts are derived from business of an interstate character.

DATED: February 24, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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