Is a qualifying cogeneration facility exempt from the section 189 gas-importer tax on the natural gas it imports to make electricity and steam for its thermal energy host?

Plain-English summary

Buffalo Paperboard Corporation planned to have a wholly owned subsidiary, Buffalo Power Corporation, build a topping-cycle cogeneration facility on Buffalo Paperboard's premises. Buffalo Power would sell steam and electricity to Buffalo Paperboard (the thermal energy host), which would use both in its production. The facility would be a qualifying cogeneration facility under section 201 of the federal Public Utility Regulatory Policies Act of 1978 (PURPA) -- its useful thermal output exceeds 15% and its useful power plus half its useful thermal output is at least 42.5% of total energy input (here 44.9%).

The question: is the natural gas Buffalo Power imports to run that facility exempt from New York's section 189 gas-importer tax (4.25% plus surcharges on imported gas services)?

Yes, for the qualifying portion. Section 189.6 exempts gas imported by a cogeneration facility (defined in Public Service Law section 2.2-a, or a PURPA section 201 qualifying facility) and used to generate electricity and/or steam supplied to and used by a thermal energy host at or near the project site. Because Buffalo Power is a PURPA-qualifying facility supplying steam and electricity to Buffalo Paperboard, its thermal energy host on the same premises, it meets section 189.6. The exempt portion is set by the statutory BTU formula: total gas used multiplied by a fraction whose numerator is the BTU value of the steam plus the electricity used by the host, and whose denominator is the total BTU value of all useful steam and electricity the facility produces.

What this means for you

The exemption keys on PURPA qualification plus a thermal host

To claim section 189.6, the facility must be a cogeneration facility under Public Service Law section 2.2-a or a PURPA section 201 qualifying facility, and the energy it makes must be supplied to and used by a thermal energy host at or near the site.

The exemption is partial, fixed by a BTU fraction

Only the share of imported gas tied to host-used steam and electricity is exempt. The statute prescribes the exact BTU fraction; gas attributable to output not used by the host stays taxable.

Same-premises subsidiary structure works here

Buffalo Power being a separate subsidiary on the host's premises did not defeat the exemption -- what mattered was qualifying-facility status and supply to the thermal host.

Common questions

Q: Does my cogeneration plant have to be PURPA-qualified to get the exemption?
A: It must be a cogeneration facility under Public Service Law section 2.2-a or a PURPA section 201 qualifying facility. Buffalo Power qualified under PURPA.

Q: Is all of my imported gas exempt?
A: No. Only the portion tied to steam and electricity actually used by the thermal energy host, computed by the section 189.6 BTU formula.

Q: Can the cogenerator be a separate company from the host?
A: Yes. Here the cogenerator was a wholly owned subsidiary of the host on the same premises, and the exemption still applied.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 189 (4.25% tax on every gas importer on imported gas services)
- Tax Law section 189.6 (exemption for gas used by a qualifying cogeneration facility to make electricity/steam supplied to a thermal energy host at or near the site)
- Public Service Law section 2.2-a (cogeneration facility)
- Public Utility Regulatory Policies Act of 1978 section 201, Public Law 95-617 (qualifying cogeneration facility)

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_3c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-95 (3) C
Corporation Tax
February 24, 1995

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C941031C

On October 31, 1994, a Petition for Advisory Opinion was received from Buffalo Paperboard
Corporation, 470 Ohio Street, Lockport, New York 14094.
The issue raised by Petitioner, Buffalo Paperboard Corporation, is whether a co-generator,
Buffalo Power Corporation, would be exempt from the tax imposed under section 189 of the Tax
Law on the purchase of imported natural gas.
Buffalo Power Corporation would be a qualified co-generation facility under section 201 of
the Public Utility Regulatory Policies Act of 1978 in that: (1) the facility is a topping cycle co­
generation facility; (2) the useful thermal energy output will exceed 15% of output; and (3) the useful
power output plus one-half of the useful thermal output will be no less than 42.5% of the total energy
input.
The total energy input would be distributed as follows, producing a total of 44.9% useful
power output plus 1/2 of the useful thermal output:
9.1%
82.5%
3.7%
4.7%
100%

Boiler Losses
Thermal Output Process Steam X 1/2 =
Electric Power
X1
=
Electric Turbine Losses
Totals

--­
41.2%
3.7%
--­
44.9%

Buffalo Power Corporation will be a wholly owned subsidiary of its thermal energy host,
Petitioner, located on the same premises.
Buffalo Power Corporation will sell steam and electricity to Petitioner. Petitioner will use
both steam and electric power in production. Some of the thermal energy (steam) will drive a shaft
turbine which will produce power. However, that power generation will be done by Petitioner, the
host, and will be considered part of the production process.
Section 189 of the Tax Law imposes a tax on every gas importer at the rate of 4 1/4% (plus
applicable surcharges) of the consideration given or contracted to be given for gas services imported
or caused to be imported into New York State.
Section 189.6 of the Tax Law provides that a portion of gas services imported by a co­
generation facility, as defined in section 2.2-a of the Public Service Law or a qualifying facility
which is a co-generation facility pursuant to section 201 of the Public Utility Regulatory Policies Act
of 1978 (Public Law 95-617), and used to generate electricity and/or steam produced by such facility
when such electricity and/or steam is supplied and used by a thermal energy host located at
TP-9 (9/88)

-2­
TSB-A-95 (3) C
Corporation Tax
February 24, 1995
or near the project site shall be exempt. The portion of natural gas services which is exempt is
determined by multiplying the total amount of natural gas used by such facility by a fraction, the
numerator of which is the BTU value of the steam used by such host plus the BTU value of the
electricity used by such host and the denominator of which is the total BTU value of all the useful
steam and electricity produced by the facility.
Herein, Petitioner states that Buffalo Power Corporation will be a qualifying co-generation
facility pursuant to section 201 of the Public Utility Regulatory Policies Act of 1978. Buffalo Power
Corporation will generate electricity and steam which will be supplied to and used by Petitioner, a
thermal energy host located on the same premises. Accordingly, Buffalo Power Corporation will
meet the requirements of section 189.6 of the Tax Law and the portion of natural gas imported into
New York State by Buffalo Power Corporation that will be exempt from the tax imposed under
section 189 of the Tax Law is determined by the formula contained in such section 189.6 of the Tax
Law.

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.