For sections 186 and 186-a, are a utility's taxable gross earnings/gross income the reduced amounts actually billed to customers under a PSC-approved rate-reduction plan, or the higher pre-reduction figures shown in its accounting true-up entries?
Plain-English summary
Long Island Lighting Company (LILCO) settled RICO and common-law lawsuits with a Rate Reduction Plan (RRP) that cut what it collects from ratepayers by $390 million over ten years, implemented through PSC-approved tariffs that lower customer bills. For accounting, LILCO also books monthly "true-up" entries against the settlement liability and non-cash entries that restore book electric operating income to its pre-reduction level (to ensure it never recovers the refunded money through rates). It asked: for sections 186 and 186-a, are its taxable receipts the reduced amounts actually billed, or the higher pre-reduction figures reflected in the accounting entries?
The amounts actually billed. "Gross earnings" under section 186 is "all receipts from the employment of capital," and "receipts" carries its ordinary meaning -- what is actually received. So the receipts includable in section 186 gross earnings and section 186-a gross income are the amounts billed to customers under the PSC-approved tariffs (i.e., the reduced amounts). The GAAP true-up entries and the non-cash entries restoring book operating income are not "receipts." (The section 186-a regulations confirm this: Question 22 says a utility includes the net amount the customer actually pays, not the higher gross figure.)
What this means for you
Utility tax follows what customers actually pay
Section 186/186-a receipts are the amounts actually billed and received under the PSC-approved tariffs -- so a genuine, PSC-approved rate reduction reduces taxable gross earnings and gross income.
Book accounting entries are not "receipts"
Non-cash GAAP entries that true-up a liability or restore book operating income to a pre-reduction level do not create taxable receipts; only actual amounts received from customers count.
Net-of-reduction billing controls
As with a prompt-payment discount (regulation Question 22), the utility includes the net amount the customer actually pays, not a grossed-up figure.
Common questions
Q: Does a PSC-approved rate reduction lower my section 186/186-a tax base?
A: Yes. The taxable receipts are the reduced amounts actually billed to customers under the approved tariffs.
Q: Do the book true-up entries add to taxable gross earnings?
A: No. The GAAP true-up and the non-cash entries restoring book operating income are not "receipts."
Q: Is tax based on gross or net billed amounts?
A: The net amount the customer actually pays, consistent with the section 186-a regulations.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 186 (utility franchise tax; "gross earnings" = all receipts from the employment of capital, no deductions)
- Tax Law section 186-a and 186-a.2(c) (gross income tax on PSC-supervised utilities; receipts from sales/services)
- 20 NYCRR 501.4 (regulations under section 186-a; Question 22 -- include the net amount actually paid after a discount)
- Companion LILCO opinion: sale-leaseback gain, TSB-A-95(9)C
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_6c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-95 (6) C
Corporation Tax
March 31, 1995
Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C941031H
On October 31, 1994, a Petition for Advisory Opinion was received from Long Island
Lighting Company, 175 East Old Country Road, Hicksville, New York 11801.
The issue raised by Petitioner, Long Island Lighting Company, is whether the amounts
subject to tax under sections 186 and 186-a of the Tax Law are the amounts billed to and received
from customers pursuant to Petitioner's rate tariffs established by the New York State Public Service
Commission ("PSC") in conformance with the Settlement Agreement.
Petitioner is a publicly-held utility corporation subject to the supervision of the PSC and
subject to tax under sections 186 and 186-a of the Tax Law.
On February 14, 1989, Petitioner entered into an agreement ("Settlement Agreement")
settling certain civil lawsuits brought against Petitioner under the Federal Racketeer Influenced and
Corrupt Organizations Act ("RICO"), 18 USCS 1961 et seq. and under the common law of New
York State. These lawsuits had alleged that Petitioner fraudulently misled the PSC and the public
concerning the cost of construction and completion of its Shoreham and Jamesport nuclear
generating facilities. Petitioner denied all wrongdoing of any kind and denied all liability. The
Settlement was reached in the interest of avoiding further expense, to dispose of burdensome and
protracted litigation, and to permit the continued operation of Petitioner's affairs unhindered by
expensive litigation and by distraction and diversion of Petitioner's personnel.
On June 28, 1989, at Petitioner's annual shareholders' meeting, the Settlement Agreement
was approved by Petitioner's shareholders and on October 30, 1990, the U.S. District Court ordered
that the effective date of the Agreement would be December 1, 1990.
The Settlement Agreement, as modified by the Court, establishes a Rate Reduction Plan
("RRP") pursuant to which Petitioner is required to reduce the amount it receives from its ratepayers
by $390 million over a 10 year period, beginning December 1, 1990. As described below, a $10
million payment to a fund for former ratepayers was deducted from the initial $20 million rate
reduction. The annual rate reductions required by the Settlement Agreement are to be accomplished
in accordance with the following schedule, commencing on the month and year indicated:
Dec. 1990
June 1991
June 1992
June 1993
June 1994
TP-9 (9/88)
May 1991
May 1992
May 1993
May 1994
May 1995
$ 20 million
$ 20 million
$ 20 million
$ 30 million
$ 30 million
-2
TSB-A-95 (6) C
Corporation Tax
March 31, 1995
June 1995
June 1996
June 1997
June 1998
June 1999
-----TOTAL
May 1996
May 1997
May 1998
May 1999
May 2000
$ 40 million
$ 50 million
$ 60 million
$ 60 million
$ 60 million
$390 million
All rate reductions required to date have been made. Under the RRP, the ratepayers'
individual monthly bills are to be reduced over a ll4-month period. Petitioner is required to reduce
rates to its ratepayers in proportion to the electric rate payments that would otherwise have been
made by each ratepayer. The RRP provides for a percentage reduction in each monthly bill, with
such percentage calculated as the ratio of (1) the total dollar amount of the required rate reduction
for the year, divided by (2) Petitioner's anticipated revenue for that year as established in Petitioner's
rates filed with the PSC. Any deficiency or overage between the actual rate reductions in a given
year and the reductions required for that year under the RRP are applied to the rate reductions for
the following year with an interest factor.
Under the Settlement Agreement, Petitioner is required to file tariffs with the PSC showing
its methodology for adjusting the customer bills pursuant to the RRP. Petitioner must also certify
in each rate application that it has not sought nor been provided with any rate revenue which recovers
any portion of these rate reductions.
Petitioner's rate tariffs, as approved by the PSC, reflect the rate reductions as required by the
RRP established pursuant to the Settlement Agreement. Accordingly, Petitioner's approved PSC
tariffs are lower than they would have been absent the Settlement Agreement.
Under the Settlement Agreement, Petitioner was also required to establish a Former
Ratepayer Fund in the amount of $10 million for the purpose of satisfying the claims of former
ratepayers and claims of the United States of America for reimbursement of electric utility payments
that the United States had paid directly to Petitioner on behalf of former ratepayers or indirectly to
Petitioner through former ratepayers. Petitioner was permitted to subtract the $10 million Former
Ratepayer Fund from the $20 million annual rate reduction effective December 1, 1990.
Accordingly, the first year's reductions amounted to a $10 million deposit into the Former Ratepayers
Fund, and a $10 million reduction to the PSt-approved tariffs for existing customers to be reflected
in filings commencing, December 1, 1990.
Petitioner also agreed to pay the reasonable attorneys' fees and litigation expenses of Class
Counsel, Suffolk County, and the Government's Counsel, up to a maximum of $10 million.
Payments of these litigation expenses did not reduce the RRP rate reductions.
Payments to the Former Ratepayer Fund and for attorneys' fees and litigation expenses were
made from revenues actually received by Petitioner upon which the gross earnings and gross income
taxes have been paid. Since these amounts did not reduce the gross receipts of Petitioner, their tax
treatment is not at issue.
-3
TSB-A-95 (6) C
Corporation Tax
March 31, 1995
On June 28, 1989, Petitioner's shareholders approved the Class Settlement, thereby
establishing a $400 millon liability pursuant to the Settlement Agreement to present and former
ratepayers. In accordance with Generally Accepted Accounting Principles, Petitioner was required
to record a liability and corresponding charge to earnings for $160 million, representing the present
value of the $390 million due ratepayers and $10 million in plaintiff's legal fees.
Beginning December 1, 1990, pursuant to an order of the Court, monthly rate reductions were
reflected in the electric tariffs charged to Petitioner's electric customers. Concurrently, at the end
of each month Petitioner makes accounting entries to both true-up the liability and to recognize the
rate reductions reflected in the customers' billings for the month. Additional non-cash entries are
also made to restore electric operating income to a level prior to the rate reductions as required by
both the PSC and the Settlement Agreement, to ensure that Petitioner will not recover any of the
monies returned from its customers through rates.
During the years 1990, 1991, 1992 and 1993 Petitioner returned through monthly rate
reductions $924,768, $19,473,212, $19,026,139, and $25,301,604, respectively. These rate
reductions will continue through May, 2000 to fully liquidate the $390 million refund liability.
Section 186 of the Tax Law imposes a tax on every corporation 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 New York State. The term "gross earnings" as used in this
section means all receipts from the employment of capital without any deduction.
The term "receipts" is not defined in section 186 of the Tax Law. However, "words of
ordinary import are to be construed according to their ordinary and popular significance, and are to
be given their ordinary and usual meaning" (McKinney's Cons Laws of NY, Book 1, Statutes section
232).
The term "receipt" is defined, in part, in Black's Law Dictionary (Sixth Edition) as the "act
of receiving; also the fact of receiving or being received; that which is received. That which comes
in, in distinction from what is expanded, paid out, sent away, and the like." Further, the term "gross
receipts" is defined in Black's Law Dictionary (Sixth Edition) as the "total amount of money or the
value of other considerations received from selling property or from performing services."
Herein, pursuant to section 186 of the Tax Law, the amounts billed to Petitioner's electric
customers pursuant to the PSt-approved tariffs, which reflect the rate reduction as required by the
Settlement Agreement constitute the receipts from such customers that are includable in Petitioner's
"gross earnings" for purposes of section 186 of the Tax Law. The amounts reflected in the
accounting entries Petitioner is required to make each month, in accordance with Generally Accepted
Accounting Principles, to "true-up" the liability and to recognize the rate reductions reflected in the
customers' billings for the month are not "receipts" of Petitioner. Further, the amounts reflected in
the non-cash entries required by both the PSC and the Settlement Agreement that are made to restore
-4
TSB-A-95 (6) C
Corporation Tax
March 31, 1995
electric operating income to a level prior to the rate reductions to ensure that Petitioner will not
recover any of the monies returned from its customers through rates are not "receipts" of Petitioner.
Section 186-a of the Tax Law imposes a gross receipts tax on the gross income of every
utility doing business in New York State which is subject to the supervision of the New York State
Department of Public Service. Section 186-a.2(c) states that
the words "gross income" mean and include receipts received in or by reason of any
sale, conditional or otherwise (except sales hereinafter referred to with respect to
which it is provided that profits from the sale shall be included in gross income)
made or service rendered for ultimate consumption or use by the purchaser in this
state, including cash, credit and property of any kind or nature (whether or not such
sale is made or such service is rendered for profit), without any deduction therefrom
on account of the cost of property sold, the cost of material used, labor or services or
other costs, interest or discount paid, or any other expense whatsoever.
Section 501.4 of the regulations promulgated pursuant to section 186-a of the Tax Law
provides that there shall be included in gross income, receipts from sales made and services rendered
for ultimate consumption or use in New York State by the purchaser. Question 22 of such section
states as follows:
Question 22: A utility renders a bill to a consumer showing the gross amount due to
be $4.00, but stating that, if payment is made within 30 days, $3.69 will be accepted
in full settlement. The consumer pays the net amount of $3.69. How much should
be included by the utility in gross income? Answer: $3.69.
Accordingly, pursuant to section 186-a of the Tax Law and the regulations promulgated
thereunder, the amounts billed to Petitioner's electric customers pursuant to the PSC-approved tariffs,
which reflect the rate reduction as required by the Settlement Agreement constitute the "receipts"
from such customers that are includable in Petitioner's "gross income" for purposes of section 186-a
of the Tax Law. The amounts reflected in the accounting entries Petitioner is required to make each
month, in accordance with Generally Accepted Accounting Principles, to "true-up" the liability and
to recognize the rate reductions reflected in the customers billings for the month are not "receipts"
of Petitioner. Further, the amounts reflected in the non-cash entries required by both the PSC and
the Settlement Agreement that are made to restore electric operating income to a level prior to the
rate reductions to ensure that Petitioner will not recover any of the monies returned from its
customers through rates are not "receipts" of Petitioner.
DATED: March 31, 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.