Are the corporate partners of a natural-gas storage partnership taxed under Article 9 or Article 9-A, and is the partnership subject to section 186-a on its storage and incidental gas-sale receipts?

Plain-English summary

Avoca Natural Gas Storage is a New York general partnership (four unrelated corporate partners) that built and operates an underground natural-gas storage facility. Customers' gas is withdrawn from an interstate pipeline at the Interconnection and piped a few hundred yards into Avoca's storage caverns, then injected back into the pipeline; customers arrange all transportation beyond the Interconnection. Avoca charges deliverability, injection, withdrawal, and compressor-fuel charges, and expects to own/sell gas only on a very limited basis (under 10% of revenues). It is FERC-regulated, not PSC-regulated. The questions: are its corporate partners taxed under Article 9 (sections 183/184 or 186) or Article 9-A, and is Avoca subject to section 186-a?

The Department held:

• Corporate partners pick up the partnership's character. Under 20 NYCRR 1-3.2(a)(5) (and Partners of Buffalo Telephone), if the partnership exercises an Article 9-A (or Article 9) privilege, its corporate partners are taxed accordingly.
• Avoca is not a transportation/transmission business (sections 183/184) -- moving gas a few hundred yards is incidental to storage; and it is not principally supplying gas through mains or pipes (section 186), because gas sales are under 10% of receipts and storage exceeds 50%.
• So the corporate partners are subject to Article 9-A by reason of Avoca's activities (a partner could still be an Article 9 taxpayer based on its own other activities).
• Section 186-a: Avoca's gas-storage business is not a utility activity, so storage receipts are not gross operating income; but where Avoca sells gas it owns for ultimate New York consumption, those sale receipts are subject to section 186-a.

What this means for you

Gas storage is not transportation or "supplying gas"

A storage facility that only moves customers' gas a short distance to and from its caverns is not principally engaged in transportation/transmission (sections 183/184), and is not supplying gas through mains or pipes (section 186) when gas sales are a small fraction of its receipts.

Corporate partners are taxed by the partnership's character -- usually Article 9-A here

Corporate partners take on the partnership's classification; because the storage partnership is not an Article 9 utility/transportation business, its corporate partners are subject to Article 9-A (unless a partner is itself an Article 9 taxpayer on its own other activities).

Section 186-a applies to gas sales, not storage

Storage receipts are not section 186-a gross operating income, but if the partnership sells gas it owns for New York consumption, those sale receipts are taxed under section 186-a.

Common questions

Q: Are the corporate partners of a gas-storage partnership Article 9 or Article 9-A taxpayers?
A: Article 9-A, because the storage partnership is not principally a transportation/transmission business or a gas supplier -- unless a partner is itself an Article 9 taxpayer on its own activities.

Q: Is the gas-storage business subject to section 186-a?
A: No. Storage receipts are not gross operating income. Only the partnership's actual gas sales for New York consumption are subject to section 186-a.

Q: Does moving gas a few hundred yards make it a transportation business?
A: No. That movement is incidental to the storage business, not a transportation or transmission business.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A); section 209.4 (corporation liable under sections 183-186 is not subject to 9-A)
- Tax Law sections 183 and 184 (transportation or transmission); section 186 (supplying gas through mains/pipes); section 186-a (utility; gross operating income)
- 20 NYCRR 1-3.2(a)(5) (corporate partner taxable when the partnership exercises a privilege); Partners of Buffalo Telephone Company, TSB-A-89(3)C
- McAllister Bros., Inc. v. Bates, 272 AD 511; Re Joseph Bucciero Contracting, TSB-A-81(5)C (more-than-50-percent-of-receipts test)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_10c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (10) C
Corporation Tax
March 25, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C951018A

On October 18, 1995, a Petition for Advisory Opinion was received from Avoca Natural Gas
Storage, Mackey Road, Avoca, New York 14809.
The issues raised by Petitioner, Avoca Natural Gas Storage, are (1) whether the corporate
partners of Petitioner are subject to franchise tax under sections 183 and 184, or under section 186
of the Tax Law as a result of Petitioner's gas storage business, and (2) whether Petitioner is subject
to tax under section 186-a of the Tax Law on its receipts attributable to the storage of gas and
receipts from incidental sales of gas.
Petitioner is a New York general partnership formed for the purpose of developing,
constructing, owning and operating an underground natural gas storage facility located near the town
of Avoca in western New York State (the "Project"). The Project will provide high deliverability
gas storage services to wholesale gas users in the northeast marketplace.
The sole business of Petitioner is the development, construction, ownership, operation and
maintenance of the Project. Petitioner's partners are four separate and unrelated corporations. The
business activities of three of the corporate partners, generally, are limited to their involvement in
Petitioner. The fourth corporate partner, which holds an 11 percent interest in Petitioner, also holds
interests in other energy businesses.
The Project will consist of several underground storage caverns that collectively will be able
to store a large quantity of natural gas (approximately 5 billion cubic feet, and the Project may be
expanded in the future.) The Project also will include facilities to handle the gas to be stored at the
facility, including compression, dehydration, filtration/separation and metering equipment. The gas
handling facility also will include all necessary piping, controls and electrical components.
Petitioner has entered into gas storage service agreements for a substantial portion of the
Project's storage capacity, and anticipates entering into agreements for the entire capacity of the
storage caverns prior to the time the Project is placed in service. Petitioner expects that its gas
storage customers will be gas distribution utilities, wholesale gas suppliers, and industrial users, who
will utilize the Project's storage to balance supply and demand for gas. The Project expects to have
contracts with customers for long-term storage service covering periods of 15 to 20 years. The long­
term storage service contracts generally provide for the payment of four charges: (i) a monthly
deliverability charge, (ii) a commodity injection charge, (iii) a commodity withdrawal charge, and
(iv) a compressor fuel charge, all of which relate directly to the storage of gas at the Project.
TP-9 (9/88)

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TSB-A-96 (10) C
Corporation Tax
March 25, 1996
The Project site is traversed by an interstate gas pipeline, which is owned by a company
unrelated to Petitioner or any of its partners. The Project will connect to the interstate gas pipeline
(the "Interconnection"), and will include piping to transport gas to and from its storage facility, a
distance of only a few hundred yards.1
Under the gas storage agreements with its customers, the gas to be stored at the Project is
made available at the point of Interconnection with the interstate gas pipeline. That is, gas that a
customer desires to store will be withdrawn from the interstate gas pipeline at the Interconnection
and piped into the gas storage facility, and gas to be redelivered to a customer will be injected into
the interstate gas pipeline at the same point of Interconnection. The Project's gas storage customers
will be responsible for arranging pipeline transportation beyond the Interconnection point for all gas
delivered to or from the Project's storage facility. Accordingly, Petitioner will not transport gas
along the interstate pipeline, but will transport gas only the few hundred yards between the
Interconnection with the interstate pipeline and its storage facility.
Petitioner anticipates taking title to and selling natural gas stored at the facility only on a very
limited basis, if at all, because virtually all gas to be stored at the Project, including "base gas"
(which is necessary to fill the storage caverns to a sufficient degree to permit volumes of gas to be
injected and withdrawn from the Project on an operational basis) will be owned by the Project's
customers. The only cases where the Project might acquire title to gas and make limited sales of gas
are in connection with: (i) Petitioner's acquisition of gas initially for testing the Project's storage
caverns for which Petitioner expects to be reimbursed by the gas customers, and (ii) Petitioner's
acquisition of gas from customers to be used as fuel for the Project's compressors (approximately
two percent of the volume of gas stored at the facility). If the Project elects to use other sources of
fuel for its compressors, such as electricity, Petitioner may sell the compressor gas to which it is
entitled or, alternatively, charge its customers an additional amount for the compressor fuel in lieu
of receiving gas. Even if Petitioner were to obtain and subsequently sell the compressor fuel, the
amount of revenue from these sales would be only a small percentage of the revenue it expects to
receive from its storage service (less than 10 percent).
The Project is regulated by the Federal Energy Regulatory Commission ("FERC") as a
market-based rate facility, and has received FERC approval of its rates. Because the Project is
subject to the jurisdiction of and supervision by the FERC, the Project will not be subject to rate or
tariff supervision by the New York State Department of Public Service.

1
Affiliates of two gas storage customers of the Project are expected to construct additional
"lateral" pipelines to connect the Project to their own interstate pipeline systems. These lateral
pipelines will be constructed on right of ways acquired by the customers' pipeline affiliates, and will
interconnect with the Project at the Project site, near to the Interconnection point with the existing
pipeline. The lateral pipelines will be constructed, owned and operated by the customers' pipeline
affiliates; neither the Project nor the partners will own or operate these pipelines.

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TSB-A-96 (10) C
Corporation Tax
March 25, 1996
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax on domestic
or foreign corporations for the privilege of exercising a corporate franchise, doing business,
employing capital, owning or leasing property in a corporate or organized capacity, or maintaining
an office in New York State. Section 209.4 of the Tax Law, provides that a corporation liable to tax
under sections 183 through 186 of Article 9 of the Tax Law is not subject to tax under Article 9-A
of the Tax Law.
Sections 183 and 184 of the Tax Law impose annual franchise taxes on a domestic or foreign
corporation formed for or principally engaged in the conduct of a transportation or transmission
business. The tax is imposed for the privilege of exercising its corporate franchise, doing business,
employing capital, owning or leasing property in a corporate or organized capacity or maintaining
an office in New York State.
Section 186 of the Tax Law imposes an annual franchise tax on a corporation, joint stock
company or association "formed for or principally engaged in the business of supplying . . . gas,
when delivered through mains or pipes . . . " The tax is imposed for the privilege of exercising its
corporate franchise or carrying on its business in such corporate or organized capacity in New York
State and is based, in part, upon gross earnings from all sources within New York State.
To determine the classification and proper taxability of a corporation under either Article 9
or Article 9-A, an examination of the nature of the corporation's activities is necessary, regardless
of the purpose for which the corporation was organized. See Matter of McAllister Bros., Inc. v
Bates, 272 AD 511, 517 (3rd Dept. 1947). Ordinarily, a corporation is deemed to be principally
engaged in the activity from which more than 50 percent 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.
Every partner in a partnership is an agent of the partnership for the purpose of its business,
and the act of every partner, including the execution in the partnership name of any instrument, for
apparently carrying on in the usual way the business of the partnership of which he is a member
binds the partnership. Partnership Law, §20.1. Each partner acts as agent of the other partners. 16
NY Jur 2d, Business Relationships, §1378. For purposes of Articles 9 and 9-A of the Tax Law, each
partnership item of income, capital, gain, loss or deduction has the same source and character in the
hands of a partner as it has in the hands of the partnership.
In interpreting section 209.1 of the Tax Law, section 1-3.2(a)(5) of the Business Corporation
Franchise Tax Regulations sets forth a general rule which holds that if a partnership is exercising any
of the privileges of section 209.1, then all of its corporate general partners are subject to the tax
imposed by Article 9-A. The same interpretation was made for purposes of Article 9 of the Tax Law
in The Partners of Buffalo Telephone Company, Adv Op Comm T & F, February 22, 1989, TSB-A­
89(3)C. The Advisory Opinion held that where a partnership is engaged in a telephone business in
New York State, each corporate partner is also engaged in a telephone business in New York State.
Therefore, each corporate partner that is principally engaged in the telephone business is subject to
tax under sections 183 and 184 of Article 9.

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TSB-A-96 (10) C
Corporation Tax
March 25, 1996
In this case, Petitioner is a New York general partnership formed for the purpose of
developing, constructing, owning, operating and maintaining an underground natural gas storage
facility located in New York State and will provide high deliverability gas storage services to
wholesale gas users in the northeast. Therefore, Petitioner is doing business in New York State and
the corporate partners of Petitioner are subject to tax under Article 9-A of the Tax Law, unless the
corporate partners are subject to tax under sections 183 and 184 or under section 186 of the Tax Law.
Petitioner receives revenues consisting of four charges for the storage of gas at the Project
on behalf of its customers. The four charges are for monthly deliverability, commodity injection,
commodity withdrawal and compressor fuel. Petitioner receives no revenue for the transportation
of gas. Petitioner does not transport gas through a pipeline, except for the few hundred yards
necessary to move the customers' gas between the nearby Interconnection point and Petitioner's gas
storage facilities. This transportation is undertaken solely in connection with the Project's function
as a gas storage facility. Accordingly, Petitioner is not deemed to be principally engaged in the
conduct of a transportation or transmission business as contemplated under sections 183 and 184 of
the Tax Law.
Petitioner states that it anticipates owning natural gas stored at the Project and making sales
of the gas only on a very limited basis, if at all. The only sales of gas Petitioner might have pertain
to (i) its acquisition of gas used for testing the Project's storage caverns and its receipt of
reimbursement for such gas, and (ii) its potential sale of compressor gas it obtains from customers
that is not needed to fuel compressors. Petitioner states that it expects that its receipts from the sale
of gas would be less than 10 percent of its revenues and the receipts from customers for its gas
storage service will exceed 50 percent of its revenues. Therefore, Petitioner is not deemed to be
principally engaged in the business of supplying gas through mains or pipes as contemplated under
section 186 of the Tax Law.
Accordingly, since Petitioner is not principally engaged in a transportation or transmission
business, none of the corporate partners of Petitioner are deemed to be principally engaged in a
transportation or transmission business pursuant to sections 183 and 184 of the Tax Law because of
Petitioner's activities. Further, since Petitioner is not engaged in the business of supplying gas
through mains or pipes, none of the corporate partners of Petitioner are deemed to be principally
engaged in the business of supplying gas through mains or pipes pursuant to section 186 of the Tax
Law because of Petitioner's activities.
Therefore, with respect to Issue "1", the corporate partners of Petitioner would not be subject
to tax under sections 183 and 184 or under section 186 of the Tax Law because of the activities of
Petitioner. However, it is possible that a corporate partner of Petitioner is subject to tax under
sections 183 and 184 or under section 186 of the Tax Law if the other activities of the corporate
partner in addition to the activities of Petitioner would make the corporate partner principally
engaged in an activity that is taxable under sections 183 and 184 or under section 186 of the Tax
Law. Where a corporate partner of Petitioner is not subject to tax under sections 183 and 184 or
under section 186 of Article 9 of the Tax Law, the corporate partner is subject to tax under Article
9-A of the Tax Law because of Petitioner's activities.

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TSB-A-96 (10) C
Corporation Tax
March 25, 1996
Section 186-a of the Tax Law imposes a tax on the furnishing of utility services. The tax is
imposed on a utility which is not subject to the supervision of the New York State Department of
Public Service, if it "sells gas ... delivered through mains [or] pipes ... or furnishes gas ... by means
of mains [or] pipes ... regardless of whether such activities are the main business of such person or
are only incidental thereto .... " The tax imposed under section 186-a of the Tax Law is imposed in
addition to the franchise tax imposed under Article 9-A or under sections 183 and 184 or under
section 186 of the Tax Law. For purposes of section 186-a of the Tax Law, the terms "utility" and
"person" include a partnership.
The tax imposed under section 186-a of the Tax Law is equal to three and one-half percent
of the gross operating income of a utility not subject to the supervision of the Department of Public
Service. Gross operating income means and includes "receipts received in or by reason of any sale,
conditional or otherwise, made for ultimate consumption or use by the purchaser of gas . . . or in or
by reason of the furnishing for such consumption or use of gas . . . service in this state. . . ."
In this case, since Petitioner is not subject to the supervision of the New York State
Department of Public Service, the tax imposed under section 186-a would be based on Petitioner's
gross operating income.
With respect to Issue "2", Petitioner's gas storage business is not an activity that is subject
to tax under section 186-a of the Tax Law. Therefore, the receipts from Petitioner's gas storage
business would not be includable in its gross operating income. However, where Petitioner sells the
gas that it owns for ultimate consumption or use in New York State, Petitioner is subject to the tax
imposed under section 186-a, and the receipts from these sales for ultimate consumption or use in
New York State are included in Petitioner's gross operating income.

DATED: March 25, 1996

NOTE:

s/DORIS S. BAUMAN
Director
Technical Services Bureau

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