United States: Cogeneration Facility Entitled to Exemption From New York Gas Import Tax

On September 9, 2004, Administrative Law Judge Brian L. Friedman of the New York State Division of Tax Appeals issued a determination in Brooklyn Navy Yard Cogeneration Partners, L.P. The case involved a statutory exemption from the gas import tax (Tax Law Section 189) for "[g]as service sold to a co-generation facility, . . .or a qualifying facility which is a co-generation facility, as such term is defined by section two hundred one 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 or steam is supplied and used by a thermal energy host located at or near the project site."

Brooklyn Navy Yard Cogeneration Partners, L.P (the "Navy Yard") developed, built, owns and operates a cogeneration facility that produces electricity and steam. The primary fuel source utilized by the Navy Yard to produce electricity and steam is natural gas. The Navy Yard sells the electricity and steam that it produces to a regulated utility -- Consolidated Edison ("Con Ed") – which in turn sells the electricity and steam to its customers.¹ Unless covered by an exemption, the Navy Yard's purchases of gas service would be subject to the gas import tax.

Judge Friedman concluded that the Navy Yard is "a qualifying facility which is a co-generation facility, as such term is defined by section two hundred one of the Public Utility Regulatory Policies Act of 1978 (Public Law 95-617)."² Judge Friedman further concluded that Con Ed is a thermal energy host located at or near the Navy Yard.

The Judge explained that the final question -- whether the electricity and steam purchased by Con Ed was "used by" Con Ed -- was a question of statutory construction and that since an exemption was involved the Navy Yard was required to prove that its interpretation of the statute is the only reasonable interpretation. Judge Friedman then concluded that the Navy Yard had met this burden by proving Con Ed uses the steam and electricity that it receives from the Navy Yard. Specifically he held that:

[M]ost States define the term "use" in its taxing statutes as an exercise of any right or power over tangible personal property by the purchaser. Clearly, once the purchaser takes possession of the tangible personal property, it may do one of a number of things to the property including reselling it. Had it been intended by the Legislature to exclude a resale of the steam or electricity from the provisions of the exemption under Tax Law § 189(former[6]), it would have been reasonable to have included the same language as was included in other subdivisions of section 189, to wit, "for its own use or consumption in this state." Since the Legislature did not include this language when it enacted the statute, the Division cannot do so now.

The importance of making a good record before the Administrative Law Judge is clearly illustrated by this case. Judge Friedman noted that the terms of the statute he was required to construe -- "thermal energy host," "at or near the project site," and "use" -- were not defined terms. The Judge relied heavily upon the testimony of the Navy Yard's witnesses and the other evidence presented, such as photographs, in reaching his conclusions.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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