INSIGHT: New York Tax Tribunal Doesn’t Defer to Agency Interpretation

The New York Tax Tribunal recently ruled that it won’t defer to the state’s Division of Tax Appeals when interpreting statutes.

In TransCanada Facility USA, Inc., the New York Tax Tribunal held that TransCanada met the definition of a “qualified New York manufacturer” and therefore was entitled to the $350,000 tax cap in computing the capital base of its corporation franchise tax liability under former Tax Law Section 210(1)(b)(1) (capital base tax cap). While this conclusion has a significant impact on electricity generators, this decision contains two important procedural holdings that necessarily impact numerous cases in all sectors and for all types of taxes.

Executive Summary

• An electricity generator may be a qualified New York manufacturer and therefore entitled to the $350,000 capital base tax cap under former Tax Law Section 210(1)(b)(1).

• TransCanada contains two procedural holdings that will impact numerous other cases in all sectors and for all types of taxes:
  • The Division of Taxation’s (division’s) interpretation of a statute is not entitled to deference when the statute does not provide an exclusion, exemption or deduction.
  • Where the legislature has expressly excluded an item in one section of the statute and chosen not to provide a similar exclusion in another section, it demonstrates that the legislature intended such difference.

TransCanada will further constrain the division because it is not permitted to appeal a tribunal decision.

The first holding that will have broad impact is that “agency deference is not warranted” when interpreting a statute that does not provide an exclusion, exemption or deduction. Second, the tribunal rejected the division’s reading of the statute and held that where the legislature had expressly excluded the generation of electricity in one section of the statute but chose not to provide a similar exclusion in another section, it demonstrated that the legislature intended such difference.

These procedural holdings will impact many future statutory interpretation cases, because they limit the instances in which the division will be able to argue that a taxpayer may prevail only if its interpretation of a statute is the only reasonable one. Further, the division is precluded from appealing a tribunal decision, and therefore it will be difficult for the division to overcome the tribunal’s view of deference.

The parties agreed that for the years at issue, TransCanada’s capital base yielded the highest amount of tax of any of the four alternatives. The issue, however, was whether TransCanada met the definition of a qualified New York manufacturer to qualify for the capital base tax cap. The administrative law judge (ALJ) determined that TransCanada had the burden of proving that the division’s notice was erroneous. The ALJ also found that the capital base paragraph in former Tax Law Section 210 related to the computation of tax and did not exempt or exclude any class of income or taxpayer.

As a result, the ALJ rejected the division’s argument that the statute must be construed against TransCanada and that TransCanada’s interpretation of qualified New York manufacturer must be the “only reasonable interpretation” in order for it to succeed. The ALJ found that because the statute was not ambiguous, it was not proper to resort to the rules of statutory construction, and the ALJ agreed with the division that because TransCanada’s property did not come within the language of the Investment Tax Credit (ITC) subdivision, TransCanada was not a qualified New York manufacturer entitled to the benefit of the capital base tax cap.

On appeal, TransCanada argued that because the legislature enacted different definitions of the term “manufacturer” for purposes of the entire net income (ENI) base and the capital base paragraphs, an electricity generator may be a qualified New York manufacturer for purposes of the capital base tax cap even though it did not qualify for purposes of the ENI base. TransCanada argued that the legislature added a specific exclusion for generators of electricity in the definition of manufacturer for ENI purposes because those taxpayers were not excluded from the definition of qualified New York manufacturer by reference to the ITC subdivision.

When adding the definition of manufacturer to the capital base tax cap provision in 2005, “the legislature chose to use language that the Tribunal had interpreted to include the generation of electricity, without including an exclusion or exception for the generation of electricity.” The tribunal thus applied a well-established rule of statutory construction to conclude that “the express exclusion of electricity generators from the definition of manufacturer under the ENI tax cap and the absence of similar language under the capital base tax cap indicates a legislative intent to exclude such electricity generators from the benefit of the ENI cap but not from the Capital Base Tax Cap.”

The far-reaching impact of this holding is that a taxpayer in a subsequent statutory interpretation case will have an easier burden of proving its interpretation of any statute that does not provide an exclusion, exemption or deduction. Now the division’s interpretation in these types of cases is not entitled to deference, and these types of statutes should be “construed most strongly against the government.” Further, the division no longer has the ability to argue that a taxpayer may prevail only when its interpretation is the only reasonable one. Finally, the division will have a difficult time changing this precedent because it is not permitted to appeal a tribunal decision.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Michael Semes is of counsel with BakerHostetler in Philadelphia and part of the firm’s state and local tax group. He is also Professor of Practice at the Villanova University Charles Widger School of Law in the Graduate Tax Program.