Does equipment used in a flywheel energy-storage facility that helps stabilize the electrical grid's frequency qualify for New York's sales tax exemption for machinery used to produce electricity for sale?

Plain-English summary

A company developed a patented flywheel energy-storage system meant to help stabilize the electrical grid's frequency (kept at 60 Hz). Its facility would pull excess electricity off the grid when there's a surplus, store it as spinning kinetic energy in large flywheels, and release it back to the grid when needed — a "frequency regulation service" sold through the New York Independent System Operator's market. It asked whether its equipment qualified for New York's sales tax exemption for machinery used to produce electricity for sale. The Department said no.

New York exempts machinery used directly and predominantly in the production of electricity by generating it for sale. The Department has long held that the "production" phase of making electricity ends at the generator that actually produces it. Here, the flywheel facility doesn't generate electricity at all — it stores electricity that other companies already generated and later returns some of it to the grid. Federal regulators had even created a special category, "Limited Energy Storage Resource," specifically because this kind of facility didn't fit the existing rules for electricity generators (it can only sustain maximum output for about 15 minutes). The Department found the facility's activity looked more like part of the transmission/distribution process than production.

Even setting that aside, the exemption also requires the equipment be used more than 50% of the time in producing electricity for sale. The company itself estimated the flywheels would be used less than half the time returning power to the grid (the rest of the time absorbing power or idle), so the predominant-use test failed independently. The Department did note a silver lining: to the extent the equipment gets permanently installed into real property the company owns, the installation charges for that work could still qualify as an exempt capital improvement — a separate, fact-specific question the opinion didn't resolve.

What this means for you

Energy storage and grid-services companies

Storing electricity — even to help stabilize the grid and even when you eventually sell power back — is treated differently from generating it. New York's production exemption is aimed squarely at generation equipment, and the Department draws the line at the generator itself; equipment that stores and later discharges power that someone else generated falls on the transmission/distribution side, not production, even if you provide a valuable and regulated service.

Anyone claiming a "predominant use" exemption for multi-function equipment

Even if you can argue your equipment sometimes generates or produces something, track the actual percentage of time or use devoted to the exempt activity. Here, the company's own usage estimate (under 50% of time spent returning power) would have doomed the exemption claim on its own, independent of the generation-versus-storage question.

Accountants and tax professionals working on utility and grid-tech projects

Don't overlook the capital-improvement angle for the installation labor even where the equipment purchase itself is taxable — permanently installed equipment that becomes part of real property the taxpayer owns can still generate exempt installation charges under Tax Law §1105(c)(3)(iii), a separate question from whether the equipment itself qualifies for a production exemption.

Common questions

Q: Does an energy storage facility (batteries, flywheels, etc.) count as "generating" electricity for New York's production exemption?
A: No, according to this opinion. The Department treats storage and later discharge of previously generated electricity as part of transmission/distribution, not production, so the generation-machinery exemption doesn't apply.

Q: What if our equipment is used mostly (over 50% of the time) to make or return electricity?
A: The predominant-use threshold (more than 50%) is a separate, independent requirement from the generation-versus-storage question — you need to clear both hurdles, not just one.

Q: Is there any exemption available for the cost of installing this kind of equipment?
A: Possibly, for the installation labor itself, if the equipment becomes a permanent capital improvement to real property you own — that's a distinct, fact-specific determination from whether the equipment purchase itself is exempt.

Q: Does this opinion apply to all energy storage projects in New York?
A: Not automatically. An advisory opinion binds the Department only as to the taxpayer who requested it and only on the facts described; a facility with different technology, ownership, or usage patterns could be analyzed differently.

Citations and references

Statutes and regulations:

• Tax Law §1115(a)(12) (production/generation exemption)
• Tax Law §1105-B (parts, tools, supplies for generating electricity)
• Tax Law §1105(c)(3), (c)(3)(iii) (installation services; capital improvement)
• Tax Law §§1105(a), 1110, 1111(b)(1) (sales/use tax; market-value basis)
• Tax Law §1101(b)(9)(i) (capital improvement definition)
• 20 NYCRR §528.13(b)(1)(iii) (transmission/distribution vs. production)

Cited cases and opinions:

• Niagara Mohawk Power Corporation v. Wanamaker, 286 App Div 446, affd 2 NY2d 764
• ABB Power Transmission, Inc., TSB-A-90(34)S
• Conti Enterprises, Inc., TSB-A-05(35)S
• Matter of Rochester Independent Packer, Inc. v. Heckelman, 83 Misc 2d 1064

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(36)S

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(36)S
Sales Tax
August 21, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S081208B

Petitioner, name and address redacted, asks whether the machinery and equipment that comprise its
proposed power frequency regulation facility will qualify for the exemptions for machinery and equipment
used directly and predominantly in the production of electricity for sale pursuant to sections 1115(a)(12) and
1105-B of the Tax Law. We conclude that the machinery and equipment, as described by Petitioner, do not
meet the requirements of sections 1115(a)(12) and 1105-B of the Tax Law. The installations of the
equipment may, however, qualify as capital improvements.
Facts
Petitioner designs and develops products and services that support a more stable and reliable
electrical grid. An essential element of Petitioner’s current project is a flywheel energy storage system it
developed and patented that can be used as part of a system to draw electrical energy from the electrical grid
that is stored in the form of kinetic energy in a rotating flywheel. Petitioner intends to use its flywheel
energy storage system to build a facility that will provide “frequency regulation services” for the electrical
grid in New York State.
Generally, the frequency of the alternating current on the electrical grid is maintained at 60 cycles
per second (“Hertz”or “Hz”). Deviations from normal grid frequency can damage equipment or devices that
obtain power from the grid. Balancing generation and load nearly instantaneously and continuously while
maintaining the required frequency is challenging because loads constantly fluctuate (e.g., lights, air
conditioners, factories, etc. are randomly turned on and off) and certain generation sources (e.g., wind
turbines, solar panels, etc.) constantly fluctuate due to weather. The need to balance electricity supply and
demand on the grid requires a special service to maintain stable power frequency. The process whereby
adjustments are made to the grid to account for the fluctuating demand and supply is known as a frequency
regulation service. The New York Independent Systems Operator (NYISO), the entity responsible for
coordinating the generation and transmission of electrical power in this state, provides a market for the
submission of bids to provide this frequency regulation service.
Petitioner intends to build a facility using its flywheels that will provide down regulation service by
absorbing excess energy from the grid and up regulation service by returning energy to the grid as needed to
maintain the 60 Hz interconnection frequency. The intended site is adjacent to power transmission
equipment (a 115 KVA transmission line and a power substation) owned by two independent third party
electricity transmission companies. In providing this frequency regulation service, Petitioner will essentially
remove electricity produced by other entities from the power grid when there are periods of oversupply, and
will use this electricity to power motors that will spin up the flywheels. When electricity is needed by the
grid Petitioner will slow the flywheels down, and that action spins a generator that converts the kinetic
energy stored by the flywheels back to electrical energy, which is returned to the power grid, thereby
assisting the grid in maintaining the necessary 60 Hz. Petitioner estimates that over an extended period, the
flywheels will be used less than 50% of the time in providing power back to the power grid. The facility will
not use or consume any fuel, and unlike a power plant, which would burn fossil fuels, is generally not subject
to regulatory oversight.

-2-

TSB-A-09(36)S
Sales Tax
August 21, 2009

The NYISO, with the approval of the Federal Energy Regulatory Commission, recently sought
regulatory amendments to create a framework to provide compensation to a facility that stores energy for the
purpose of providing a frequency regulation service (like Petitioner’s or one that uses batteries). These
amendments established a definition of Limited Energy Storage Resource (LESR) for the purposes of
integrating facilities similar to Petitioner’s into the New York rate structures. Generally, these regulatory
amendments place the emphasis on the LESRs provision of regulation service (See FERC order accepting
tariff revisions, May 15, 2009). The regulatory action was necessitated by the fact that Petitioner’s facility
can sustain maximum energy withdrawal or injection for no more than 15 minutes, and therefore Petitioner’s
facility did not meet the requirements of the rate structure for electricity generators.
Petitioner states that the NYISO will constantly monitor Petitioner’s state of readiness to remove
power from the grid. Thus, if Petitioner’s flywheels are not operating (i.e., spinning) at peak capacity and
there is excess electricity in the grid, NYISO will allocate the excess electricity to Petitioner in down
regulation service. If Petitioner’s flywheels are already spinning at peak capacity, NYISO will not require
Petitioner to provide down regulation. Petitioner is paid via NYISO settlement procedures for agreeing to
remove or provide electricity when requested by the NYISO for specific periods of time per day.
Mechanically, Petitioner’s facility will consist of 20 pods, with each pod containing 10 flywheels
and the associated cooling system, and 10 transformers. Each flywheel consists of a heavy cylinder that
spins at high speed (up to 16,000 revolutions per minute) while suspended by a magnetic lift system inside a
metal, vacuum-sealed container. The flywheel unit is anchored to and contained within an underground
concrete foundation assembly. The ten flywheels are electrically connected to the associated electronics
required to operate the flywheels. These electronics are housed in an above-ground container.
The flywheels and the power electronics generate a substantial amount of heat. The cooling system
prevents overheating. A “closed loop” system of pipes carries a fluid to the heat source (i.e., the flywheels
and power electronics). The temperature of the fluid rises as it absorbs the excess heat. The fluid is then
pumped away from the heat source to a cooling system, where the temperature of the fluid is lowered. The
cooling system, located in close proximity to each pod, is a fan-driven heat exchanger similar to a radiator. A
pump house is responsible for pumping the fluid from the heat source to the cooling system and back.
The transformers collect the low voltage power generated by the pods and convert this voltage to an
intermediate voltage level capable of being transmitted to the transmission substation that contains the
transmission transformer which is connected to the grid.
Petitioner will form two single-member limited liability companies (Holding LLC and Operating
LLC). Petitioner will be the sole member of Holding LLC, which in turn will be the sole member of
Operating LLC. Petitioner will sell Operating LLC the flywheels, the concrete containers, and the associated
electronics. Operating LLC will purchase the cooling system and pump house from other vendors.
Analysis
Section 1115(a)(12) of the Tax Law provides an exemption for machinery and equipment for use and
consumption directly and predominantly in the production of electricity by generating. Section 1105-B of
the Tax Law also exempts parts, tools, and supplies used in the production of electricity for sale by
generating. Receipts from the services of installing, repairing, maintaining, or servicing such machinery,
equipment, parts, tools, and supplies are exempt from the tax imposed on these services under section
1105(c)(3) of the Tax Law (See Tax Law section 1105-B(b).)

-3-

TSB-A-09(36)S
Sales Tax
August 21, 2009

The threshold determination is whether any of the machinery or equipment installed at Petitioner’s
facility is used and consumed directly and predominantly in the production of electricity for sale by
generating. In general, the production phase of the manufacturing process with respect to the generation of
electricity for sale is considered to end at the generator that produces the electricity. See Niagara Mohawk
Power Corporation v Wanamaker, 286 App Div 446, affd 2 NY2d 764; ABB Power Transmission, Inc., Adv
Op Comm T&F, July 17, 1990, TSB-A-90(34)S; Conti Enterprises, Inc., Adv Op Comm T&F, September
27, 2005, TSB-A-05(35)S. However, the determination as to whether a particular piece of machinery
qualifies for the exemption depends upon the particulars of a taxpayer's operation and must be individually
assessed on its own fact pattern (Matter of Rochester Independent Packer, Inc. v. Heckelman, 83 Misc 2d
1064, 374 NYS2d 991, 993).
Petitioner's "flywheel frequency regulation" facility is designed to support more stable, reliable, and
efficient electricity grid operation. Essentially, Petitioner’s power frequency regulation facility removes
electricity from the electrical grid when there is a surplus. The energy removed from the grid is stored
mechanically in the rotation of the spinning flywheels. If the frequency of the power grid drops below the
required threshold, the NYISO may ask Petitioner to provide electricity back to the electrical grid. Petitioner
describes its “frequency regulation service” as “energy storage-based regulation technology.” In other
words, Petitioner removes power generated by other parties from the grid so that it can store that electricity
for use in maintaining the frequency of the electrical grid in the event of a power fluctuation. A frequency
regulation facility could use batteries to provide essentially the same function, but Petitioner hopes that its
flywheel facility will be far more environmentally friendly and economically feasible.
As Petitioner’s facility did not fit into the overall tariff scheme as a generator, the NYISO sought
regulatory amendments with the Federal Energy Regulatory Commission for approval for tariffs for Limited
Energy Storage Resources (LESR). The tariff amendments were approved on May 15, 2009. As a storage
resource, Petitioner's activity seems best described as part of the transmission or distribution process rather
than as a production activity (20 NYCRR 528.13(b)(1)(iii)). Petitioner is merely storing electricity generated
by other entities until the NYISO requests that Petitioner provide it back to the electrical grid. Unlike a
facility that uses fossil fuels, wind, or some other form of power generation, Petitioner’s facility is capable of
providing energy, and therefore its regulation service, only to the extent it has previously removed and stored
electricity from the power grid. Petitioner itself describes the provision of the energy output as incidental to
the provision of the regulation service. If withdrawn at the maximum rate, Petitioner’s facility can
continuously supply power to the grid for only 15 minutes without shutting down. Due to the limited ability
to supply energy to the grid, a LESR is considered, under the tariff approved by the FERC on May 15, 2009,
to be a “regulation-only” supplier of electricity, and is therefore not deemed to be in the same category as
generation facilities which are otherwise required to supply energy to the grid in full hour time blocks.
Even if Petitioner’s facility could be considered a generation facility, Section 1115(a)(12) of the Tax
Law requires that the machinery and equipment be used directly and predominantly (more than 50% use) in
the production of electricity for sale by generating. Since Petitioner estimates that over an extended period
of time, the machinery and equipment will be used less than 50% of the time in returning power to the
electrical grid, the use of the machinery and equipment fails the predominant-use test for the exemption.
Based on these facts, it is concluded that the flywheels are not used directly and predominantly in the
production of electricity for sale by generating. Accordingly, the purchase or use of the flywheels and
related machinery or equipment is subject to sales or use tax under Tax Law §§ 1105(a) and 1110, unless
otherwise exempt. Generally, the sales tax is computed on the price paid for an item or service, including
any shipping or handling charges made by the vendor. But if the machinery or equipment (such as the pods)
is used outside New York State for over six months before its first use in the state, the use tax is based on the

-4-

TSB-A-09(36)S
Sales Tax
August 21, 2009

current market value of the property (not to exceed its cost) at the time of first use within New York (See
§1111(b)(1) of the Tax Law).
To the extent that non-exempt tangible personal property is installed into real property owned by
Petitioner (i.e., not leased property), charges for the installation of this property may qualify for exemption
from tax under Tax Law section 1105(c)(3)(iii) as installations of tangible property that become a capital
improvement. The term “capital improvement” is defined in Tax Law section 1101(b)(9)(i) as an addition or
alteration to real property that: (1) substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; (2) becomes part of the real property or is permanently affixed to
the real property so that removal would cause material damage to the property or article itself; and (3) is
intended to become a permanent installation.
Whether a particular installation qualifies as a capital
improvement to real property can be determined only by examining the facts and circumstances of that
particular installation. Such a determination is beyond the scope of this Advisory Opinion.

DATED: August 21, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.