When Con Edison and New York City's own Public Utility Service jointly petition about a preference-power distribution deal -- Con Edison leasing part of its distribution system and acting as the City's billing/collection agent -- which pieces of the arrangement create taxable receipts for Con Edison, and which stay exempt as the City's own governmental purchase/resale?

Plain-English summary

The City of New York established its own Public Utility Service ("Utility") to buy discounted "preference power" from the New York State Power Authority (PASNY) and resell it to residential, commercial, and industrial consumers citywide. Because the City has no distribution network of its own, Con Edison and the City's Utility jointly petitioned the Department about a Lease and Operating Agreement: Con Edison leases Utility an undivided interest in its distribution system, and acts as Utility's billing/collection agent, while retaining exclusive control over the system itself. If PASNY can't arrange transmission, Con Edison can also arrange with Long Island Lighting Company (LILCO) to wheel a share of the power into the part of the City served by LILCO, for which Utility pays Con Edison a separate "wheeling charge." Con Edison's rental is set to match what it would have billed at its own tariff rates (minus its own fuel/power costs), and it remits to Utility the "funds collected for preference power" (customer billings net of costs and an uncollectibles adjustment) -- while retaining any amounts tied to late payment or non-payment of bills, which Utility separately assigns to it. The Petition raised sales/use tax, section 186 utility franchise tax, and section 186-a utility gross-receipts tax questions.

This is the direct precedent for the later Westchester County rulings on the same doctrine -- TSB-A-87(1)C/(4)S and TSB-A-87(2)C/(5)S, issued about 13 months later, involve an essentially identical Con Edison preference-power distribution structure for Westchester County and cite this same line of reasoning, tracing back to the original "New York City Energy Office" ruling, TSB-A-85(23)C, (49)S (Oct. 16, 1985).

On sales tax, Utility's own purchases (including its use of Con Edison's distribution system) are treated as an exempt governmental purchase of a service, and Con Edison's billing/collection services aren't separately taxed. But Utility's resale of power to end consumers IS taxable, and Con Edison, as Utility's agent, shares the obligation to collect that tax and obtain exemption certificates from qualifying customers -- including the special no-certificate exemption for purely residential electric use under section 1105-A.

On the franchise taxes, Utility owes nothing under section 186 or 186-a (both exclude municipalities). But Con Edison's own rental fee, any wheeling charge for LILCO transmission, and any late-payment/non-payment amounts it's entitled to retain are ALL Con Edison's own taxable receipts under both sections, with MTA surcharges under sections 186-b/186-c applying proportionally to its Metropolitan Commuter Transportation District activity. As in the Westchester rulings, the Department held that despite being labeled a "rental," Con Edison's arrangement is actually a SERVICE because Con Edison retains exclusive possession and control of its system -- which is why the pass-through "funds collected for preference power" escape being counted as Con Edison's own receipt, while wheeling charges, late fees, and any retained surplus do count.

What this means for you

Municipalities buying discounted power for citywide resale

Your own purchase-and-resale-for-distribution arrangement can remain largely tax-exempt at your level, but your RETAIL sale of power to end consumers is still taxable just like a private utility's sale -- and you and your distribution partner (acting as your billing agent) share the collection obligation.

Utilities acting as an agent for a government power program

Your own rental/service fee, any transmission "wheeling" charge, and any late-payment amounts you're entitled to keep are all your own taxable receipts -- but pure pass-through customer payments you collect on the government's behalf and remit in full are not.

Multi-party joint petitions

A private utility and its government counterparty can file ONE joint Petition for Advisory Opinion together (as Con Edison and the City's Utility did here) rather than filing separately, when their tax questions all arise from the same agreement.

Common questions

Q: Does the City's Public Utility Service owe any franchise tax on this arrangement?
A: No -- it's a municipality, excluded from both section 186 and section 186-a.

Q: Is Con Edison's rental/wheeling fee taxable to Con Edison?
A: Yes -- both are Con Edison's own receipts for services performed, includible in its gross earnings/income under sections 186 and 186-a.

Q: What about late-payment charges Con Edison collects from the City's consumers?
A: Those are Con Edison's own retained receipts (assigned to it by the City), not pass-through funds, so they're taxable to Con Edison.

Q: How does this relate to the Westchester County rulings issued about a year later?
A: TSB-A-87(1)C/(4)S and TSB-A-87(2)C/(5)S apply this same reasoning to a near-identical Con Edison/Westchester County arrangement, both tracing back to the same TSB-A-85(23)C precedent.

Q: Can another city or utility rely on this specific ruling?
A: No. It binds the Department only for these petitioners' specific facts and can't be relied upon by others, even with a similar preference-power arrangement.

Citations and references

Statutes and regulations:

• Tax Law § 1105, § 1110, § 1116(a), § 1105-A (sales/use tax, governmental exemption, residential utility exemption)
• Sales and Use Tax Regulations § 529.2, § 527.2(e), § 527.7(d)(3)
• Tax Law § 1101(b)(8)(ii) (agent-as-vendor)
• Tax Law § 186, § 186-a, § 186-b, § 186-c (utility franchise/receipts taxes and MTA surcharges)
• 1946 Op. Atty. Gen. 326; New York City Energy Office, TSB-A-85(23)C, (49)S

Related rulings:

• TSB-A-87(1)C/(4)S and TSB-A-87(2)C/(5)S -- the later Westchester County rulings applying this same doctrine

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a86_22c_49s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (22) C
Corporation Tax
TSB-A-86 (49) S
Sales Tax
December 1, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. Z860307C

A Petition for Advisory Opinion, submitted jointly by Consolidated Edison Company of New
York, Inc., 4 Irving Place, New York, New York 10003, and New York City Public Utility Service,
49 Chambers Street (Suite 720), New York, New York 10007, was received on March 7, 1986.
The Petition raises three issues regarding tax consequences with respect to transactions
arising from a Lease and Operating Agreement between the Petitioners by which New York City
Public Utility Service arranges for the distribution and sale, through Consolidated Edison Company
of New York facilities, of preference power it purchases from the New York State Power Authority.
These issues involve the (1) Sales and Use Tax; (2) Franchise Tax on Utility Companies; and (3) Tax
on the Furnishing of Utility Services.
The City of New York has established a Public Utility Service ("Utility"), which, among
other things, is authorized to purchase electrical power and energy ("preference power") from the
Power Authority of the State of New York ("PASNY") and from other entities, to arrange with utility
companies such as Consolidated Edison Company of New York ("Con Edison") for the distribution
of such preference power through the lease of transmission, substation and distribution facilities
within the service areas of such utility companies; and to sell and distribute such preference power
to itself and to residential, commercial, industrial and other consumers. Utility will determine who
is to receive the preference power. Con Edison will act as the operating agent of Utility in the sale
of such power. Con Edison will do all billing and collection.
Con Edison will lease to Utility an undivided interest in Con Edison's distribution system,
to the extent required to sell and distribute preference power to consumers. Con Edison has
exclusive control of its entire system, including all matters relating to the design, construction,
expansion, operation, use, maintenance and retirement of the system. Con Edison will indemnify
and hold Utility harmless from and against any and all liability, suits, claims, demands, actions,
judgments, costs and expenses arising from Con Edison's exercise of exclusive control of its system.
If PASNY does not make the necessary arrangements, Con Edison will make arrangements
with other utilities, if available, for transmission of preference power to Con Edison's system, and
where feasible, Utility will contract with and pay such other utilities directly for such transmission.
If PASNY does not make the necessary arrangements, Con Edison will make arrangements
with Long Island Lighting Company, Inc. ("LILCO") (if Con Edison's facilities are available) to
transmit a proportionate share of preference power for delivery to consumers in that portion of the
City which is in LILCO's service territory. Utility will pay a wheeling charge to Con Edison for such
transmission.
RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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The rental is calculated on the basis of kilowatt hours of preference power sold by, and
distributed on behalf of Utility during the month. The amount of the rental is the sum of ­
1.

other than "Industrial Economic Development Consumers" -- the charges which
would have been billed at Con Edison's applicable tariffs -- including the fuel
adjustment clause less Con Edison's fuel and purchased power costs reflected in such
tariffs; and

2.

for "Industrial Economic Development Consumers" -- the charges under rates,
pursuant to Con Edison's tariff, applicable to such consumers.

Utility's rates are fixed to provide revenue in an amount not less than necessary to recover
the following costs and expenses: the actual cost to Utility for the purchase, transmission,
distribution and delivery including the rental paid by Utility; the actual expenses necessary for
administration of the Public Utility Service; and any other costs or charges that Utility incurs or has
an obligation to pay under the agreement.
The "funds collected for preference power" is the amount billed at Utility's rates, adjusted
to reflect amounts uncollected. The adjustment is computed as follows:
1.

Subtract the rental from the gross amount billed.

2.

Multiply the remainder by the provision for uncollectible accounts approved by the
PSC in the most recent rate case.

Con Edison will forward to Utility all "funds collected for preference power" after deducting
the rental amount, any transmission cost incurred by Con Edison, and any additional costs actually
incurred by Con Edison. In the event the funds collected for preference power are less than the
deductions, Con Edison will bill Utility for the deficiency.
Utility assigns to Con Edison Utility's rights to amounts due and owing from Utility's
consumers to the extent such amounts are included in "funds collected for preference power" and
remitted to Utility. Con Edison will retain any such amount together with other amounts related to
the late payment or non-payment of bills, as prescribed by Con Edison's PSC schedule, that it may
collect from Utility's consumers.
ISSUE I - Sales and Use Tax
Questions Presented
(a) Is the New York City Public Utility Service, established by the City of
New York as authorized by Local Law No. 78 for the year 1982, which is an agency,
instrumentality or political subdivision of New York State as defined in section 1116
of the Tax Law, exempt from the imposition of sales and use taxes as imposed by
sections 1105 and 1110 of the Tax Law?

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Article 28 of the New York State Sales and Use Tax Law provides in Section 1116(a) that
any sale by or to the following and any use by any of the following shall not be subject to the sales
and compensating use taxes imposed under such article:
"(1) The state of New York, or any of its agencies, instrumentalities, public corporations.
. . or political subdivisions where it is the purchaser, user or consumer, or where it is the vendor of
services or of property of a kind not ordinarily sold by private persons".
Regulation 529.2, subdivision (a), offers the following definitions:
(1) Agencies and instrumentalities of the State as used in this section means any authority,
commission or independent board created by an act of the Legislature for a public purpose.
(2) A public corporation as used in this section means any corporation created by an act of
the Legislature for a public purpose or pursuant to an agreement or compact with another state or
Canada.
Subdivision (b)(2) provides that "governmental entities [as defined above] as purchasers,
users, consumers, occupants or patrons must exercise their right to exemption through the issuance
of governmental purchase orders or the appropriate exemption document".
Accordingly, upon issuing a governmental purchase order to its vendors, Utility is not
required to pay sales or use tax on property or services purchased for its own use or consumption.
(b) Is the sale of preference power by PASNY to Utility exempt from sales
taxes?
Section 1105(b) of the Tax Law imposes tax on the receipts from every sale, other than sales
for resale, of electricity and electric service of whatever nature.
Regulation 527.2(e) provides that the purchaser of utility services intended for resale must
furnish its supplier with a Resale Certificate (Form ST-120).
Consequently, Utility must furnish a Resale Certificate to PASNY when purchasing
preference power which will be resold.
(c) Are charges to Utility for the rental of Con-Edison's distribution system,
and for Con-Edison's services of billing and collecting monies, taxable?

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December 1, 1986
Although the utilization of Con-Edison's transmission system in the distribution of preference
power is viewed as a lease transaction by the Petitioners, for sales tax purposes it is considered the
purchase of a service by a governmental entity which is exempt from taxation under Tax Law
1116(a)(1), supra. Furthermore, Con Edison's charges for billing and collecting monies from
Utility's customers are exempt because the Tax Law imposes no sales tax on such services.
(d) Is the sale of preference power by Utility to the ultimate consumer
subject to sales taxes?
Section 529.2(c) of the Sales and Use Tax Regulations relating to governmental entities as
vendors, states in part that "(2) [s]ales by New York State governmental entities of tangible personal
property or services of a kind which are ordinarily sold by private persons . . . are subject to the sales
and use tax. . . .
Example 6: A municipality sells electricity to its residents. The sale is taxable."
Regulation 527.7(d)(3) provides that "[m]unicipalities which provide services subject to tax
are required to register as a vendor with the [sales tax] bureau and collect the appropriate tax which
shall be remitted with a timely filed return".
In the Lease and Operating Agreement, Con Edison agrees to perform, as Utility's agent, the
services of selling, billing, and collecting monies arising from the distribution and sale of preference
power. In this regard it must be noted that the Tax Law, in defining the term "vendor", adds the
following provisions:

when in the opinion of the tax commission it is necessary for the
efficient administration of this article to treat any salesman,
representative, peddler or canvasser as the agent of the vendor,
distributor, supervisor or employer under whom he operates or from
whom he obtains tangible personal property sold by him or for whom
he solicits business, the tax commission may, in its discretion, treat
such agent as the vendor jointly responsible with his principal,
distributor, supervisor or employer for the collection and payment
over of the tax. (Tax Law, 1101(b)(8)(ii)).
Consequently, the Petitioners must share the obligation for the proper collection of the tax
including obtaining the proper certification from customers claiming exemption from tax. Exempt
retail purchases of electricity to be used exclusively for non-residential purposes, must be supported
by one of the following documents:

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Resale Certificate, Form ST-120
Exempt Use Certificate, Form ST-121,
Exempt Organization Certificate, Form 119.1,
Direct Payment Permit, Form AU-297, or
Governmental Purchase Order.
No certificate is required to claim the exemption from statewide sales tax provided under Tax
Law 1105-A for purchases of electric power solely for residential use. This exemption, both from
statewide tax and certification, extends to billings (in a lump sum or based on a single meter)
combining both residential and non-residential power usage, if the non-residential use does not
exceed 25 percent. When the portion representing residential usage is less than 75 percent of the
total bill, the purchaser must file Form TP-385, Certification of Residential Use.
Technical Services Bureau Memorandum TSB-M-78(7)S, Reduction in Rate on Certain
Energy Sources and Services, should be reviewed for additional information regarding the sale of
utility services.

ISSUE II - Franchise Tax on Utility Companies
Questions Presented
(a)

Is the New York City Public Utility Service subject to the tax
imposed under section 186 of the Tax Law?

Section 186 of the Tax Law imposes a franchise taxon "Every corporation, joint-stock
company or association... formed for or principally engaged in the business of supplying...
electricity...."
Since Utility is a municipality, it is not a corporation, joint-stock company or association
formed for or principally engaged in business that would subject it to tax under section 186 of the
Tax Law.
(b)
Are the rentals received by Con Edison from Utility for the use of its
distribution system and for its services in billing and collecting monies as agent for
Utility gross earnings to Con Edison subject to the tax imposed by section 186 of the
Tax Law?
(c)
Do the monies collected by Con Edison from Utility's consumers as
agent for Utility for the sale of preference power constitute gross earnings to Con
Edison subject to the tax imposed by section 186 of the Tax Law?
The tax imposed by section 186 of the Tax Law is based, in part, upon gross earnings from
all sources within New York State. Such section defines the term "gross earnings" as all receipts
from the employment of capital without any deduction.

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Accordingly, the rental Con Edison receives from Utility for the use of its distribution system
and for its services in billing and collecting monies as Utility's agent are receipts of Con Edison for
services performed and are included in Con Edison's gross earnings. Any wheeling charge Con
Edison receives from Utility for the transmission of preference power is also included in Con
Edison's gross earnings. The funds collected for preference power that are collected by Con Edison,
as Utility's agent, from Utility's consumers for the sale of preference power do not constitute gross
earnings of Con Edison. However, any amount not included in "funds collected for preference
power" that is collected by Con Edison, as Utility's agent, from Utility's consumers for the sale of
preference power, such as an amount related to late payment or non-payment of bills, is a receipt of
Con Edison and is included in Con Edison's gross earnings.
(d)
Are such rentals and preference power sales monies collected by Con
Edison from Utility's consumers as agent for Utility subject to the temporary
metropolitan transportation business tax surcharge imposed under section 186-b of
the Tax Law?
Section 186-b of the Tax Law provides that the temporary metropolitan transportation
business tax surcharge on utilities is in addition to the tax imposed under section 186 of the Tax Law
and, for the taxable years such tax surcharge is applicable, the rate of the tax surcharge is applied to
the tax imposed under section 186 or to that portion of the tax imposed under section 186 which is
attributable to the taxpayer's business activity carried on within the Metropolitan Commuter
Transportation District ("MCTD"). The portion of the tax attributable to business activity carried
on within the MCTD shall be determined by multiplying the tax imposed under section 186 by the
ratio of the taxpayer's gross earnings from all sources within the MCTD to its gross earnings from
all sources within New York State.
Consequently, for the taxable years the temporary metropolitan transportation business tax
surcharge on utilities under section 186-b of the Tax Law is in effect, if Con Edison has business
activities both within and without the MCTD it must determine its gross earnings from within the
MCTD as well as its gross earnings from within New York State. Con Edison's gross earnings from
within the MCTD include the rental received from Utility for the use of its distribution system and
for its services in billing and collecting monies as Utility's agent, any wheeling charge received from
Utility for the transmission of preference power, and any amount that is collected from Utility's
consumers, as Utility's agent for the sale of preference power, that is not included in "funds collected
for preference power".
ISSUE III Tax on the Furnishing of Utility Services
Questions Presented:
(a)
Is the New York City Public Utility Service subject to the tax imposed
under section 186-a of the Tax Law?

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Section 186-a of the Tax Law provides:
. . . [A] tax equal to 3% of its gross income is imposed on every utility doing business in New York
State which is subject to the supervision of the State Department of Public Service. . . .
. . . . A tax equal to 3% of its gross operating income is imposed on every other utility doing business
in New York State. . .
. . . . The word "utility" includes every person subject to the supervision of the State Department of
Public Service,. . . . also every person who sells electricity etc. delivered through mains, pipes or
wires, or furnishes electric etc. by means of mains, pipes or wires, regardless of whether such
activities are the main business of such person or are only incidental thereto. . ..
. . . . The word "person" means persons, corporations, companies, associations, joint-stock
associations, etc. . . . except New York State, municipalities, political and civil subdivisions of the
State or municipality. . .
Utility is a municipality and as such is not subject to tax imposed under section 186-a of the
Tax Law.
(b)
Is the rental received by Con Edison from Utility for the use of its
distribution systems and for its services as agent for Utility in billing and collecting
monies from Utility's consumers for the sale of preference power gross income to
Con Edison subject to tax under section 186-a of the Tax Law?
(c)
Do the monies collected by Con Edison from Utility's consumers as
agent for Utility for the sale of preference power constitute gross income to Con
Edison subject to tax under section 186-a of the Tax Law?
Section 186-a of the Tax Law provides:
. . . . The words "gross income" mean and include receipts received in or by reason of any sale,
conditional, or otherwise,. . . . made or service rendered for ultimate consumption or use by the
purchaser in this State, . . . .
. . . . Also profit from any transaction (except for sales for resale and rentals) within this State
whatsoever. . . .
Generally, "sales made and services rendered for ultimate consumption or use within this
State" means sales of gas, electricity, steam, water, refrigeration, telephony or telegraph when
delivered through mains, pipes or wires, sale of merchandise which are part of stock in trade, charges
for transportation of passengers and/or goods, toll charges and service charges such as charges for
installation and moving of telephones and for the delivery of messages. Thus, "sales made and
services rendered" has been defined to include sale and services which are the principal business of
the taxpayer and which are made to customers.

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In order to be included under the heading "profit from any other transaction whatsoever,
except the profit on sales for resale and rentals," the profits must be from labor not performed in the
conduct of the taxpayer's principal business and from the sales of materials and supplies, other than
such as are purchased for resale. Isolated transactions also come under this item such as when a
water company, which does not make a practice of furnishing this service, lays pipes and mains for
a customer with title vesting in such customer.
In 1946, the Attorney-General of the State of New York rendered an opinion relating to what
constitutes a rental for purposes of section 186-a of the Tax Law. In that opinion, the AttorneyGeneral approved a proposed ruling by the Tax Department that equipment for street lighting and
for the control of such lighting transferred from a utility company to the City of New York, where
the equipment was clearly in the control of the City, constituted a rental. (1946 Op. Atty. Gen. 326)
However, in that opinion, the Attorney-General noted that: "Nothing in the history or language of
the statute indicates that amounts which are actually charges for service may be excluded from gross
income by merely calling them rentals."
The attribute that distinguishes a rental from a service is that in a rental situation the lessee
has possession and efficient control of the rented equipment or rented real property. Since Con
Edison has exclusive control of its entire distribution system, including all matters relating to the
design, construction, expansion, operation, use maintenance and retirement of the system, Con
Edison's lease to Utility of an undivided interest in Con Edison's distribution system, to the extent
required to sell and distribute preference power to consumers, is not a rental but rather a service
being performed by Con Edison.
Accordingly, the funds collected for preference power that are collected by Con Edison as
Utility's agent from Utility's consumers for the sale of preference power do not constitute receipts
of Con Edison. However, any amount not included in "funds collected for preference power" that
is collected by Con Edison as Utility's agent from Utility's consumers for the sale of preference
power, such as an amount related to late payment or non-payment of bills, is a receipt for services
performed by Con Edison. Any wheeling charge Con Edison receives for contracting with others
for the transmission of preference power is a fee for a service.
The services that Con Edison performs for Utility are not services "for ultimate consumption
or use by the purchaser", within the meaning intended, so that the total "receipts" for such services
do not constitute gross income as defined. Such services rendered are incidental to the conduct of
Con Edison's principal business. As such, the services rendered are transactions taxable on the
profits derived therefrom. To the extent that such services are rendered on behalf of New York State
consumers, such profits would be subject to tax in their entirety. New York City Energy Office,
State Tax Commission Advisory Opinion, October 16, 1985, TSB-A-85(23)C.

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(d)
Is such rental and preference power sales monies collected by Con
Edison from Utility's consumers as agent for Utility subject to the tax surcharge
imposed by section 186-c of the Tax Law?
Section 186-c of the Tax Law provides that the temporary metropolitan transportation
business tax surcharge on utility services is in addition to the tax imposed under section 186-a of the
Tax Law and, for the taxable years such tax surcharge is applicable, the rate of the tax surcharge is
applied to the tax imposed under section 186-a or to that portion of the tax imposed under section
186-a which is attributable to the taxpayer's business activity carried on within the MCTD. The
portion of the tax attributable to business activity carried on within the MCTD shall be determined
by multiplying the tax imposed under section 186-a by the ratio of the taxpayer's gross income from
all sources within the MCTD to its gross income from all sources within New York State.
Consequently, for the taxable years the temporary metropolitan transportation business tax
surcharge on utility services under section 186-c of the Tax Law is in effect, if Con Edison has
business activities both within and without the MCTD it must determine its gross income from
within the MCTD as well as its gross income from within New York State. Con Edison's gross
income from within the MCTD includes the rental received from Utility for the use of its distribution
system and for its services in billing and collecting monies as Utility's agent, any wheeling charge
received from Utility for the transmission of preference power, and any amount that is collected from
Utility's consumers, as Utility's agent for the sale of preference power, that is not included in "funds
collected for preference power".

DATED: December 1, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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