Does equipment used solely to install connecting pipeline linking a newly drilled gas well to the existing pipeline system qualify for New York's investment tax credit as equipment used in natural gas 'extraction'?

Plain-English summary

A business in the natural gas extraction industry asked whether it could claim New York's investment tax credit on equipment used exclusively to install pipeline connecting a newly drilled gas well to the existing natural gas pipeline network -- pipeline needed to transport the gas away after it's brought up out of the ground. The equipment itself met several of the credit's technical requirements: it was depreciable tangible personal property, had a five-year useful life, and was located in New York.

The problem was the last, substantive requirement: qualifying property must be "principally used ... in the production of goods by manufacturing, processing, assembling, refining, mining, extracting..." (or in repairing/servicing other property that itself qualifies). The Department drew a line between the extraction operation itself -- bringing the gas out of the ground -- and what happens to the gas AFTER extraction, which is transportation. Installing connector pipeline is squarely a transportation-related activity, not a step in the extraction process. And because the pipeline being installed isn't itself qualifying production property, the equipment used to install it can't qualify under the credit's alternative "repair and service of other qualifying property" route either -- there's no qualifying property being serviced. With neither path available, the Department concluded the connector-pipeline installation equipment simply doesn't meet the "principally used in production" test, so no investment tax credit is allowed for it.

What this means for you

Natural gas and other extraction businesses building connecting infrastructure

Equipment used to build pipeline, gathering lines, or similar transportation infrastructure connecting a well to a broader distribution/transport network is treated as serving a transportation function, not the extraction function itself -- even though the extraction business couldn't get its product to market without it. Don't assume infrastructure that's operationally necessary for your extraction business automatically counts as "extraction" equipment for credit purposes.

Businesses claiming the investment credit through the "repair and service" pathway

That pathway only helps if the equipment being repaired or serviced is ITSELF qualifying production property. If the underlying asset (here, connector pipeline) doesn't qualify as production property in the first place, equipment used to install, maintain, or service it can't piggyback onto that pathway either.

Common questions

Q: Would equipment used directly in drilling or extracting the gas itself qualify?
A: This ruling doesn't address that -- it's narrowly limited to equipment used exclusively to install CONNECTING pipeline after the well is drilled, which the Department found is a transportation function separate from extraction.

Q: Does it matter that transporting the gas is essential to the extraction business's overall operation?
A: No -- the ruling draws the line at the extraction process itself, not at what's commercially necessary for the extraction business to sell its product.

Q: Can another natural gas business rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other taxpayers, even similarly situated gas extraction companies installing connector pipeline.

Citations and references

Statutes and regulations:

• Tax Law § 210.12, § 210.12(b) (investment tax credit qualifying property requirements)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (4) C
Corporation Tax
February 20, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C861008B

On October 8, 1986, a Petition for Advisory Opinion was received from Grimaldi,
Fagliarone and Tornatore, 650 James Street, Syracuse, New York 13203.
The issue raised is whether a business in the natural gas extraction industry may claim an
investment tax credit, pursuant to section 210.12 of the Tax Law, for equipment used exclusively
in the installation of pipeline to connect a newly drilled gas well to the existing natural gas
pipeline system. The pipeline is necessary for the transportation of the natural gas after its
extraction from the ground.
The equipment at issue is tangible personal property, depreciable under section 167 of the
Internal Revenue Code, with a five year useful life and a situs in New York State.
Section 210.12 of the Tax Law provides that a taxpayer is allowed a credit against the tax
imposed by Article 9-A with respect to qualified tangible personal property and other tangible
property which:
(1)

is acquired, constructed, reconstructed or erected by the taxpayer after December
31, 1968;

(2)

is depreciable pursuant to section 167 of the Internal Revenue Code or recovery
property with respect to which a deduction is allowable under section 168 of the
Internal Revenue Code;

(3)

has a useful life of four years or more;

(4)

is acquired by the taxpayer by purchase as defined in section 179(d) of the Internal
Revenue Code;

(5)

has a situs in New York State, and

(6)

is principally used by the taxpayer in the production of goods by manufacturing,
processing, assembling, refining, mining, extracting, farming, agriculture,
horticulture, floriculture, viticulture or commercial fishing.

Pursuant to section 210.12(b) of the Tax Law, the term "property used in the production
of goods" includes machinery, equipment or other tangible property which is principally used in
the repair and service of other machinery, equipment or other tangible property used principally
in the production of goods and includes all facilities used in the production operation, including
storage of materials to be used in production and of the products that are produced. Thus,

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-87 (4) C
Corporation Tax
February 20, 1987

qualifying property must be principally used either in the production of goods or in the repair and
service of other qualifying property.
The installation of pipeline to connect a newly drilled gas well to an existing pipeline
system is the performance of a service that is not part of the extracting operation. Furthermore,
since the pipeline in question is not qualifying property, the installation of such pipeline is not a
repair or service to other qualifying property. Therefore, the equipment used in the installation of
such pipeline is not qualifying property because the equipment is not used in the production of
goods and is not related to the repair and service of other qualifying property.
Accordingly, a business that installs pipeline to connect a newly drilled gas well to an
existing pipeline system may not claim the investment tax credit, pursuant to section 210.12 of
the Tax Law, on the cost or other basis of the equipment used in the installation of connecting
pipeline because such equipment is not qualifying property.

DATED: February 20, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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