New York STATE Franchise Tax Changes for Utility and TTD Companies

By Brian J. Rebhun

The New York State Department of Taxation and Finance issued a Technical Services Bureau memorandum [TSB-M-00(04)(C)] on December 19, 2000, to explain the corporate tax law changes for certain utility companies. Previously, utility and TTD (transportation, transmission, or distribution of gas, electricity, or steam) corporations were taxed under separate statutes for New York State corporation tax purposes (N.Y. Tax Law sections 186, 183, and 184, respectively).

The notice explains that the New York State corporate tax responsibilities of certain utility corporations became subject to the general corporation tax (Article 9-A) on January 1, 2000. Historically, in New York, utility companies were subject to a tax on gross earnings received from the employment of capital plus a tax on dividends (N.Y. Tax Law section 186). TTD companies were taxed on the net value of capital stock as well as the gross earnings received from conducting business in New York. Now, utility and TTD companies are subject to the general corporation tax based on the traditional three-factor formula of property, payroll, and receipts, with receipts double weighted.

Filing changes. Utility and TTD corporations that reported on a fiscal year must file a short-period general corporation tax return for the period beginning on January 1, 2000, and ending on the date their fiscal year ends for federal income tax purposes. Fiscal year taxpayers must use 1999 forms (CT-3, CT-3-A, CT-3-S, or CT-3-S-A) and file the returns 2As months after the end of the fiscal year. Calendar year taxpayers will file general corporation tax returns for the 2000 calendar year using 2000 forms, now available.

Combined reporting. Previously, utility and TTD companies could not file a combined report with related entities that filed under the state’s general corporation tax laws. Now, the regulations provide the benefits of combined reporting to utility and TTD corporations that meet the unitary business, capital stock, and distortion conditions. This change allows the offset of income from profitable companies with current and net operating losses of other members of a group and, in some cases, a reduction in the overall allocation of income to New York by aggregating apportionment data across entities.

For tax years ending on or after December 31, 1997, the corporation tax regulations have been amended to remove the necessity for prior permission to file on a combined basis. Instead, a group of corporations wishing to file on a combined basis must provide a combined filer statement (CT-51) and certain other information with its combined franchise tax return.

Exception. Taxpayers considered to be “continuing section 186 taxpayers” will remain subject to the utility tax unless they make an irrevocable election by filing a general corporation tax return on the date or extended date the return is due.

TTD corporations. Under the new rules, TTD corporations must file a final transportation and transmission corporation franchise tax return on capital stock (form CT-183) and a transportation and transmission corporation franchise tax return on gross earnings (form CT-184). Also, if the corporation is subject to the metropolitan transportation business tax surcharge (MTA surcharge), a final transportation and transmission MTA surcharge return (forms CT-183-M and CT-184-M) was due on March 15, 2000, covering the 1999 year.

NOLs. Utility and TTD corporations may claim a net operating loss (NOL) deduction like other general corporate taxpayers, however, they can only deduct NOLs sustained in years in which they were taxable under the general corporation tax.

New York S corporation elections. Under the new law, utility and TTD companies may elect to be treated as a New York S corporation and receive pass-through tax treatment. To make the election, a corporation must be a general corporate taxpayer and a federal S corporation (or plan to be a federal S corporation, and file an election on Form CT-6). If a federal S election is pending, a New York S election may be filed indicating that the federal S election is pending.

Entire net income adjustments. New York requires certain adjustments to entire net income depending on a corporation’s prior classification. A qualified public utility (QPU) was subject to ratemaking supervision by the New York State Department of Public Service (DPS) on December 31, 1999, and was subject to tax under Tax Law section 186 for the tax year ending on December 31, 1999. A qualified power producer (QPP) was not subject to ratemaking supervision by the DPS on December 31, 1999, but was subject to tax under Tax Law section 186 for the tax year ending on December 31, 1999, because of being principally engaged in the business of supplying electricity. A qualified pipeline (QP) was subject to ratemaking supervision by the Federal Energy Regulatory Commission or the DPS on December 31, 1999, and was subject to tax under Tax Law sections 183 and 184 for the tax year ending on December 31, 1999, because of being principally engaged in the business of pipeline transmission.

QPUs are required to adjust entire net income to reflect modifications for depreciation and federal gain or loss on transition property and for regulatory assets. Unlike QPUs, QPPs and QPs must adjust entire net income to reflect modifications for depreciation on transition property only. Transition property must have been placed in service by a QPU, QPP, or QP before January 1, 2000, and a depreciation deduction under IRC 167 must have been allowed. Such property maintains its transition character only in the hands of the taxpayer that owned it on January 1, 2000. QPUs, QPPs, and QPs are allowed to use accelerated depreciation deductions based on the federal guidelines. Furthermore, these corporations are not required to complete the depreciation deduction schedule (CT-399) required for all corporations subject to the general corporation tax.

Pipeline receipts. Because utility and TTD companies are now taxed under the three-factor apportionment formula, one of the most important items in the Department’s notice is the proper method for determining the amount of receipts from transporting and transmitting gas through pipes in New York State. New York receipts are calculated by multiplying total receipts by the proportion of New York State transportation units (one cubic foot of gas over one mile) to total transportation units.

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