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Volume 6 - Opinions of Counsel SBEA No. 112

Opinions of Counsel index

Special franchise assessment (municipally owned and operated utility); Municipal corporations exemption (utility property) - Real Property Tax Law, §§ 102(17), 406:

Tangible property of a municipally owned and operated utility company, located in the public way is not tangible property of a special franchise, but must be assessed by the local assessor if otherwise defined as real property. Such property is exempt only if located within the boundaries of the owning municipal corporation.

We have been asked whether tangible property of a municipally owned and operated power company, which property is located in the public way, is real property liable to taxation.

All real property within the State of New York is subject to real property taxation unless specifically exempt therefrom by law (Real Property Tax Law, § 300). Real property is defined for this purpose in subdivision 12 of section 102 of the Real Property Tax Law.

Included within that definition are special franchises (§ 102(12)(h)). A “special franchise” is the right or authority to operate in the public way and, for purposes of assessment and taxation, a special franchise includes the value of tangible property located in the public thoroughfare (§ 102(17); see, People ex rel. Metropolitan Street Railway Company v. Tax Commissioners, 174 N.Y. 417, 67 N.E. 69). A special franchise does “not include property of a municipal corporation” (§ 102(17)).

The fact that this definition excludes property of a municipal corporation does not mean, however, that the tangible property of a municipal corporation is not real property or is therefore exempt.

The term “special franchise” was first added to the definition of real property by chapter 712 of the Laws of 1899. Prior to that date, however, the tangible property used in the exercise of the franchise to operate in the public way had been assessed locally by municipal assessors. This is clear from the Court of Appeals decision in the Metropolitan Street case, supra. In the course of its opinion, the Court noted as follows:

The right to assess special franchises by central authority is challenged as a violation of the principle of home rule embodied in the constitution and especially the right to assess the tangible property annexed thereto and included therein by the act, because the latter is withdrawn from the jurisdiction of the local assessors by whom it had been theretofore assessed. (174 N.Y. at 436 (emphasis added).)

Other case law makes it clear that the exception for municipally owned property in the definition of special franchise does not mean that such property is therefore not assessable as real property. In People ex rel. City of Auburn v. Duryea, 59 App.Div. 488,69 N.Y.S. 388, the issue before the court was whether property of the City of Auburn used in a water supply system located outside the boundaries of the city was assessable by the town in which it was located. The town assessors contended that the property was assessable under the general definition of real property in the then Tax Law. The city countered that items such as its pipeline and pumphouse were part of a special franchise and therefore not subject to taxation pursuant to the definition of special franchise as added in 1899.

The court noted at the outset that, “the property in question was real, and not personal, under the definition given in section 2 of the law, both before and after the amendments of 1899, There can be no doubt that the property in question was assessable in the town, under . . . [the Tax Law], before the amendatory act was passed [citations omitted]” (69 N.Y.S. at 389).

In considering the City ’s contention, the court reviewed the history of the Tax Law and the intent of the Legislature in defining special franchises, noting as follows:

[The] provisions relating to tangible property of a corporation, and making such property a part of a special franchise, have no application to the tangible property of a municipal corporation, because the term “special franchise” was created solely for the purpose of taxation, and the property of a municipal corporation was expressly exempted from such taxation.

The purpose of the amendatory act was to provide for an increase of the area of taxation so as to include property not theretofore subject to taxation. No purpose is apparent to relieve and exempt from taxation property theretofore taxable. And as to tangible property, the provision was that, when taxable as part of a special franchise, it should only be taxed upon the assessment made for the purpose of a special franchise tax. When not assessable as a part of a special franchise. it was to be assessed as it had been before the amendatory act was passed. (id. at 390 (emphasis added).)

(See also, People ex rel. City of Rochester v. DeWitt, 59 App.Div. 493, 69 N.Y.S. 366, aff ’d, 167 N.Y. 575, 60 N.E. 1118.)

Therefore, while tangible property owned by a municipality and located in the public way is not assessable as part of a special franchise, it must be assessed locally if otherwise defined as “real property” in subdivision 12 of section 102. Examples of these definitions include those found in paragraph (e) (mains, pipes and tanks located upon, above or under any public or private street or place), and paragraph (f) (equipment for the distribution of heat, light, power, gases and liquids).

Once the property has been determined to be real property which must be assessed locally, the question of its taxable status remains.

Section 406, subdivision 1, of the Real Property Tax Law provides an exemption for real property owned by a municipal corporation “ held for a public use” if located within its corporate limits. Property outside the boundaries of the owning municipality is not so exempt with certain limited exceptions not here applicable.

Without question, the real property of the municipally owned power plant is taxable at least to the extent that it is located beyond the municipal boundaries. Whether the property within is taxable is dependent upon whether such usage constitutes a “public use” within the meaning of section 406(1).

Article 14-A of the General Municipal Law authorizes local governments to operate public utilities for gas and electric service. By itself, this does not mean, however, that the property is held for a public use (see, e.g., Town of Harrison v. Westchester County, 13 N.Y.2d 258, 264-265, 196 N.E.2d 240, 246 N.Y.S.2d 593).

There is no reported case law in point in New York. The implication of cases such as Duryea, supra, and De Witt, supra, however, is that the ownership and operation of equipment for the distribution of items essential to the public health and welfare, such as water, heat, gas and light is a “public use” within the meaning of subdivision 1 of section 406.

Moreover, decisions in other states support this proposition; that is, they have recognized operation of a municipally owned public utility as “public use” of the property. Examples may be found in Texas (A & M Consolidated Independent School District v. Bryan, 143 Tex. 348, 184 S.W.2d 914); Massachusetts (Tax Collector of North Reading v. Town of Reading, 366 Mass. 438, 319 N.E.2d 887, and Board of Gas and Electric Commissioners of Middleborough v. Board of Assessors of Lakeville, 355 Mass. 387, 245 N.E.2d 246); and Ohio (Cleveland v. Board of Tax Appeals, 167 Ohio St. 263, 147 N.E.2d 663). In the last cited case the court declared that the right to exemption was “not mitigated by the fact that a charge is made for the service rendered by the utility to the public or by the fact that a profit may result from that charge” (147 N.E.2d at 664).

We believe that the courts in New York would agree with the rationale followed by these other decisions. Operation of municipally owned airports (Town of Harrison v. Westchester County, supra), parking lots (County Dollar Corporation v. Yonkers, 47 Misc.2d 627, 263 N.Y.S.2d 33), and sports arenas (County of Erie v. Kerr, 49 A.D.2d 174, 373 N.Y.S.2d 913) have been judicially construed as “public uses” within the meaning of section 406. Comparing the provision of transportation, access and entertainment-the subjects of the aforementioned cases - to provision of basic necessities such as heat, light, gas and electricity, we are of the opinion that if the former are public uses, the latter must necessarily also be within that category.

In passing, we note that the opinion in Town of Huntington v. Bradford, 273 N.Y. 603, 7 N.E.2d 715, is distinguishable on its facts. There the Court was considering the “public use” question relative to a lease of municipal property to a lighting company for utility purposes, rather than a municipally owned and operated public utility.

April 21, 1980