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Volume 6 - Opinions of Counsel SBEA No. 14

Opinions of Counsel index

Special franchise assessment (tax credit) (contracted fees or payments) - General City Law, § 20-b; Real Property Tax Law, § 626; Village Law, § 5-530:

Franchise fees or payments in the nature of a tax payable to a municipality by a cable television company pursuant to a contract which provides that such fees or payments shall be in addition to any and all other taxes imposed by law, do not qualify for the credit or reduction against taxes allowed by section 626 of the Real Property Tax Law.

We have been asked whether a municipality may condition the granting of a franchise to a cable television company on that company’s waiver of its right to a credit against special franchise taxes under section 626 of the Real Property Tax Law.

Section 626, subdivision 1, allows as a credit or deduction from the tax levied on a special franchise in any assessing unit, the sum paid to that assessing unit which is based upon a percentage of gross earnings or a license fee or other sum of money which is “in the nature of a tax,” if the special franchise owner paid such sum for the exclusive use of the assessing unit under any agreement or statute requiring such payment. Sums payable to an assessing unit which are “in the nature of a tax” fall within the ambit of this statute even though they may not be considered taxes in the classic sense (see, People ex rel. Nassau Electric R. Co. v. Grout, 119 App.Div. 130, 103 N.Y.S. 975, aff’d, 189 N.Y. 510, 81 N.E. 1173; see also, 4 Op.Counsel SBEA Nos. 18, 33, 110).

Although there is no provision of law permitting the waiver mentioned in the inquiry, there is a judicial decision that supports conditioning the grant of a franchise on such a waiver.

In City of Ithaca v. Ithaca St. Ry. Co., 145 App.Div. 675, 130 N.Y.S. 359, the defendant railroad was operating a single track railway pursuant to a franchise from the City of Ithaca. It subsequently applied to the city for permission to construct and maintain a double-track railway, and the franchise was granted pursuant to a written agreement. One section of the agreement provided that the defendant would pay a specified amount to the city for the franchise. This amount would be “chargeable against the earnings and assets of the defendant as taxes were chargeable” and it would be “in addition to all franchise or other taxes and assessments imposed by law” (id. at 360). The defendant asked that the sum payable under the contract be deducted from its special franchise taxes in accordance with the provisions of section 48 of the Tax Law (the predecessor to § 626).

Notwithstanding the language of section 48, the Appellate Division, Third Department, concluded that where “public policy” does not prevent it, a party may waive the benefit of a statute and incur obligations beyond that which would otherwise take precedence. The court proceeded to find the contract valid and denied the defendant a credit against its special franchise tax. Impliedly then, this type of waiver would not violate public policy. Under this holding, if a municipality includes in a contract granting a franchise to the cable TV company a clause stating that any franchise fee or tax payable under the terms thereof will be “in addition to any and all other taxes imposed by law,” such contract would be valid.

Significantly, the court decided that the contract apparently did not contravene the legislative policy behind the enactment of section 48. This legislative intent was to equalize the tax on corporations and to compel a special franchise owner to pay one and only one franchise tax. The special franchise tax was intended to represent a levy against the full value of the franchise. Thus, according to the legislative policy, if the amount paid “in the nature of a tax” to the assessing unit is greater than the tax levied on the special franchise assessment, the company should not have to pay a second tax on the franchise (see, Village of Saranac Lake v. Paul Smith’s Electric Light and Power Co., 183 App. Div. 620,170 N.Y.S. 541, app.dsmd., 229 N.Y. 609, 129 N.E. 927). Similarly, if the tax is greater than the charge in the nature of a tax, the excess would be payable to the municipality.

The court also held that no “double taxation” occurred by reason of the contract. The parties had specifically agreed that, in addition to all other taxes, a further sum was to be paid. Thus, the true sum the city was to receive for the granting of the franchise was the amount received from the special franchise tax and the sum chargeable against the earnings and assets of the defendant.

Of particular significance is the court’s implied conclusion that no violation of “public policy” occurred under these circumstances. “Public policy” is a very amorphous concept for which there is no single, acceptable definition which would be appropriate in all cases. The courts have approved the definition of public policy as the principle which states that it is unlawful to do that which tends to be injurious or contrary to the public good or welfare (10 N.Y. Jur., Contracts § 133 (1960)).

A cable television company is a private, for profit business which is the sole recipient of the tax credit. The availability and the waiver of a tax credit can thus be perceived as an issue primarily of private benefit and concern. The exercise of the waiver is of little concern to the public and is therefore not contrary to public policy.

In addition, if the Legislature intended section 626 to express a strong public policy against extra taxes paid by special franchises, it presumably would not have enacted section 20-b of the General City Law and section 5-530 of the Village Law. Those laws authorize cities and villages to impose taxes on utilities based on a prescribed percentage of their gross income (and cable television companies are utilities; see, Staminski v. Romeo, 62 Misc.2d 1051, 310 N.Y.S.2d 169). Both statutes state specifically that the tax imposed will be “in addition to any and all other taxes.” The Legislature did not intend payments made by utilities pursuant to those statutes to be deducted from special franchise taxes-paid by said utilities in accordance with section 626 of the Real Property Tax Law (see, 4 Op.Counsel SBEA No. 110).

Through the aforesaid enactments, the Legislature has given explicit sanction to cities and villages to limit the impact of the tax credit imposed by section 626. These authorizations suggest that section 626 is not so grounded in public policy that a waiver of the right to such credit would violate such policy.

Conditioning the grant of a franchise upon the waiver of a section 626 credit also appears consonant with regulations of the New York State Commission on Cable Television. Section 819 of the Executive Law requires a cable television system to obtain a franchise from the municipality if it commenced or expanded operations after April 1, 1973. Section 818 thereof permits the municipality to impose a fee, tax or a charge on the cable television system. The regulations promulgated by the Commission on Cable Television state further:

Any franchise may contain such additional terms and conditions as the municipality and the franchises deem appropriate, provided such additional terms and conditions are consistent with all Federal and State laws, rules, regulations and orders (9 NYCRR 595.2). (emphasis supplied)

Accordingly, franchise fees or payments in the nature of a tax, payable pursuant to a contract which provides that such fees or payments shall be in addition to any and all other taxes imposed by law, do not qualify for the credit or reduction allowed pursuant to subdivision 1 of section 626 of the Real Property Tax Law.

July 12, 1978