The Supreme Judicial Court ruled today the city of Boston was wrong to try tax Veolia Energy's network of steam pipes through Boston Proper, ruling that, collectively, they are parts of a "great integral machine," which have been exempt from taxation since at an 1866 ruling.
The ruling means Boston assessors will have to repay Veolia the roughly $2 million in "personal property" taxes they had levied on the value of steam pipes for the 2014 tax year. However, the company still owes about the same amount in the tax for the following tax year, because it applied for an abatement the wrong way, the Massachusetts Appeals Court ruled earlier this year.
City assessors said they decided to tax the pipes because the state law on personal property taxes specifically excludes "pipes" from the ban on machinery taxation.
But in its ruling, the state's highest court ruled that the steam pipes were not simply passive vessels but are part of a network designed to generate the final steam product at customer sites. In other words, they are part of a big old steam machine.
To reach that conclusion, the court first had to consider and explain in some detail the complexities of the steam network - which more than 250 Veolia customers use for both heating and cooling as well as sterilization.
The networks operate together to balance customer load and steam generation across the generation facilities to ensure equivalent rates of production and consumption. The steam is stored and transported through pipes within the networks. By design, these pipes expand, contract, and move to withstand pressure and heat fluctuations. Also, they are equipped with valves to control pressure, to shed condensate (steam that has returned to liquid state), and to direct the flow of steam. ...
Once steam reaches a customer's site, a pressure reduction valve reduces that pressure to assure safety, to comply with regulatory requirements, and to conform to customer equipment compatibility and use requirements. After a customer uses the steam, the networks condense it into condensate, some of which the networks return to the generation facilities through condensate-return lines for further steam production.
And all this is done under monitoring by Veolia workers, via "a centralized supervisory control and data acquisition system."
The court credited a Veolia manager, who concluded that "the steam "is not a finished product until it's delivered to the customer through their control valves and provided to them for use in their energy services."
And that brought the justices to Commonwealth vs. Lowell Gas Light Co., an 1866 decision by their predecessors, who faced a similar question involving a gas company's mains under city streets - and who ruled that all those pipes were part of a "great integral machine:"
They constituted a part of the machinery by means of which the corporate business was carried on, in the same manner as pipes attached to a pump or fire engine for the distribution of water, or wheels in a mill which communicate motion to looms and spindles, or the pipes attached to a steam-engine to convey and distribute heat and steam for manufacturing purposes, make a portion of the machinery of the mill in which they are used. Indeed, in a broad, comprehensive and legitimate sense, the entire apparatus by which gas is manufactured and distributed for consumption throughout a city or town constitutes one great integral machine, consisting of retorts, station-meters, gas-holders, streetmains, service-pipes and consumers' meters, all connected and operating together, by means of which the initial, intermediate and final processes are carried on, from its generation in the retort to its delivery for the use of the consumers.
In 1956, the court issued a similar ruling in a case involving Boston assessors and Boston Gas, and then again in 1978, in a case involving the Lowell Gas Co.
Today's court noted that the legislature had never tried to change the "great integral machine" doctrine laid down by their predecessors and that they saw no reason to do so, either.
The assessors' argument that the doctrine was effectively abrogated by the Legislature's subsequent addition of "poles, underground conduits, wires and pipes" to the list of exceptions from the exemption, which already included real estate and machinery used in manufacture, is belied entirely by the fact that this court continued to apply the doctrine notwithstanding the change.