News Briefings - State Taxes

The following article was taken from the 11/16/2009 issue of State & Local Taxes Weekly.

11/16/09 -- Pennsylvania High Court holds sales tax applies to delivery of electricity

by Judith Richardson-Dunkley, Esq., Esq. (RIA)

The Pennsylvania Supreme Court has upheld a Commonwealth Court decision denying a refund of sales tax paid on "delivery" charges and other costs associated with the sale of electricity for commercial use, finding that the unbundling of electricity charges under the Competition Act did not affect the taxation of electricity under the Tax Code. (Spectrum Arena Limited Partnership v. Commw., Pa. S. Ct., Dkt. No. 42 MAP 2008, 11/05/2009)

Separate charges. The taxpayer owns a sports and entertainment facility which purchased electricity from one provider that was delivered by another. The taxpayer paid sales tax on transmission services, distribution services, competitive transmission charges (CT charges) and intangible transmission charges (IT charges) (hereafter "disputed charges"), charged by the local utility that delivered the electricity and then filed for refund arguing that the non-generation costs did not constitute a taxable sale of tangible personal property or taxable services under the Tax Code. The Department of Revenue Board of Appeals denied the refund petition, finding that the disputed charges were part of the "sale of electricity" under Policy Statement 60.23 (Pa. Code § 60.23) and therefore taxable. The taxpayer appealed to the Commonwealth Court, which upheld the Board's decision, and in a second en banc decision, denied exceptions filed by the taxpayer on the basis that the disputed charges were exempt from tax under Pa. Code § 54.1.

Unbundled charges. The taxpayer appealed and argued that lower court ignored the impact of the Competition Act, which unbundled services for the delivery of electricity from the sale of electricity allowing consumers to purchase electricity from any provider they wished and have that electricity delivered by their local provider. The taxpayer also argued that the disputed charges met all the requirements necessary to qualify as "exempt" delivery charges under Pa. Code § 54.1; that the continued taxation of delivery charges for electricity while exempting post-deregulation delivery charges with respect to natural gas resulted in disparate treatment of similar industries; and that the lower court erred in holding that consumers must pay sales tax on statutory transition charges as part of the purchase price even though the Competition Act explicitly defines such charges as separate from the purchase of electricity.

The Competition Act defines the retail sale of electricity as the "total value" of anything paid or delivered, or promised to be paid or delivered, whether in money or otherwise. The statute is plain and unambiguous, and the "total value" if electricity is not just the cost of the electricity itself, but all costs required for the energy to power the facility. The raw energy is not the end product, and cannot be utilized without some means of getting it to the consumer. In addition, the unbundling of the generation of electricity from the delivery of electricity under the Competition Act did not exempt delivery and transmission related charges from sales tax, but merely allowed consumers to choose an electrical provider in order to negotiate better rates and reduce costs. The taxpayer argued that the fact that the General Assembly made no corresponding amendment to the Tax Code means that the General Assembly did not intend for the delivery-related charges to be subject to sales tax. However, there was no amendment needed because the definition of "sale" already included the charges based on the definition set forth in the Public Utility Code.

The Public Utility Code defines the "sale" of electricity as "[r]etail sales of electric generation, transmission, distribution or supply of electricity, dispatching services, consumer services, competitive transition charges, intangible transition charges and universal service and electricity conservation charges and such other retail sales in this Commonwealth." Since the Public Utility Code so clearly provides that the disputed charges are subject to sales tax, there was no need to modify the language of the Tax Code.

Case law. The taxpayer next argued that case law supports a finding that the legislature intended to exempt the disputed charges from sales tax. The taxpayer relied on PECO Energy Co. v. Commw., 919 A2d 188 (2007) for the proposition that the practical effects of the Competition Act on business cannot be ignored when interpreting the Public Utility Realty Tax Act (PURTA). However, the issue in PECO was whether the term "cost" in PURTA should be interpreted as "cost as shown by books on account" or "original cost." Although the definition adopted by the court was consistent with the practical effects of the Competition Act, that consistency was coincidental. The definition was actually adopted because it was the plain meaning of the language in PURTA. Here, the plain meaning of the Tax Code, read in light of the Public Utilities Code, states that tax is assessed on an electric "sale at retail," which would include the disputed charges.

Exemption inapplicable. The taxpayer also argued that the disputed charges are clearly exempt under the plain language of Pa. Code § 54.1. However, Pa. Code § 54.1 addresses a situation where a finished consumer good is delivered by a third party carrier who had no involvement in the production of the good, but merely conveys the item to the consumer. In this case, both the generator of the electricity and the local company that delivers it are the "vendor." The local company not only delivers the electricity, but is required to generate and produce any electricity that the other company cannot provide. Also, the electricity cannot be provided if the local company does not deliver it, and under the Competition Act, the consumer cannot select any entity other than its local utility to deliver the electricity. There is no truly independent delivery company as contemplated by Pa. Code § 54.1.

Disparate treatment. Lastly, the taxpayer argued that allowing the taxation of post deregulation delivery charges for electricity while exempting such charges with respect to natural gas improperly creates a disparate tax scheme. The taxpayer also pointed out that in the context of many other goods, delivery charges and similar incidental charges are not taxed, and that the General Assembly would not have intentionally created such a disparate tax scheme. However, Pa. Code § 60.23 directly undermines this position by specifically stating that the Department of Revenue is required to impose sales and use tax on the total purchase price for each separate charge for the generation, transmission or distribution in connection with providing nonresidential electric utility services, as well as related charges, services or costs for the generation, transmission or distribution of electricity whether or not the total amount charged is billed as a single charge by one vendor or billed separately by one or more vendors. There is no comparable policy statement regarding natural gas. Although the disparate treatment of electricity and natural gas may seem illogical, it is apparently the scheme intended by the legislature given the clear language of the policy statement, and it is not within the court's power to alter this scheme.