New ruling reinstates sales tax on transport of electricity

January 19, 1999

Tax Department decision will increase electrical costs; may also affect natural gas

The state Department of Taxation and Finance has determined that transportation of electricity is subject to sales tax--a ruling that may increase energy costs for some customers by 5 percent, and interfere with the transition to a competitive marketplace.

Meanwhile, the Pataki Administration has also indicated it is considering a host of issues relating to restructuring of the electric industry, with the goal of reducing the energy tax burden.

The new Tax Department ruling reverses a decision the agency made two years ago, as the state Public Service Commission was considering plans to restructure and create competition in New York's electrical industry.

State law imposes sales tax on "the receipts from every sale, other than sales for resale, of gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam service of whatever nature."

In January 1997, the Tax Department issued an Opinion of Counsel that sales tax would not apply to "unbundled" transportation of electricity.

"If the utility is solely providing transportation service from its city-gate to the customer's premises, no sales tax is payable on the transportation fee," the 1997 decision said.

Savings available to consumers as a result of that ruling have played a key role in the nascent development of a competitive market for electricity in the territory served by Consolidated Edison Inc. Competition in other areas of the state was also expected to move forward in large part because of those savings.

In a revised opinion dated January 1, 1999, Deputy Commissioner and Counsel Steven U. Teitelbaum emphasized that the tax law imposes sales tax on "electric ... service of whatever nature."

In a restructured electrical industry, he wrote, "one company will be generating and selling electricity and another company will be providing the service of (among other things) getting the electricity to the customer.

"It is my opinion that the phrase 'electricity ... and electric ... service of whatever nature' imposes tax on the services of both parties in the provision of electricity."

The new ruling initially was to apply from January 1, 1999. In response to The Business Council and others, however, the department has agreed to delay the change until April 1.

"We are concerned not only about the impact on electrical rates, but the potential impact on natural gas users who buy from alternative providers," said Kevin Lanahan, The Business Council's energy analyst.

The state has applied similar sales-tax rules to transmission of both electricity and natural gas in the past. Imposition of sales tax on the two sources could cost consumers a total of hundreds of millions of dollars a year.

The new ruling would not affect the price of electricity used in the manufacturing process, which is exempt from sales tax. Other businesses, and residential users, participating in Phase One of ConEd's retail access program will see energy bills go up. Other ratepayers throughout the state would have experienced savings from the 1997 sales-tax exemption as retail access took hold in the other utility territories.