December 27, 1996

I. Issue

You request a ruling on the sales tax applicable to charges imposed by *************** on two categories of customer: "transportation customers" and "bundled customers."

II. Facts

A. Transportation Customers

You state that *************** ("the taxpayer") provides "gas transportation services" to its "transportation customers" via its gas distribution system pipelines in the following manner: the transportation customer purchases gas from an out-of-state supplier who delivers the gas to an agreed upon interconnection point between the interstate pipeline and the taxpayer's distribution system, (the "point of receipt").

A written agreement between the taxpayer and the transportation customer designates the maximum daily transportation volume (MDTV) of gas that such a customer may nominate for transportation and delivery by the taxpayer from the point of receipt to the "point of delivery." [1] Transportation customers may consume more or less than the agreed upon MDTV of gas.

Title to the gas purchased by the transportation customer from its supplier passes to the transportation customer outside Massachusetts, prior to the delivery of the gas at the point of receipt. Title to the gas does not pass to the taxpayer; however, the taxpayer is "deemed to be in control or possession of gas delivered to it...until such time as such gas has been delivered to [the transportation] customer at the point of delivery...." Due to the nature of the commodity and the means of transport, transportation customer-owned gas is "necessarily commingled" in the taxpayer's pipeline with gas owned by the taxpayer, and with gas owned by other parties.

The taxpayer in certain instances purchases gas from its transportation customers. Generally, this occurs when the customer does not consume all the gas purchased from its out-of-state supplier. In such situations, the taxpayer gives the transportation customer an "undertake energy credit" for the gas; the gas is "deemed to have been purchased" by the taxpayer. An "undertake penalty" may apply if the quantity of gas consumed by the transportation customer falls below a designated amount. The taxpayer states that in the undertake energy credit situation, a sale of gas from the transportation customer to the taxpayer occurs for which the taxpayer provides a resale certificate; the undertake penalty, if applicable, is considered by the taxpayer to be a "price adjustment." (Presumably, the undertake penalty decreases the amount paid by the taxpayer to the transportation customer for the gas.)

The taxpayer may also sell gas at retail to its transportation customers who require more than the contracted for amount of gas. In this situation, the taxpayer charges the transportation customer an "additional demand charge" for transporting the gas sold by the taxpayer to the transportation customer's site. An "overtake energy charge" is also billed to the transportation customer in such situations; this charge represents the cost of the gas sold. According to the taxpayer, the overtake energy charge is subject to sales tax.

You ask about the application of the sales tax to the following charges:

The " monthly customer charge," which represents a "fee for the right to be connected to the [taxpayer's] pipeline." This charge is incurred "whether or not gas is drawn [by the transportation customer] from the pipeline." This charge is "priced...as a recovery of costs associated with customer services and investments such as billing...."

The " demand charge," which is for "the actual transportation of the customers' gas through the [taxpayer's] pipeline....based on the [MDTV]. This charge is determined based upon the overall distribution system costs incurred by the [taxpayer] in the transportation of gas...."

The " additional demand charge," which results when a customer "draws gas above its daily contractually entitled amount [the MDTV]...." You state this charge is "associated with the cost of transporting the additional gas and not the gas itself." (As noted, the cost of this additional gas is invoiced to the customer as an overtake energy charge, which is subject to tax.)

The " overtake penalty" is "assessed for quantities of gas taken in excess...of the gas delivered by the supplier...to the [taxpayer's] transportation system." The penalty is calculated by multiplying the excess gas consumed by a rate, "designed to recover the fixed costs associated with the production...[of] the gas supply [and] the cost of the [taxpayer's] distribution system." It is assessed only in the context of a retail sale, that is, when the overtake energy charge is assessed.

B. Bundled Customers

Bundled customers are "hooked up" to the taxpayer's pipeline, from which they receive gas. Unlike transportation customers, bundled customers do not have title to the gas they receive via the taxpayer's pipeline, nor do they agree in advance to receive a certain amount of gas from the taxpayer.

Bundled customers are billed monthly. The bill is comprised of two separate charges: a "monthly customer charge," and for those bundled customers who do receive gas during the billing period, an "energy charge." The monthly customer charge covers the taxpayer's "customer specific costs associated with service lines connected to each customer," as well as metering, billing and customer accounting expenses. The energy charge is "the charge for all metered gas used [by the bundled customer in the billing period], measured in therms."

The monthly customer charge is billed to the bundled customer monthly regardless of whether the customer receives gas during the billing period; the energy charge is included on the customer's monthly bill only if the customer has received gas from the taxpayer during the billing period.

III. Discussion

General Laws Chapter 64H, § 2, imposes an excise on retail sales in the commonwealth by any vendor of "tangible personal property or services." For sales tax purposes, the definition of "services" is limited to "telecommunications services." G.L. c. 64H, § 1. A "sale" is defined as including "any transfer of title or possession or both, exchange, barter, lease, rental, conditional or otherwise, of tangible personal property...for a consideration...." Id. A "retail sale" is defined as "a sale of services or tangible property or both for any purpose other than resale in the regular course of business....[but] shall not include...(b) sales of transportation services...." Id. The "sales price" on which the sales tax is based is "the total amount paid by a purchaser to a vendor as consideration for a retail sale....In determining the sales price...no deduction shall be taken on account of...(ii) the cost of materials used, labor or service cost...losses or other expenses...;(iii) the cost of transportation of the property prior to its sale at retail...; and there shall be excluded...transportation charges separately stated, if the transportation occurs after the sale of the property is made...." Id.

A. Transportation Customers

In the monthly customer charge situation, the customer pays for the non-exclusive right to use the taxpayer's pipeline; this charge is imposed even if the customer does not use the pipeline in a given billing period. Since this charge is not paid in consideration for a retail sale it is not subject to sales tax. G.L. c. 64H, § 2; see also Directive 92-7 and Letter Ruling 85-9.

In the demand charge situation, the taxpayer delivers gas owned by the transportation customer from the point of receipt to the point of delivery. The taxpayer provides "transportation services" for the customer. The sale of transportation services does not involve a "retail sale;" thus, separately stated demand charges for transportation services are not subject to sales tax. G.L. c. 64H, §§ 1, 2.

In the additional demand charge situation, the taxpayer delivers the gas it sells to the customer pursuant to a retail sale of tangible personal property (the gas). The charges are part of the "sales price" subject to tax since they are charges for "the cost of transportation of the property prior to its sale at retail." G.L. c. 64H, § 1. [2]

The overtake penalty is calculated to recover the taxpayer's "fixed costs" associated with its retail sales of gas. The penalty is imposed when a retail sale of gas occurs, as is a separate charge for transportation services (the additional demand charge). The overtake penalty is included in the sales price subject to tax (which includes the overtake energy credit) since "the cost of...service cost...losses or other expenses..." may not be deducted from the "sales price." G.L. c. 64H, § 1.

B. Bundled Customers

If the bundled customer receives no gas through the taxpayer's pipeline during a billing period, only the monthly customer charge is billed to the customer. Since this charge is not paid in consideration for a retail sale of tangible personal property it is not subject to sales tax. G.L. c. 64H, § 2; see also Directive 92-7 and Letter Ruling 85-9.

If the bundled customer receives gas through the taxpayer's pipeline during a billing period, the customer is billed for the monthly customer charge and the energy charge. The energy charge is subject to sales tax as consideration for the retail sale of the gas to the customer by the taxpayer. G.L. c. 64H, § 2. Under the facts of this case, the monthly customer charge is independent of any transfer of tangible personal property and does not subsidize any transfer of tangible personal property that may occur. Therefore, the separately stated monthly customer charge is not subject to sales tax.

Very truly yours,

/s/Mitchell Adams

Mitchell Adams
Commissioner of Revenue

MA:HMP:kt

LR 96-5



[1] The point of delivery is a "single location, acceptable to [the taxpayer], where [the taxpayer's] distribution facilities are interconnected with the [transportation] customer's facilities and where the [transportation] customer's gas supply will be delivered."

[2] "The sale" occurs when the vendor/taxpayer delivers the gas to the purchaser/customer. At that point, both possession of and title to the gas are transferred from the taxpayer to the customer.