Massachusetts has recently adopted two Acts: St. 1990, c. 121 (Chapter 121), and St. 1990, c. 150 (Chapter 150). These new laws have substantially modified the provisions of the sales and use tax in Chapters 64H and 64I of the General Laws. The Department of Revenue is issuing this Technical Information Release (TIR) to explain the effect of the new laws on the taxation of the sale or use of certain types of energy, generally including gas, steam, electricity, and heating fuel, under G.L. c. 64H and 64I. In particular, this TIR will discuss the exemptions from the taxation of these energy sources that are available to residential users, small businesses, certain industrial users, governmental entities, and charitable organizations, and the manner in which these users must claim their exemptions.
II. New Statutory Provisions
In the absence of a specific statutory exemption, the sales and use tax under G.L. c. 64H, 64I, has traditionally been imposed on the retail sale or use of all tangible personal property, including some fuels. See, e.g, Letter Ruling 1982-119 (diesel). Under prior law, however, the sales, furnishing, or service of gas, electricity, or steam was specifically exempt from tax. See G.L. c. 64H, § 6(i) (1988). Specific exemptions were also available for heating fuel (G.L. c. 64H, § 6(j) (1988)) and certain enumerated commercial and industrial uses of otherwise taxable fuels (G.L. c. 64H, § 6(r) (1988)). Chapters 121 and 150 have now removed the general exemption for sales or use of gas, electricity, steam, and heating fuel, but at the same time have modified the exemptions available for specific uses of these and other sources of energy. These modified exemptions, which generally apply to residential use, small businesses, certain industrial uses, and use by governmental and non-profit organizations, are discussed below.
A. Exemption for Residential Use
The sale, furnishing, or service of gas, steam, or electricity for residential purposes and the sale of any fuel for residential heating purposes is exempt from tax under G.L. c. 64H and 64I. See G.L. c. 64H, §§ 6(i), 6(j), as amended by St. 1990, c. 150, §§ 360, 361. Residential use includes use in any dwelling where people customarily reside on a long-term basis, whether or not the occupants of the dwelling are the purchasers of the fuel, and regardless of the number of heating, electrical, or other utility systems that the dwelling may have. Thus, residential use includes, for example, use in apartment buildings, rooming houses, and nursing homes as well as use in single family or multiple family homes. Residential use generally does not include use in hotels.
In the case of buildings with mixed residential and commercial use, the residential exemption extends only to the portion of the building used as a residence. If a vendor sells gas, steam, electricity, or heating fuel for use in a mixed residential and commercial building, and if the building has separately metered utility systems, the vendor must collect tax on the fuel sold for use in the non-residential systems.
If a building with mixed residential and commercial use does not have separately metered utility systems, the collection of tax on sales of gas, steam, electricity, or heating fuel for use in the building is based upon the predominant use of the building, as determined by the relative residential and commercial consumption of the particular utility in the building, unless the vendor and purchaser agree to prorate the tax as described below. Thus, the vendor must collect tax on the entire sales price of the energy sold if the predominant use of a building is commercial, and may apply for an abatement of tax paid to the extent of the building's residential use. Similarly, a vendor need not collect any tax if the predominant use is residential, but the purchaser of fuel for use in a predominantly residential building must file use tax returns and pay use tax based on the portion of the energy used commercially. However, as an alternative to the abatement applications or use tax returns, outlined above, for mixed use buildings that are not separately metered, a purchaser may request the vendor to prorate the collection of tax in accordance with the relative residential and commercial energy use in the building, and the vendor may agree to collect and pay the tax on the basis of such a proration. Proration is voluntary on the part of both purchasers and vendors and is not required by the Commissioner.
A purchaser does not need to provide a vendor with an exemption certificate in order to claim the exemption for residential use of gas, electricity, steam, or heating fuel. A vendor may accept a purchaser's assertion of residential use (including predominant or prorated residential use), provided that the vendor is acting in good faith.
B. Small Business Exemption
A sale of gas, steam, electricity, and heating fuel to a business that, on the date of the sale, has five or fewer employees is exempt from sales and use tax. G.L. c. 64H, § 6(qq) (added by Chapter 150, section 352). In order to claim the exemption, a business must complete and sign an exemption certificate, attesting to its qualification for the exemption, and must give the certificate to the vendor. A vendor must collect tax on any sale of gas, steam, electricity, or heating fuel for commercial use unless it has taken an exemption certificate in good faith from the purchaser.
For the purposes of the small business exemption under G.L. c. 64H, § 6(qq), an "employee" of a business includes any partner, owner, or officer of the business who normally works for the business for thirty hours per week or more. It also includes any other individual who is an employee as defined for federal income tax withholding purposes in section 3401 of the Internal Revenue Code, and who normally works for the business for thirty hours per week or more unless, at the time that such an individual was hired, the business and the individual specifically agreed that the individual would work for the business for a period of less than five months, and the individual has in fact worked for the business for less than five months.
A business must satisfy the requirement of having five or fewer employees on an ongoing basis in order to maintain its exemption under G.L. c. 64H, § 6(qq). If at any time a business that has claimed a small business exemption under G.L. c. 64H, § 6(qq), loses its eligibility, it must revoke the exemption certificates that it has given to its vendors.
C. Industrial Users
Three separate but interrelated exemptions apply to the use of different kinds of power in an industrial plant. For the purposes of all three exemptions, an industrial plant is a factory at a fixed location primarily engaged in the manufacture, conversion, or processing of tangible personal property to be sold in the regular course of business.
1. Gas, steam, or electricity used in manufacturing. Under G.L. c. 64H, § 6(i), as amended by Chapter 150, section 360, sales of gas, steam, or electricity which are consumed and used directly and exclusively in an industrial plant in the actual manufacture of tangible personal property to be sold or in the heating of the industrial plant are exempt from tax provided that the exemption is allowed only with respect to a metered building, location, or premises at which not less than seventy-five percent of the gas, steam, or electricity consumed at the meter is used for the combination of such manufacturing or heating of the manufacturing area. The seventy-five percent consumption requirement under G.L. c. 64H, § 6(i), as amended, is applied on a billed meter basis; purchases of energy billed on a particular meter are exempt only if seventy-five percent of the energy consumed at that meter is used as described above.
2. Fuel used in manufacturing. Under G.L. c. 64H, § 6(r), as amended by Chapter 150, section 361, an exemption exists, inter alia, for fuel or substitutes therefor consumed and used directly and exclusively in an industrial plant in the actual manufacture of tangible personal property to be sold (excluding the publishing of a newspaper). However, in the case of the sale of gas, steam, or electricity, the exemption contained in section 6(r) is limited to the exempt amount allowable under G.L. c. 64H, § 6(i) (discussed above).
3. Heating fuel used by manufacturers. Under G.L. c. 64H, § 6(j), as amended by Chapter 150, section 360, sales of fuel for heating purposes in an industrial plant are exempt from tax, provided that the exemption is allowed only with respect to a building, location, or premises in which not less than seventy-five percent of the building, location, or premises is used in the actual manufacture of tangible personal property to be sold.
In order to claim an exemption under G.L. c. 64H, §§ 6(i), 6(j), 6(r), for the use of gas, steam, electricity, or heating fuel, a purchaser must give an exemption certificate to the vendor. A vendor must collect tax on all sales of energy to an industrial plant unless it has taken an exemption certificate in good faith.
D. Exempt Purchasers
Sales of tangible personal property, including gas, electricity, steam, and heating fuel, to governmental and certain charitable organizations are exempt from tax. G.L. c. 64H, §§ 6(d), 6(e). As described below, charitable organizations must provide vendors with an exemption certificate and Form ST-2 (Certificate of Exemption) to claim their exemptions. Governmental organizations are not required to present exemption certificates.
III. Administrative Provisions
A. General Rules
The sections of Chapter 121 and Chapter 150 providing for the taxation of sales and use of gas, electricity, steam, and heating fuel become effective on September 1, 1990. See Chapter 150, section 372. All vendors engaged in the retail sale of these fuels must register as vendors with the Department of Revenue and must collect tax on deliveries made on or after September 1, 1990. If energy provided before September 1, 1990, and energy provided on or after September 1, 1990, are included on one bill, the vendor may prorate the tax on that bill accordingly.
The vendor must collect tax on the sales price of all commercial sales unless it has accepted an exemption certificate in good faith from the user. The type of certificate will vary with the particular exemption claimed by the purchaser. In order to ease the implementation of Chapters 121 and 150, the Commissioner has approved a temporary form, the Energy Exemption Certificate (Form ST-EEC) which vendors providing gas, steam, electricity, and heating fuel may accept from any commercial purchaser until further notice. Qualifying charitable organizations must present a copy of Form ST-2 (Certificate of Exemption) along with Form ST-EEC.
After a transition period, the temporary Energy Exemption Certificate, Form ST-EEC, will be phased out, and a purchaser of gas, electricity, steam, or heating fuel that has not previously given Form ST-EEC to a vendor will be required to provide an certificate appropriate to its exemption claim. Small businesses will use a Small Business Certificate (Form ST-13). Businesses claiming exemptions under G.L. c. 64H, §§ 6(i) or 6(j), will provide an Exempt Utility Use Certificate (Form ST-12C). Eligible charitable organizations will provide Forms ST-2 (Certificate of Exemption) and ST-5 (Exempt Purchaser Certificate). No certificates will be required from residential users or governmental entities.
In order to register, a vendor must complete and file Form TA-1 (Application for Original Registration) with the Department. The Commissioner will waive the normal $10.00 registration fee for all vendors who register between July 18, 1990 and November 1, 1990. Vendors must pay the tax that they have collected over to the Department either monthly, quarterly, or annually, in accordance with the rules stated in DOR regulation, 830 CMR 62C.16.2, Sales and Use Tax Returns and Payments, and the instructions to Form TA-1, except as those rules are modified by the offset procedure provided below.
B. Transition Rule: Offsets for Taxes Collected Before Purchaser Provides Exemption Certificate
In order to facilitate the implementation of the new statutory provisions regarding the sale of gas, electricity, steam, and heating fuel, a vendor of these utilities may, at its option, employ the following offset procedure. In general, a vendor must collect tax on the sale of gas, electricity, steam, and heating fuel to businesses as of September 1, 1990, if it has not received an exemption certificate from the purchaser. If a vendor collects tax on such sales to a business, but then receives in good faith a certificate from the business before January 1, 1991, the vendor may credit the business with the amount of the tax that it actually collected from the business between September 1, 1990, and the date on which it received the certificate, and may then claim this amount, without interest, as an offset on its next sales and use tax return to the extent that such amounts have been paid over to the Commissioner.
This offset procedure applies only to sales and use tax returns for tax periods ending before January 1, 1990. Furthermore, the offset procedure applies only to amounts actually credited before January 1, 1991, to the account of a purchaser that has presented an exemption certificate, and only if the purchaser provides the vendor with an exemption certificate before January 1, 1991. If a certificate is given to the vendor at a later date, or if the purchaser's account is not credited before January 1, 1991, the vendor must apply for an abatement to obtain the return of any amounts improperly collected and paid over. The vendor must maintain records adequate to substantiate all offsets claimed.
Stephen W. Kidder
Commissioner of Revenue
August 21, 1990