|Referenced Sources:||Massachusetts General Laws|
Sales and Use
The Massachusetts Legislature has adopted an act restructuring the electric utility industry in the Commonwealth. See Chapter 164 of the Acts of 1997 (An Act Relative to the Electric Utility Industry in the Commonwealth, Regulating the Provision of Electricity and Other Services, and Promoting Enhanced Consumer Protections Therein). This Technical Information Release (TIR) is being issued to clarify the sales and use tax implications of electric utility restructuring and to provide guidance on the sales tax collection responsibilities of vendors selling and distributing electricity.
Restructuring of the electric utility industry will offer retail customers a choice in selecting a power supplier. Retail customers can choose to purchase their power from either a competitive supplier or a distribution company that provides standard offer service.1 In addition, if the selected competitive supplier fails to provide the retail customer with sufficient generation, a distribution company is responsible for providing default generation service.
One consequence of restructuring the electric utility industry is that the way in which retail customers are billed for electricity will change. Instead of a single "bundled" charge on the retail customer's bill for electricity, there are, effective March 1, 1998, seven "unbundled" charges.2 These charges include a:
The customer charge is incurred regardless of whether the retail customer incurs a generation charge. The amounts assessed for the other charges are based upon specified rates per kilowatt-hour ("kWH") of power drawn from distribution lines. The unbundled charges can be billed collectively in a single bill issued by the distribution company. Alternatively, at the competitive supplier's option, the generation charge can be billed separately by the competitive supplier with the remaining charges being billed by the distribution company.
B. Statutory Authority
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 "tangible personal property" includes electricity and the term "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.
C. Imposition of the Sales Tax on Separately Stated Unbundled Charges
1. Generation Charge
Because G.L. c. 64H, § 1 defines "tangible personal property" as including electricity, the generation charge is a charge for the sale of tangible personal property at retail. Thus, except to the extent that an exemption applies, this charge is subject to the sales tax imposed by G.L. c. 64H, § 2. Exemptions for the sale of electricity are specifically available to residential users, industrial plants in the actual manufacturing of tangible personal property, and small business with five or fewer employees See G.L. c. 64H, § 6(i)(2)(residential users), G.L. c. 64H, § 6(i)(3) (industrial plants) and G.L. c. 64H, § 6(qq)(small businesses). If a taxpayer is exempt on the generation charge, the taxpayer will also be exempt on any other taxable charges for the sale of electricity.
2. Transmission & Distribution Charges
Under G.L. c. 64H, § 1, separately stated transportation charges may be excluded from the sales price subject to tax if the transportation occurs after the sale at retail. The Department will treat transmission and distribution charges as transportation charges for purposes of determining sales price.6 Thus, transmission and distribution charges will be included in sales price if they occur before the retail sale and will be excluded if they occur after the retail sale.
A retail sale occurs when title or possession of tangible personal property is transferred to the retail customer. Because possession of electricity will be transferred at a retail customer's meter after transmission and distribution have occurred, the transmission and distribution will occur before the retail sale unless title to the electricity is transferred earlier. Title passage is generally determined by contract. See DD 96-5. Thus, if contracts for the sale of electricity transfer title to the electricity before transmission or distribution occur, separately stated transmission and distribution charges are not subject to tax.7 See LR 96-5.
3. Transition Charge
Transition charges are mandatory charges paid by retail customers when purchasing electricity. They are imposed under no other circumstances. They are collected by distribution companies, which by law must phase out of the business of electrical generation, but still remain as retailers of electricity, providing standard offer service and default generation service. The charges compensate these vendors for generation-related and overhead expenses.
In calculating the amount of the "sales price" . . . "(a) no deduction shall be taken on account of . . . (ii) the cost of materials used, labor or service costs, interest charges, losses or other expenses." G.L. c. 64H, § 1. The types of expenses includible as transition costs fall within the language of G.L. c. 64H, § 1(a)(ii). Under this provision, the transition charge is properly included as part of the sale price of electricity and is therefore subject to the sales tax.
4. Customer Charge
The customer charge provides, in essence, a nonexclusive right to access a distribution company's power distribution network. Since the customer charge will be imposed without regard to the amount of electricity the retail customer draws, if any, the charge will not be paid in consideration for a retail sale, and will not be subject to sales tax under G.L. c. 64H, § 2. See DD 92-78 and LR 96-5.9
5. Renewable Resources Charge
The renewable resources charge is collected to support the Massachusetts Renewable Energy Trust Fund. The public purpose of the fund is to generate the maximum economic and environmental benefits over time from renewable energy to Massachusetts ratepayers by promoting the increased availability, use, and affordability of renewable energy.
In determining the amount of the sales price upon which the sales tax is based, a vendor must include the cost of materials, labor or services, interest charges, losses or "other expense[s]." G.L. c. 64H, § 1(14)(a)(ii). Where the legal incidence of a charge or fee is on the vendor, manufacturer, producer or other non-consumer, the charge or fee is considered a cost of doing business and must be included in the sales price as an other expense. But since the legal incidence of the renewable resources charge is on the retail consumer, the charge is not considered a cost of doing business and is not includible in the sales price as an other expense. See DD 86-1. The renewable resources charge is not subject to the sales tax.
6. Energy Efficiency Charge
The energy efficiency charge is collected to support two services administered by distribution companies: a) energy efficiency services and b) demand-side management services. A distribution company provides energy efficiency services when it implements "an action, policy or measure which entails the application of the least amount of energy required to produce a desired or given output."10 It provides demand-side management services when it implements "any technologies, measures or actions designed to decrease the kilowatt or kilowatt-hour use, or to alter the time pattern of that use by consumers of electricity."11
On the one hand, "[t]he term 'sale at retail' or 'retail sales' shall not include . . . (c) professional, insurance, or personal service transactions which involve no sale or which involve sales as inconsequential elements for which no separate charges are made." G.L. c. 64H, § 1. On the other hand, any amount paid for services that are a part of a sale of tangible personal property must be included in determining the sales price. G.L. c. 64H, § 1.
The energy efficiency charge is a charge for personal services that the distribution company offers to retail customers, but provides only upon request. The charge for energy efficiency and demand-side management services is separately stated on a retail customer's electricity bill. The charge itself is for separate consulting services, not for the sale of electricity. Thus, the energy efficiency charge is not includible in the sales price of electricity and is not subject to the sales tax.
D. Sales and Use Tax Collection Obligations
The sales tax imposed on a retail sale is collected by the vendor from the purchaser of the tangible personal property or service purchased, and the vendor then remits the sales tax to the Commonwealth. See G.L. c. 64H, §§ 2, 3. A "vendor" is a retailer or other person selling tangible personal property or services of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax. G.L. c. 64H, § 1.
In general, any person with receipts from retail sales relating to generation or transition costs is a vendor. This will include competitive suppliers and distribution companies providing standard offer service or default service or receiving transition charges. A vendor must collect and remit tax on its receipts from retail sales to the extent that receipts are included in sales price.
Separate bills can be issued by the competitive supplier and the distribution company. In this case, the competitive supplier is responsible for collecting and remitting to the Commonwealth tax on the generation charges that it bills and the distribution company will be responsible for collecting and remitting tax on any transition charges. However, if a customer receiving generation service from a competitive supplier requests that all charges be listed in a single complete bill, then the distribution company shall collect all taxes due, remitting to the Commonwealth the portion of tax on its receipts and transmitting to the competitive supplier the portion of tax on the competitive supplier's receipts. The competitive supplier, in turn, must remit such taxes to the Commonwealth. In all cases, the purchaser is obliged to pay use tax on any charge included in sales price if a vendor has not collected tax on that amount.
In the case of standard offer service, if transmission but not distribution occurs prior to the retail sale, transmission charges are included in the sale price collected by the vendor of the electricity ( i.e. the distribution company) and distribution charges are excluded. In this situation, the vendor must collect and remit tax on the generation, transmission, and transition charges, but not on the customer, distribution, energy efficiency and renewable resources charges. But if transmission and distribution occur after the retail sale, neither of these charges are included in the sales price collected by the vendor of the electricity. In this situation, the vendor must collect and remit tax on the generation and transition charges only.
In the case of competitive service, the Department presumes that contracts will be written to transfer title to electricity to the purchaser before transmission and/or distribution occurs. Thus, such charges would not be taxable. To the extent that title is not transferred in this manner, the purchaser will be required to pay use tax on any portion of transportation charges included in the sale s price.12
/s/Bernard F. Crowley
Bernard F. Crowley, Jr. for the
Commissioner of Revenue
November 6, 1998