When natural-gas service is unbundled, how much of the gas-marketer's and the local utility's charges count as taxable gross earnings under Connecticut's utility company gross earnings tax?

Plain-English summary

The utility company gross earnings tax is a quarterly tax that gas and other utility companies pay on their own gross earnings from operations in Connecticut (Conn. Gen. Stat. § 12-264(a)) — it is not a sales tax collected from customers. After Connecticut "unbundled" natural-gas service, a customer could buy gas from an independent gas marketer while the local distribution company (LDC) still moved the gas through its pipes. The LDC asked DRS how to divide up the taxable gross earnings between the two companies under three unbundled billing arrangements. (A fourth arrangement, where the LDC both sells and transports the gas, was undisputed — all of the LDC's charges count as its gross earnings.)

The answer turns on two different measuring sticks in the statute:

• An LDC's gross earnings include "all income classified as operating revenues by the Department of Public Utility Control in the uniform systems of accounts" — which includes Account 489, Revenues from Transportation of Gas of Others (the transportation revenue), but not gas that a marketer sold (that would belong in the LDC's gas-sales accounts 480/481, and treating it there would make Account 489 superfluous).
• A gas marketer's gross earnings are its "gross income from the sales of natural gas" — the gas, but not the LDC's transportation charge.

Applying those two sticks to the three billing methods:

• Method 1 — Services Billed Separately: The LDC's total charges to the customer are the LDC's gross earnings; the marketer's total charges to the customer are the marketer's gross earnings. (Each is taxed on exactly what it bills.)
• Method 2 — Gas Marketer as Payment Agent (marketer sends the single bill): The marketer's gross earnings are the single bill total minus the LDC's transportation charge; the LDC's gross earnings are its transportation charge to the marketer.
• Method 3 — LDC as Payment Agent (LDC sends the single bill): The LDC's gross earnings are the single bill total minus the marketer's gas charge; the marketer's gross earnings are its gas charge to the LDC.

The result is symmetrical and avoids double-counting: transportation is always taxed to the LDC, gas is always taxed to the marketer, no matter who sends the bill. DRS grounded this in the DPUC's Uniform System of Accounts, which is adopted as a regulation (Conn. Agencies Regs. § 16-27-3) and is read like a statute — including the rule that no provision (here, Account 489) should be treated as superfluous.

The ruling also flags a registration requirement: under Conn. Gen. Stat. § 12-264(b)(2) (as amended by 2000 Conn. Pub. Acts 174, § 27), a company authorized to transmit or sell gas in a franchise area generally may not transport gas for a seller unless that seller has registered with DRS for this tax (exceptions in SN 2000(13); registered gas marketers listed in AN 2000(5)).

What this means for you

Natural-gas utilities (LDCs) and gas marketers

Regardless of who prints the customer's bill, you are taxed on your own function: the LDC on its transportation revenue, the marketer on its gas-sale income. In a combined-bill setup, the party that collects the whole amount subtracts the other party's share before computing its gross earnings tax — so an LDC acting as payment agent doesn't pay gross earnings tax on the marketer's gas, and a marketer acting as payment agent doesn't pay on the LDC's transportation. Marketers should also confirm they are registered with DRS before an LDC transports their gas.

Accountants and tax professionals

The statute uses two different bases: "income classified as operating revenues" in the DPUC Uniform System of Accounts for the LDC (Account 489 for transportation of others' gas; Accounts 480/481 for the LDC's own gas sales), versus "gross income from the sales of natural gas" for the marketer (§ 12-264(a)). Because the Uniform System of Accounts is a regulation (Reg. § 16-27-3), DRS construes it with the ordinary anti-surplusage canon — Account 489 must mean something, so marketer-sold gas cannot be swept into the LDC's gas-sales accounts. Note the § 12-264(b)(2) registration condition and its exceptions (SN 2000(13); AN 2000(5)). The same billing arrangements are analyzed for sales and use tax in the same-day companion, Ruling 2000-7.

Common questions

Q: Is the utility company gross earnings tax a sales tax?
A: No. It is a quarterly tax the utility or gas seller pays on its own gross earnings from Connecticut operations under Conn. Gen. Stat. § 12-264(a), not a tax collected from the customer at the register.

Q: Under unbundled gas service, who is taxed on what?
A: The LDC is taxed on its transportation revenue; the gas marketer is taxed on its gas-sales income. This split holds no matter which company bills the customer.

Q: In a single-bill arrangement, does the billing company pay tax on the whole amount?
A: No. It subtracts the other company's portion. A marketer that bills backs out the LDC's transportation charge; an LDC that bills backs out the marketer's gas charge.

Q: Do gas marketers have to register with Connecticut?
A: Generally yes. Under § 12-264(b)(2), an LDC may not transport gas for a seller unless that seller has registered with DRS for the gross earnings tax (with limited exceptions listed in SN 2000(13)).

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-264(a) (quarterly utility company gross earnings tax; gross earnings from operations; operating revenues vs. gross income from the sales of natural gas)
• Conn. Gen. Stat. § 12-264(b)(2), as amended by 2000 Conn. Pub. Acts 174, § 27 (registration requirement for gas sellers)

Regulations:

• Conn. Agencies Regs. § 16-27-3 (Uniform System of Accounts for gas utilities; Accounts 480, 481, 489)

Administrative guidance and cases:

• SN 2000(13) (2000 Legislation Affecting the Utility Company Gross Earnings Tax)
• AN 2000(5) (List of Registered Gas Marketers)
• Gianetti v. Norwalk Hospital, 211 Conn. 51 (1989); Preston v. Department of Environmental Protection, 218 Conn. 821 (1991) (regulations construed like statutes; no provision treated as superfluous)
• Companion ruling: Ruling 2000-7 (same billing arrangements under the sales and use taxes)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2000-6

Original ruling text

Ruling 2000-6, Utility Company Gross Earnings Tax / Gross Earnings from Operations

FACTS:

A local gas distribution company ("LDC"), the principal business of which is the manufacture, sale or distribution of gas to be used for light, heat or power, distributes gas through its gas mains to end users located within its franchise area in Connecticut. Prior to 1996, the LDC made only "bundled" sales of gas. These sales consisted of the sale of gas and the transportation of that gas through its gas mains to end users located in Connecticut. In 1996, the Connecticut Department of Public Utility Control ("DPUC") decided that the LDC was thereafter required to provide unbundled transportation services to end users who chose to purchase gas from any person other than the LDC ("gas marketer"). However, because the LDC owns the gas mains within its franchise area, the LDC has continued to provide transportation of the gas in all cases. The LDC enters into a Firm Transportation Service Agreement with each end user choosing to purchase gas from a gas marketer and to purchase only transportation of the gas from the LDC. As a result of the DPUC decision, four different billing and service options are now available to end users in the LDC’s franchise area (the first three of which involve "unbundled" sales and are addressed in this Ruling). Each end user will choose the billing method that will be used.

1. Services Billed Separately. An end user will receive two bills--one bill from the LDC reflecting charges for the unbundled transportation services, and the other bill from the gas marketer reflecting charges for the gas (including any other charges defined by contract between the end user and the gas marketer). The end user will be financially responsible to the LDC for the charges for the transportation services, and will be financially responsible to the gas marketer for the charges for the gas.

2. Gas Marketer as Payment Agent. An end user will receive a single bill from the gas marketer reflecting both charges for the transportation services and charges for the gas (including any other charges defined by contract between the end user and the gas marketer). The bill may or may not be itemized. To the extent provided by the contract between the end user and the gas marketer, the end user will be financially responsible to the gas marketer for all charges reflected on the single bill. The LDC will send to the end user an invoice for the transportation services, but the invoice will be clearly marked that it is not a bill.

The gas marketer will receive a bill from the LDC for the unbundled transportation services. The gas marketer will be financially responsible to the LDC for the charges reflected on the LDC’s bill.

3. LDC as Payment Agent. An end user will receive a single bill from the LDC reflecting both charges for the transportation services, and charges for the gas (including any other charges defined by contract between the end user and the gas marketer). The bill may or may not be itemized. The end user will be financially responsible to the LDC for all charges reflected on the single bill.

The LDC will receive a bill from the gas marketer reflecting charges for the gas (including any other charges defined by contract between the end user and the gas marketer). The LDC will be financially responsible to the gas marketer for the charges reflected on the gas marketer’s bill.

4. Gas and Transportation Both Provided by LDC. An end user will receive a single bill from the LDC reflecting charges for the "bundled" sales of gas and the transportation of that gas. It is undisputed that the total charges by the LDC to the end user will be included in the LDC’s gross earnings that are subject to the utility company gross earnings tax.

ISSUES:

To what extent, under each of the first three billing methods described above, the LDC’s charges to an end user or to a gas marketer are included in its gross earnings that are subject to the utility company gross earnings tax.

To what extent, under each of the first three billing methods described above, the gas marketer’s charges to an end user or to the LDC are included in its gross earnings that are subject to the utility company gross earnings tax.

RULING:

1. Under the Services Billed Separately billing method, the total charges by the LDC to the end user will be included in the LDC’s gross earnings that are subject to the utility company gross earnings tax, and the total charges by the gas marketer to the end user will be included in the gas marketer’s gross earnings that are subject to the utility company gross earnings tax.

2. Under the Gas Marketer as Payment Agent billing method, the difference computed by subtracting the charges by the LDC to the gas marketer for the transportation services from the total charges reflected on the single bill that the gas marketer will send to the end user will be included in the gas marketer’s gross earnings that are subject to the utility company gross earnings tax. The charges by the LDC to the gas marketer for the transportation services will be included in the LDC’s gross earnings that are subject to the utility company gross earnings tax.

3. Under the LDC as Payment Agent billing method, the difference computed by subtracting the charges by the gas marketer to the LDC for the gas from the total charges reflected on the single bill that the LDC will send to the end user will be included in the LDC’s gross earnings that are subject to the utility company gross earnings tax. The charges by the gas marketer to the LDC for the gas will be included in the gas marketer’s gross earnings that are subject to the utility company gross earnings tax.

DISCUSSION:

Conn. Gen. Stat. §12-264(a) provides in part:

(a) Each ... (2) company the principal business of which is manufacturing, selling or distributing gas ... to be used for light, heat or power ... and (3) company required to register pursuant to section 16-258a shall pay a quarterly tax upon gross earnings from such operations in this state. Gross earnings from such operations under subdivisions (1) and (2) of this subsection shall include (A) all income classified as operating revenues by the Department of Public Utility Control in the uniform systems of accounts prescribed by said department for operations within the taxable quarter .... Gross earnings from such operations under subdivision (3) of this subsection shall be gross income from the sales of natural gas....

Service Billed Separately billing method

The gross earnings from operations of the LDC include "all income classified as operating revenues by the Department of Public Utility Control in the uniform systems of accounts prescribed by said department." Conn. Gen. Stat. §12-264(a). "Income classified as operating revenues ... in the uniform systems of accounts" includes charges by the LDC to an end user for the unbundled transportation services that are provided by the LDC. The Operating Revenue Accounts prescribed for Gas Utilities include Account 489, Revenues from Transportation of Gas of Others. "This account shall include revenues from transporting gas for other companies through the production, transmission, and distribution lines, or compressor stations of the utility." Id . Therefore, under the Services Billed Separately billing method, the gross earnings from operations of the LDC include its charges to an end user for the unbundled transportation services.

The gross earnings from operations of a gas marketer are its "gross income from the sales of natural gas." Conn. Gen. Stat. §12-264(a). Charges by the gas marketer to an end user for the gas are included in the gas marketer’s "gross income from the sales of natural gas." Therefore, under the Services Billed Separately billing method, the gross earnings from operations of the gas marketer include the gas marketer’s charges to the end user for the gas.

Gas Marketer as Payment Agent billing method

The gross earnings from operations of the LDC include "all income classified as operating revenues by the Department of Public Utility Control in the uniform systems of accounts prescribed by said department." Conn. Gen. Stat. §12-264(a). "Income classified as operating revenues ... in the uniform systems of accounts" includes charges by the LDC to the gas marketer for the unbundled transportation services that are provided by the LDC. Uniform System of Accounts prescribed for Gas Utilities, Account 489, Revenues from Transportation of Gas of Others. Therefore, under the Gas Marketer as Payment Agent billing method, the gross earnings from operations of the LDC include its charges to the gas marketer for the unbundled transportation services.

The gross earnings from operations of a gas marketer are its "gross income from the sales of natural gas." Conn. Gen. Stat. §12-264(a). Charges by the gas marketer to an end user for the gas are included in the gas marketer’s "gross income from the sales of natural gas." Therefore, under the Gas Marketer as Payment Agent billing method, the gross earnings from operations of the gas marketer include the gas marketer’s charges for the gas.

On the other hand, "gross income from the sales of natural gas" does not include the gas marketer’s charges to an end user for the unbundled transportation services that are provided by the LDC. Therefore, under the Gas Marketer as Payment Agent billing method, the gross earnings from operations of the gas marketer is the difference computed by subtracting the charges by the LDC to the gas marketer for the transportation services from the total charges reflected on the single bill that the gas marketer will send to the end user.

LDC as Payment Agent billing method

The gross earnings from operations of a gas marketer are its "gross income from the sales of natural gas." Conn. Gen. Stat. §12-264(a). Charges by the gas marketer to an end user for the gas are included in the gas marketer’s "gross income from the sales of natural gas." Therefore, under the LDC as Payment Agent billing method, the gross earnings from operations of the gas marketer include the gas marketer’s charges to the LDC for the gas.

The gross earnings from operations of the LDC include "all income classified as operating revenues by the Department of Public Utility Control in the uniform systems of accounts prescribed by said department." Conn. Gen. Stat. §12-264(a). "Income classified as operating revenues ... in the uniform systems of accounts" includes charges by the LDC to an end user for the unbundled transportation services that are provided by the LDC. Uniform System of Accounts prescribed for Gas Utilities, Account 489, Revenues from Transportation of Gas of Others. Therefore, the gross earnings from operations of the LDC include its charges to an end user for the unbundled transportation services.

On the other hand, "income classified as operating revenues ... in the uniform systems of accounts" does not include charges for the gas that is purchased by the end user from a gas marketer. This is the case for several reasons. The Operating Revenue Accounts prescribed for Gas Utilities include Account 480, Residential Sales, and Account 481, Commercial and Industrial Sales. Account 480 provides in part: "This account shall include the net billing for gas supplied for residential or domestic purposes." Account 481 provides in part: "This account shall include the net billing for gas supplied to commercial and industrial customers." As their title indicates, Accounts 480 and 481 pertain to sales of gas by an LDC. The gas that an end user has purchased from a gas marketer and that is transported by the LDC is not, for purposes of Accounts 480 and 481, "gas supplied" by the LDC. Otherwise, Account 489, Revenues from Transportation of Gas of Others, would be superfluous.

The Uniform System of Accounts prescribed for Gas Utilities has been adopted as a regulation. See Conn. Agencies Regs. §16-27-3. "It is obvious, that inasmuch as a regulation is a written instrument the general rules of interpretation apply." 1A J. Sutherland, Statutory Construction (5th Ed. Singer) §31.06. "Our rules of statutory construction apply to administrative regulations." Preston v. Department of Environmental Protection , 218 Conn. 821, 829 n.9, 591 A.2d 421 (1991). "Agency regulations, appropriately issued, have the force and effect of a statute. See Fusco-Amatruda Co. v. Tax Commissioner , 168 Conn. 597, 604, 362 A.2d 847 (1975); Hartford Electric Light Co. v. Sullivan , 161 Conn. 145, 154, 285 A.2d 352 (1971). We therefore construe agency regulations in accordance with accepted rules of statutory construction. 1A J. Sutherland, Statutory Construction (4th Ed. Sands 1985) §3l.06. Just as it is accepted that the legislature does not enact superfluous statutes; State v. Ellis , 197 Conn. 436, 472-73, 497 A.2d 974 (1985); Amsel v. Brooks , 141 Conn. 288, 295, 106 A.2d 152, appeal dismissed , 348 U.S. 880, 75 S. Ct. 125, 99 L. Ed. 693 (1954); the same is true of administrative regulations." Gianetti v. Norwalk Hospital , 211 Conn. 51, 60, 557 A.2d 1249 (1989). See also 2A J. Sutherland, Statutory Construction (5th Ed. Singer) §46.07.

Therefore, under the LDC as Payment Agent billing method, the gross earnings from operations of the LDC is the difference computed by subtracting the amount billed by the gas marketer to the LDC for the gas from the total charges reflected on the single bill that the LDC will send to the end user.

It bears mentioning that Conn. Gen. Stat. §12-264(b)(2), as amended by 2000 Conn. Pub. Acts 174, §27, provides that "[no person, firm, corporation or municipality that is chartered or authorized by this state to transmit or sell gas within a franchise area shall transmit gas for any person that sells gas to be used for light, heat or power to an end user or users located in this state, unless such seller has registered with the Department of Revenue Services for purposes of the tax imposed under this chapter." The exceptions to this prohibition are noted in SN 2000(13) , 2000 Legislation Affecting the Utility Company Gross Earnings Tax . Gas marketers that have registered with the Department of Revenue Services for purposes of the tax imposed under chapter 212 are identified in AN 2000(5) , List of Registered Gas Marketers .

LEGAL DIVISION

December 11, 2000