When gas service is unbundled -- one company sells the gas and the local utility only transports it -- are the utility's transportation charges subject to Connecticut sales tax?

Plain-English summary

Connecticut "unbundled" natural-gas service in the 1990s: the state Department of Public Utility Control let commercial and industrial customers buy their gas from independent gas marketers while the local distribution company (LDC) — which owns the pipes — kept doing the actual transportation. That created four billing arrangements, and the LDC asked DRS whether its transportation charges are subject to sales and use tax as "charges by the retailer to the purchaser for shipping or delivery" under Conn. Gen. Stat. § 12-407(8) and (9), assuming the gas sale itself is not exempt.

The controlling rule is narrow: a shipping or delivery charge is taxable only if it is a charge by the retailer of the property. Delivery performed by someone else, under a separate contract with the customer, is not taxable — unless that person is acting as the retailer's agent for delivering the property. Applying that:

• Option 1 — Services Billed Separately (LDC bills transportation, marketer bills gas): Only the marketer's gas charge is taxable. The LDC's transportation charge is not taxable, because the LDC is not the retailer of the gas and has its own separate contract with the customer.
• Option 2 — Marketer as Payment Agent (marketer sends one combined bill): The LDC's transportation charge is not taxable. Everything the marketer collects except what it remits to the LDC for transportation is taxable as the sale of gas. (Here the retailer/marketer is acting as the LDC's payment agent, not the other way around.)
• Option 3 — LDC as Payment Agent (LDC sends one combined bill): The LDC's transportation charge is not taxable. Everything the LDC remits to the marketer other than the transportation it keeps is taxable as the sale of gas. The LDC collects the tax on the gas as the marketer's agent, remits the gas payment plus tax to the marketer, and the marketer is responsible for remitting the sales tax to the Department. (The LDC is the marketer's agent only for collecting payment — not for delivering the gas.)
• Option 4 — Gas and Transportation Both Provided by LDC: All the LDC's charges are taxable. Here the LDC is the one retailer of both the gas and its transportation, so the transportation is a charge "by the retailer to the purchaser" and is taxable whether or not separately stated (if the gas is not exempt).

The through-line: unbundling can move the transportation charge out of the taxable base — but only because a different company (the marketer) is the retailer. When one company sells and delivers, separately stating the delivery does not make it tax-free.

What this means for you

Natural-gas utilities (LDCs) and gas marketers

Who is the "retailer" of the gas decides whether the pipe charge is taxable. If you are an LDC merely transporting gas that a marketer sold under a separate customer contract, your transportation charge is outside the sales-tax base — in all three unbundled billing setups. But if you (the LDC) both sell and transport the gas, the transportation is fully taxable even if you break it out on a separate line. Marketers should note that in a combined bill, the taxable amount is the total minus the LDC's transportation component.

Commercial and industrial gas customers

Your bill's structure matters. Under unbundled service, sales tax attaches to the gas charge (unless the gas itself is exempt), not to the LDC's transportation. If a single company both sells and delivers your gas, expect tax on the whole charge, delivery included.

Accountants and tax professionals

The operative provisions are the "shipping or delivery" clauses of Conn. Gen. Stat. § 12-407(8)(A)(iii) and (9)(A)(iii): delivery charges are in the base only when charged by the retailer of the property; third-party delivery under a separate contract is out unless the deliverer is the retailer's delivery agent (a collection agent doesn't count). Whether the gas sale is exempt at all runs through § 12-412(3) and Policy Statement 94(3.2). This ruling has a same-day companion, Ruling 2000-6, applying the utility company gross earnings tax to the same four billing options.

Common questions

Q: Are natural-gas delivery/transportation charges taxable in Connecticut?
A: Only when they are charged by the retailer of the gas. If a gas marketer sells the gas and the local utility separately transports it, the utility's transportation charge is not a taxable delivery charge.

Q: What if one company both sells and delivers the gas?
A: Then the delivery charge is taxable — it is a charge "by the retailer to the purchaser," taxable whether or not it is separately stated, as long as the gas sale is not exempt.

Q: In a combined "one bill" arrangement, what is taxable?
A: The taxable amount is the total bill minus the transportation component that belongs to the LDC. The LDC's transportation piece is not taxable; the remainder is taxed as the sale of gas.

Q: Who remits the tax when the LDC bills for the marketer?
A: The LDC collects the sales tax on the gas as the marketer's agent and remits the gas payment and tax to the marketer; the marketer is responsible for remitting the tax to the Department.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(2)(a) (transfer of title to tangible personal property is a taxable "sale")
• Conn. Gen. Stat. § 12-407(8)(A)(iii) and (9)(A)(iii) (sales price / gross receipts include charges by the retailer to the purchaser for shipping or delivery)
• Conn. Gen. Stat. § 12-412(3) (exemption for certain sales of gas)

Administrative guidance:

• Policy Statement 94(3.2) (Gas, Electricity and Heating Fuel Purchased for Residential Use or for Use in Agricultural Production, in the Fabrication of Finished Products to be Sold, or in an Industrial Plant)
• Companion ruling: Ruling 2000-6 (same billing arrangements under the utility company gross earnings tax)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2000-7

Original ruling text

Ruling 2000-7, Sales and Use Taxes / Sale of Natural Gas / Transportation of Natural Gas

FACTS:

A local gas distribution company ("LDC") makes sales to commercial and residential customers in Connecticut. Prior to 1996, the LDC provided only "bundled" sales. These sales consisted of the retail sale of natural gas and the transportation of that gas through its pipes within Connecticut.

In 1996, the Connecticut Department of Public Utility Control ("DPUC") ordered the LDC to begin providing "unbundled" sales to its commercial and industrial customers. This order from the DPUC allowed these customers to purchase natural gas from gas marketers ("Marketers") other than the LDC. However, because the LDC owns the local distribution pipeline in its territory, the LDC has continued to provide transportation of the natural gas in all cases. The LDC enters into a Firm Transportation Service Agreement with each customer electing to purchase natural gas from a Marketer other than the LDC and to purchase only transportation of the gas from the LDC. As a result of the DPUC order, four different billing and service options are now available to customers:

Services Billed Separately. The LDC charges the customer for transportation of natural gas. The Marketer charges the customer for the sale of gas. The LDC and the Marketer separately bill the customer.

Marketer as Payment Agent. The customer elects the Marketer as its payment agent. The LDC sends its original invoice for transportation to the Marketer and a copy to the customer. The Marketer combines the charges for its gas and the LDC’s transportation into one bill. The customer pays the Marketer, and the Marketer remits the payment for transportation charges to the LDC. The LDC may terminate transportation to the customer if the Marketer fails to pay the LDC, even if the customer has remitted payment to the Marketer.

LDC as Payment Agent. The customer elects the LDC as its payment agent. The LDC bills the customer for the Marketer’s sale of gas and for the LDC’s sale of transportation of the gas. The customer pays the LDC and the LDC remits the gas payment to the Marketer.

Gas and Transportation Both Provided by LDC. The LDC sells gas to customers and provides transportation of the gas. The LDC separately identifies the charges for the gas and the transportation on its bills.

ISSUE:

Whether, under each of the four options described above, the LDC’s charges for transportation of natural gas are subject to sales and use taxes as "charges by the retailer to the purchaser for shipping or delivery" under Conn. Gen. Stat. §12-407(8) and (9), if the sale of the natural gas is not exempt.

RULING:

In the Services Billed Separately option, only the charges by the Marketer for gas are subject to sales and use taxes. The charges by the LDC are not taxable; they are not charges "by the retailer" of the gas.

In the Marketer as Payment Agent option, the charges for transportation by the LDC are not taxable; they are not charges "by the retailer" of the gas. Any and all amounts the Marketer collects from its customers other than the amounts it remits to the LDC for transportation are subject to sales and use taxes as charges for the sale of gas.

In the LDC as Payment Agent option, the charges for transportation by the LDC are not taxable; they are not charges "by the retailer" of the gas. Any and all amounts the LDC remits to the Marketer other than the amounts it retains for transportation charges are subject to sales and use taxes as charges for the sale of gas. The LDC should collect sales and use taxes on the natural gas as agent for the Marketer, and remit the amounts collected for gas, together with the tax, to the Marketer. It is the Marketer’s responsibility to remit sales and use taxes to the Department.

In the Gas and Transportation Both Provided by LDC option, all charges by the LDC are subject to sales and use taxes. The transportation charges, whether or not separately stated, are charges "by the retailer to the purchaser" for the gas, and thus are taxable.

DISCUSSION:

In Conn. Gen. Stat. §12-407(2)(a), "sale" and "selling" are defined to include any transfer of title of tangible personal property. These sales are subject to sales and use taxes unless specifically exempted. Under Conn. Gen. Stat. §12-412(3), certain sales of natural gas are exempt from tax. Sales that are not exempt under this provision include sales made to commercial customers other than manufacturers, fabricators and those engaged in agricultural production that have met certain conditions. ( See Policy Statement 94(3.2), Gas, Electricity and Heating Fuel Purchased for Residential Use or for Use in Agricultural Production, in the Fabrication of Finished Products to be Sold, or in an Industrial Plant. )

The definitions of "sales price" and "gross receipts" in Conn. Gen. Stat. §12-407(8)(A)(iii) and (9)(A)(iii) include within the amounts subject to sales and use taxes

any charges by the retailer to the purchaser for shipping or delivery, notwithstanding whether such charges are separately stated in a written contract, or on a bill or invoice rendered to such purchaser or whether such shipping or delivery is provided by the retailer or a third party.

To be included within the taxable gross receipts and sales price of an item of tangible personal property, shipping and delivery charges must be charges by the retailer of the property, although the delivery may be performed by a third party acting on behalf of the retailer. However, delivery provided by a person other than the retailer, in a separate contract or agreement between the purchaser of the property and the person making the delivery, is not subject to tax unless the person making the delivery is specifically acting as the agent of the retailer for the purpose of delivering the tangible personal property that the retailer has sold to the customer.

In the Services Billed Separately option, the LDC and the Marketer have separate contracts with the customers; therefore, the LDC’s delivery charge is not a charge by the retailer of the tangible personal property.

In the Marketer as Payment Agent option, the LDC and the Marketer also have separate contracts with the customers, and the LDC’s delivery charge is not a charge by the retailer of the tangible personal property. The retailer (Marketer) is acting as the agent of the person making the delivery (LDC), rather than the other way around, and only for the purpose of collecting payment from the customer.

In the LDC as Payment Agent option, the LDC and the Marketer also have separate contracts with the customers, and the LDC’s delivery charge is not a charge by the retailer of the tangible personal property. The person making the delivery (LDC) does act as the agent of the retailer (Marketer), but only for the purpose of collecting payment from the customer, not for the purpose of delivering the tangible personal property that the retailer has sold to the customer.

Finally, in the Gas and Transportation Both Provided by LDC option, there is only one retailer of both the tangible personal property and the transportation of the tangible personal property. Therefore, the delivery charges are charges by the retailer, and are subject to sales and use taxes if the gas is not exempt.

LEGAL DIVISION

December 11, 2000