Does a gas company get the lower 4% residential gross-earnings-tax rate on gas sold to multi-family apartment and condo buildings, even when it bills the landlord or property manager on a single meter?

Plain-English summary

The utility company gross earnings tax is a quarterly tax a gas or electric company pays on its own earnings. Under Conn. Gen. Stat. § 12-265(b), the general rate is 5%, but earnings allocable to "residential service" for gas or electricity are taxed at a lower 4% — a break the legislature added in 1985 to reduce home heating costs.

A local gas distribution company sold and distributed gas to multi-family buildings — apartments, duplexes and condominiums. Each building had two or more (often four or more) dwelling units but was served by a single meter, and the company billed the landlord (for apartment/duplex buildings) or the property manager (for condominium buildings). The gas was used by the occupants for heating, hot water, clothes drying and cooking (and sometimes to heat common areas like lobbies and hallways). The company asked whether its earnings from these sales qualified for the 4% residential rate.

DRS said yes — this is residential service. Because "residential service" isn't defined in the tax statutes, DRS applied the ordinary rule that words take their commonly approved usage (Conn. Gen. Stat. § 1-1(a)) and looked up "residential" — "used, serving, or designed as a residence or for occupation by residents." Multi-family dwellings plainly fit: they are used, designed and serve as residences. DRS reinforced the conclusion three ways:

• Consistency with its own sales-tax guidance, which treats "residential dwelling" as including apartment buildings and condominiums (PS 94(3.1)/(3.2)).
• Legislative history of the 1985 rate cut, where lawmakers described it as relief for "residential users" and "residential home heaters" and a way to reduce "home heating costs."
• Alignment with utility ratemaking — the Department of Public Utility Control approves residential rates that build in this tax, and had itself determined that multiple-family dwelling units "are occupied by residential customers and are taxed at the 4% rate … no matter what service these customers are on."

So the single meter and the billing to a landlord or property manager don't change the character of the service: the gas heats homes, so the company's earnings are residential-service earnings taxed at 4%.

What this means for you

Gas and electric utilities

When you serve multi-family residential buildings — apartments, duplexes, condos — your gross earnings from those sales qualify for the lower 4% residential rate under § 12-265(b), even if the account is a single master meter billed to a landlord or property manager. The test is the use and design of the premises as a residence, not who receives the bill or how many units share a meter. Classify master-metered residential buildings as residential for gross-earnings-tax purposes, consistent with how DPUC treats them for ratemaking.

Landlords and property managers of residential buildings

This is mainly a utility-level tax, but it matters to you because the utility's tax rate is built into the rates you pay. Master-metered apartment and condo buildings are treated as residential (4%), not commercial (5%), which is the lower-tax outcome.

Accountants and tax professionals

The rate split is in § 12-265(b) (5% general, 4% on residential-service gas/electricity), added by 1985 Conn. Pub. Acts 159, § 5. With "residential service" undefined, DRS used § 1-1(a) common-usage construction plus its own PS 94(3.1)/(3.2) "residential dwelling" definition (apartment buildings and condominiums included) and DPUC's parallel ratemaking treatment (D.P.U.C. Docket No. 93-03-09). The billing party and single-meter configuration are not controlling; the residential use and design of the building is.

Common questions

Q: What's the difference between the 4% and 5% utility gross-earnings-tax rates?
A: Under § 12-265(b), the general rate is 5%, but gross earnings allocable to residential service for gas or electricity are taxed at 4% — a reduction the legislature enacted in 1985 to lower home heating costs.

Q: Does gas sold to an apartment or condo building count as residential service?
A: Yes. Multi-family dwellings are used and designed as residences, so the company's earnings from selling gas to them are residential-service earnings taxed at 4%.

Q: Does a single master meter or billing the landlord change that?
A: No. DRS held the single meter and billing the landlord (apartments/duplexes) or property manager (condos) don't change the residential character of the service.

Q: What about gas used for the building's common areas?
A: The ruling treated the sale to these residential buildings as residential service overall; the gas was used by occupants for heating, hot water, drying and cooking, and in some cases to heat common areas within the residential building.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-265(b) (utility company gross earnings tax: 5% general rate; 4% on gross earnings allocable to residential service for gas or electricity), as amended by 1985 Conn. Pub. Acts 159, § 5
• Conn. Gen. Stat. § 1-1(a) (words construed according to commonly approved usage)

Administrative guidance and authorities:

• PS 94(3.1) / PS 94(3.2) (defining "residential dwelling" to include apartment buildings and condominiums)
• Decision of December 1, 1993, D.P.U.C. Docket No. 93-03-09 (multiple-family dwelling units taxed at the 4% residential rate)
• Legislative history of 1985 Conn. Pub. Acts 159 (§§ 5, 18)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 99-3

Original ruling text

Ruling 99-3, Utility Company Gross Earnings Tax Residential Service

FACTS:

A company which is a local gas distribution company and the principal business of which is manufacturing, selling or distributing gas to be used for heating purposes sells natural gas and distributes it through its pipes to the following type of buildings: Each building contains only dwelling units and the common areas within the building (such as lobbies and hallways). While each building has two or more (and typically four or more) dwelling units, the building is served by a single meter. Where the multi-family dwelling units in the building are apartments or duplexes, the company bills the landlord for the sale and distribution of the gas to the building. Where the multi-family dwelling units in the building are condominiums, the company bills the property manager for the sale and distribution of the gas to the building. While the gas that the company sells and distributes to the building is used in the dwelling units for heating purposes (including hot water heating, clothes drying and cooking) by the occupants of these dwelling units, in some cases the gas is also used to heat the common areas within the building.

ISSUE:

Where gas that is sold and distributed by a local gas distribution company is used for heating and cooking purposes by the occupants of multi-family dwellings, each of which multi-family dwellings is served by a single meter, and the company bills the landlord, where the multi-family dwellings are apartments or duplexes, and the property manager, where the multi-family dwellings are condominiums, for the sale and distribution of the gas, are the company’s gross earnings from such sale and distribution allocable to residential service?

DISCUSSION:

Conn. Gen. Stat. §12-265(b) provides that

[each company and municipal utility included in section 12-264 shall be taxed at the rate of five per cent upon the amount of gross earnings in each taxable quarter from operations, except as set forth in subsection (c) or (d) of this section and except that each company and municipal utility manufacturing, selling or distributing gas or electricity to be used for light, heat or power shall be taxed at the rate of four per cent upon the amount of gross earnings in each taxable quarter allocable to residential service ...

The italicized language was added by 1985 Conn. Pub. Acts 159, §5.

The term "residential service" is not defined in title 12 of the Connecticut General Statutes. (endnote 1) During the debate on 1985 Conn. Pub. Acts 159, no one asked or explained what "residential service" encompassed. The House Co-Chair of the Finance, Revenue and Bonding Committee stated that "the residential utilities tax for gas and electric and goes from 5% to 4%, a reduction of one per cent in the gross receipts tax on residential users" (endnote 2) and also characterized the rate drop as "reducing] the home heating costs." (endnote 3)  The Senate Co-Chair of the Finance, Revenue and Bonding Committee said that the "intention was to in some way offer broad relief to each and every residential home heater."  (endnote 4)  Another senator stated that "[part of the revenue reduction package that we have before us today is going to give us the ability to lower the gross revenue tax on electric and gas users... residential users, in the State of Connecticut.  (endnote 5)

Words and phrases are to be "construed according to the commonly approved usage of the language ..." Conn. Gen. Stat. §1-1(a). "Residential" means

used, serving, or designed as a residence or for occupation by residents (a residential hotel) ; providing and administering living accommodations for students (a residential college); requiring or involving attendance of classes on a campus (residential study, a residential course); adapted or restricted to or occupied by residences (a residential quarter); of, relating to, or connected with residence or residences (residential trade, a residential zone, residential construction). [Emphasis added]

Webster’s Third New International Dictionary of the English Language, Unabridged 1931 (1981).

Construing "residential service" accordingly to the commonly approved usage of the language, the gross earnings of a local gas distribution company from the sale and distribution (through its pipes) of natural gas to multi-family dwellings are gross earnings from residential service because multi-family dwellings are used and designed and serve as a residence or for occupation by residents.

This is in harmony with the Department’s interpretation of "residential dwelling" in PS 94(3.1), 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 Manufacturing Plant .  (endnote 6)

Just as importantly  (endnote 7) , it is in accord with the manner in which the Department of Public Utility Control approves the rates charged by public service companies to residential users of gas or electricity, where those rates include the tax imposed under Chapter 212 of the Connecticut General Statutes on the gross earnings of those public service companies from manufacturing, selling or distributing gas or electricity to be used for light, heat or power  (endnote 8) .

RULING:

Where gas that is sold and distributed by a local gas distribution company is used for heating and cooking purposes by the occupants of multi-family dwellings, each of which multi-family dwellings is served by a single meter, and the company bills the landlord, where the multi-family dwellings are apartments or duplexes, and the property manager, where the multi-family dwellings are condominiums, for the sale and distribution of the gas, the company’s gross earnings from such sale and distribution are allocable to residential service.

Endnotes:

1. The term is also not defined in Title 16 of the Connecticut General Statutes. Title 16 pertains to public service companies, as defined in Conn. Gen. Stat. §16-1, and establishes the Department of Public Utility Control and the Public Utilities Control Authority. A local gas distribution company is a public service company. See note 7.

2. 28 H.R. Proc., Pt. 11, 1985 Sess., p. 3927.

3. 28 H.R. Proc., Pt. 11, 1985 Sess., p. 3945.

4. 28 S. Proc., Pt. 5, 1985 Sess., p. 1686.

5. 28 S. Proc., Pt. 5, 1985 Sess., p. 1666.

6. "A ‘residential dwelling’ is any building, all or a predominant part of which is used for housing. Thus, for example, homes, apartment buildings , condominiums , mobile home parks, nursing or convalescent homes and halfway houses are "residential dwellings," whereas such places as hotels, motels (other than apartment hotels or motels) and hospitals are not considered "residential dwellings.’" [Emphasis added] PS 94(3.2) , at 2. PS 94(3.2) interprets the amendments made to Conn. Gen. Stat. §12-412(3) by 1989 Conn. Pub. Acts 251, §12.

7. Section 18 of 1985 Conn. Pub. Acts 159 provides:

Not later than thirty days after the effective date of section 5 of this act, each electric and gas public service company, as defined in section 16-1 of the general statutes, which does not have a proposed rate amendment under section 16-19 of the general statutes pending before the department of public utility control at such time, shall request the department to reopen the proceedings under section 16-19 on the company’s most recent rate amendment, solely for the purpose of decreasing the company’s rates to reflect the decrease under section 5 of this act in the gross earnings tax imposed on the company. The department shall immediately reopen such proceedings, solely for such purpose.

Because the purpose of requiring every electric and gas public service company to request the Department of Public Utility Control "to reopen the proceedings under section 16-19 on the company’s most recent rate amendment, solely for the purpose of decreasing the company’s rates to reflect the decrease under section 5 of this act in the gross earnings tax imposed on the company" was to shift the economic benefit of the tax rate reduction from the public service companies to residential users of gas or electricity, the General Assembly must have intended the Department of Revenue Services and the Department of Public Utility Control to interpret "residential service" in the same manner.

8. "Conn. Gen. Stat. Section 12-265(b) requires that public service companies pay a gross receipts tax (GRT) of 4% on residential accounts and 5% on commercial/industrial accounts. The determination of which tax rate to use is based on the use of the premises. For example, multiple family dwelling units are occupied by residential customers and are taxed at the 4% rate . Since the Department is eliminating Rate 1F [Residential firm Multiple Dwelling Heating Service, including the Bridgeport Housing Authority], all multiple dwelling customers will be switched to either Rate 7A [Small Firm Commercial-Industrial General Service] or Rate 7B [Large Firm Commercial-Industrial General Service]. Up to the present time, the Company paid the higher 5% rate on all rates 7A and 7B customers including non-heating multiple family dwelling customers. The Department finds that no matter what service these customers are on, they are still residential accounts and should be taxed at 4%." [Emphasis added] Decision of December 1, 1993, D.PU.C. Docket No. 93-03-09, at 20.

LEGAL DIVISION

Issued August 3, 1999