When a utility just delivers electricity or natural gas that a customer bought from a competing third-party supplier, is the utility's delivery/transportation charge itself a taxable 'electric service' or 'gas service'?

Plain-English summary

New York State Electric & Gas (NYSEG) serves roughly 815,000 electric and 240,000 gas customers across a 19,800-square-mile territory. Under a 1998 retail-access program approved by the Public Service Commission, thousands of NYSEG's customers now buy their actual electricity or gas from a competing third-party supplier instead of from NYSEG itself -- while NYSEG continues to own the wires and pipes and simply transports and distributes the energy to the customer's location. NYSEG asked whether its separate charge for that transportation/distribution service is itself taxable, even though NYSEG isn't the one selling the underlying electricity or gas.

New York's sales tax reaches "electric service" and "gas service" of "whatever nature," and the statute's definition of a taxable "receipt" specifically includes transportation, transmission, or distribution charges regardless of whether the utility or a third party provides that delivery. The Department had already announced this policy in a 1999 Technical Services Bureau memorandum: when energy sales and energy delivery are split between two different companies under deregulation, the "service...of whatever nature" language taxes the services of both companies, not just the entity that sells the actual electricity or gas. So NYSEG's charge for getting third-party-purchased electricity or gas to the customer counts as taxable electric or gas service.

But the story doesn't end there. A new law passed in 2000 (Tax Law § 1105-C) specifically targets this exact situation -- delivery-only charges on energy bought from someone other than the delivering utility -- and phases out the tax on those charges in 25% increments each September 1st starting in 2000, reaching a zero percent rate by September 1, 2003. So while NYSEG's delivery charges were fully taxable as of this ruling (effective April 1, 2000), the tax on them was already scheduled to shrink and eventually disappear entirely for retail-access delivery charges.

What this means for you

Utilities operating under retail energy choice/deregulation programs

If you deliver electricity or gas that customers bought from a different supplier, your delivery/transportation/distribution charge is taxable electric or gas service under § 1105(b) -- being just the "delivery company" rather than the energy seller doesn't get you out of the tax. But check the phase-out schedule under § 1105-C for the applicable time period, since the rate on these specific delivery-only charges was set to decline to zero by September 1, 2003.

Third-party energy suppliers and their customers

The underlying commodity sale (the electricity or gas itself, sold by the third-party supplier) and the delivery service (provided by the incumbent utility) are analyzed and taxed separately. A customer switching suppliers under retail access doesn't escape sales tax on the delivery portion of their bill just because a different company now sells them the energy.

Accountants and tax professionals

This ruling captures a specific transitional moment in New York's utility-deregulation tax policy: the underlying "service of whatever nature" theory taxing both parties' services (from TSB-M-99(1)S/(1.4)S) combined with the brand-new statutory phase-out in § 1105-C. Confirm which tax year and phase-out percentage applies to any older bills or disputes involving this exact issue, since the rate changed annually from 2000 through 2003.

Common questions

Q: If I buy my electricity from a company other than my regular utility, do I still pay sales tax on the delivery charge?
A: At the time of this ruling, yes -- the delivering utility's transportation/distribution charge was taxable electric or gas service. That tax was being phased out in stages, reaching zero by September 1, 2003.

Q: Does this ruling mean utility delivery charges are tax-free today?
A: Not necessarily on its own facts -- it only describes the phase-out schedule in effect as of 2000. Confirm current law for present-day delivery charges rather than relying on this ruling for today's rate.

Q: Can another utility or supplier rely on this ruling?
A: No. It binds the Department only as to NYSEG and the facts described, though the underlying statutes and Technical Services Bureau memoranda it discusses (TSB-M-99(1)S, TSB-M-99(1.4)S, TSB-M-00(4)S) reflect general Department policy of that era.

Citations and references

Statutes and Department guidance:

• Tax Law § 1101(b)(3) (definition of "receipt," including transportation/transmission/distribution charges)
• Tax Law § 1105(b) (tax on gas, electric, refrigeration, and steam service)
• Tax Law § 1105-C, added by Ch. 63, Laws of 2000 (phase-out of tax on third-party gas/electric transportation charges)
• TSB-M-99(1)S (Jan. 29, 1999) and TSB-M-99(1.4)S (policy on taxing utility delivery charges for third-party-supplied gas/electricity)
• TSB-M-00(4)S (June 9, 2000) (sales and use taxes on gas and electricity)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(27)S
Sales Tax
July 21, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990112B

On January 12, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from New York State Electric & Gas Corporation, 4500 Vestal Parkway East,
P.O. Box 3607, Binghamton, New York, 13902-3607.
The issues raised by Petitioner, New York State Electric & Gas Corporation, are:

1. Whether a utility’s service of transporting and distributing electricity sold by a third party
   supplier to the consumer is a taxable “electric service” within the meaning of Section 1105(b) of the
   Tax Law.
2. Whether a utility’s service of transporting and distributing natural gas sold by a third
   party supplier to the consumer is a taxable “gas service” within the meaning of Section 1105(b) of
   the Tax Law.
   Petitioner submitted the following facts as the basis of this Advisory Opinion.
   Petitioner is a regulated utility engaged in transmitting and delivering electricity and
   transporting and delivering natural gas. Petitioner serves approximately 815,000 electric customers
   and 240,000 gas customers in its 19,800 square mile service territory in the central, western, and
   eastern parts of New York State. Thousands of those electric customers purchase their electricity
   from third party suppliers under a retail access program established in 1998 by Petitioner and
   approved by the New York State Public Service Commission, and thousands more will likely soon
   do so as the retail access program expands. Petitioner simply provides a transportation service to
   those customers, transmitting and distributing electricity furnished by the third party. Likewise,
   many of Petitioner’s gas customers purchase their gas from third parties and Petitioner only provides
   a transportation service to them.
   Applicable Law and Regulations
   Section 1101(b) of the Tax Law provides, in part:
   When used in this article for the purposes of the taxes imposed by
   subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
   hundred ten, the following terms shall mean:
   *

*

*

-2­
TSB-A-00(27)S
Sales Tax
July 21, 2000

(3) Receipt. The amount of the sale price of any property and the charge for
any service taxable under this article, including gas and gas service and electricity
and electric service of whatever nature, valued in money, whether received in money
or otherwise, including any amount for which credit is allowed by the vendor to the
purchaser, without any deduction for expenses or early payment discounts and also
including any charges by the vendor to the purchaser for shipping or delivery, and,
with respect to gas and gas service and electricity and electric service, any charges
by the vendor for transportation, transmission or distribution, regardless of whether
such charges are separately stated in the written contract, if any, or on the bill
rendered to such purchaser and regardless of whether such shipping or delivery or
transportation, transmission, or distribution is provided by such vendor or a third
party, but excluding any credit for tangible personal property accepted in part
payment and intended for resale....
Section 1105(b) of the Tax Law imposes a tax upon:
The receipts from every sale, other than sales for resale, of gas, electricity,
refrigeration and steam, and gas, electric, refrigeration and steam service of whatever
nature, and from every sale, other than sales for resale, of telephony and telegraphy
and telephone and telegraph service of whatever nature except interstate and
international telephony and telegraphy and telephone and telegraph service and from
every sale, other than sales for resale, of a telephone answering service.
Chapter 63 of the Laws of 2000, added new Section 1105-C of the Tax Law which provides,
in part:
Reduced tax rates with respect to certain gas service and electric service.
Notwithstanding any other provisions of this article or article twenty-nine of this
chapter:
(a) The rates of taxes imposed by this article and pursuant to the authority of
article twenty-nine of this chapter on receipts from every sale of gas service or
electric service of whatever nature (including the transportation, transmission or
distribution of gas or electricity, but not including gas or electricity) shall be reduced
each year on September first, beginning in the year two thousand, and each year
thereafter, at the rate per year of twenty-five percent of the rates in effect on
September first, two thousand, so that the rates of such taxes on such receipts shall
be zero percent on and after September first, two thousand three.

-3­
TSB-A-00(27)S
Sales Tax
July 21, 2000

Opinion
Technical Services Bureau Memorandum entitled Application of Sales Tax to Sales of
Certain Utility Services, January 29, 1999, TSB-M-99(1)S, announced a change in policy with
respect to the imposition of sales tax on charges for transporting and distributing electricity and
natural gas. The original effective date of TSB-M-99(1)S was April 1, 1999. This effective date was
changed to April 1, 2000, as reflected in TSB-M-99(1.4)S. TSB-M-99(1.4)S, provides, in part:
Historically, electricity or gas, along with (among other things) the service of
getting it to the consumer, was provided by one party, the utility, and the entire
charge was subject to sales tax. In a restructured environment, one company will be
selling electricity or gas and another company will be providing the service of
(among other things) getting the electricity or gas to the customer. The phrase “gas,
electricity...and gas, [and] electric...service of whatever nature” imposes tax on the
services of both parties in the provision of electricity or gas.
Therefore, the Department has determined that the fee a utility charges the
customer for getting the electricity or gas to the customer is subject to state and local
sales tax as a charge for electric or gas service.
In accordance with the Department’s policy as set forth in TSB-M-99(1)S and
TSB-M-99(1.4)S, effective April 1, 2000, Petitioner’s receipts from charges derived from
transporting and distributing electricity and natural gas sold by a third party supplier to the consumer
constitute receipts from the sale of electric and gas services, respectively, and are therefore subject
to tax under Section 1105(b) of the Tax Law.
However, as provided by Section 1105-C of the Tax Law, the imposition of tax on the
transporting and distributing of electricity and natural gas purchased from someone other than the
vendor of the gas or electricity will be phased out beginning on September 1, 2000 at yearly intervals
so that there will be no tax on such services in such circumstances beginning on and after September
1, 2003. See Technical Services Bureau Memorandum entitled Sales and Use Taxes on Gas and
Electricity, June 9, 2000, TSB-M-00(4)S.

DATED: July 21, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.