Is a natural-gas utility's fixed monthly customer charge taxable when the customer uses no gas that month?

Plain-English summary

South Carolina Revenue Ruling 12-2 held that a natural-gas utility's fixed monthly customer charge was part of the taxable price of natural gas, even during a month when the customer consumed no gas.

The charge helped the utility recover the continuing cost of maintaining and operating its distribution network. It arose from the same agreement under which the utility sold gas to the customer. The Department therefore included it in taxable gross proceeds of sales rather than treating it as a separate nontaxable fee.

The result followed the tax treatment of the underlying gas sale. If the customer's natural-gas purchase was exempt under § 12-36-2120—such as the residential use identified by the ruling—the related fixed monthly charge was also exempt.

Why zero usage did not matter

The utility billed the fixed charge every month. A commercial customer might use gas throughout the year, while another might use it only during winter. In either case, the fixed charge paid for the utility's availability and infrastructure under the continuing gas-sales relationship.

The Department applied the “but for” test from Meyers Arnold v. South Carolina Tax Commission: but for the agreement to sell natural gas, the utility would not receive the monthly charge. That connection placed the fee in the gross proceeds of the gas sale.

The ruling's example used a $10 fixed charge. A customer using no gas still owed $10; a customer buying $100 of gas owed $110. The Department treated the fixed component as taxable in both examples when the gas sale itself was taxable.

Exempt customers

The fixed charge did not create tax where the underlying gas sale qualified for an exemption. The ruling specifically identified natural gas used for residential purposes as an example.

Utilities therefore had to determine the tax status of the customer's gas use first, then apply the same treatment to the associated fixed monthly charge.

What this means for billing

Natural-gas utilities

Separately stating a fixed service or customer charge does not remove it from gross proceeds when it is part of the agreement to sell taxable gas. Billing systems should carry the customer's applicable exemption treatment to that charge.

Commercial customers

A bill may remain taxable in a zero-consumption month because the fixed charge is still consideration arising from the taxable gas-sales agreement.

Common questions

Q: Is the fixed charge taxable if the meter records zero usage?

A: Yes, when the customer's gas sale is taxable. Actual consumption during that particular month is not required under the ruling.

Q: Does separately listing the charge make it nontaxable?

A: No. The ruling treated it as part of gross proceeds because it arose from the overall gas-sales agreement.

Q: What if the customer's gas use is exempt?

A: The fixed charge follows the exempt treatment of the underlying gas sale under the ruling.

Citations and references

• S.C. Code Ann. § 12-36-910(A) — sales tax on retail tangible-personal-property sales
• S.C. Code Ann. § 12-36-90 — gross proceeds of sales, including costs and expenses recovered through the price
• S.C. Code Ann. § 12-36-2120 — sales-tax exemptions
• S.C. Code Ann. § 12-36-2120(33) — residential fuel exemption identified in the ruling
• Meyers Arnold v. South Carolina Tax Commission, 328 S.E.2d 920 (S.C. Ct. App. 1985) — “but for” gross-proceeds analysis cited by the ruling

Subject

Monthly Fixed Charges Billed by a Natural Gas Utility

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR12-2.pdf

Original ruling text

State of South Carolina
Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #12-2

SUBJECT:

Monthly Fixed Charges Billed by a Natural Gas Utility
(Sales & Use Tax)

EFFECTIVE DATE: Applies to all periods open under the statute.
REFERENCES:

S. C. Code Ann. Section 12-36-910(A) (2000))
S. C. Code Ann. Section 12-36-1110 (Supp. 2010)
S. C. Code Ann. Section 12-36-90 (2000 and Supp. 2010)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2010)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public and
to Department personnel. It is an advisory opinion issued to apply
principles of tax law to a set of facts or general category of taxpayers. It is
the Department’s position until superseded or modified by a change in
statute, regulation, court decision, or another Departmental advisory
opinion.

Question:
Are the monthly fixed charges billed by a natural gas utility to a customer, as described in the
facts, subject to the sales tax?
Conclusion:
Since the monthly fixed charges are a part of the overall agreement between the utility and the
customer for the sale of natural gas to the customer, the monthly fixed charges billed by a natural
gas utility to a customer, as described in the facts, are subject to the sales tax whether or not the
customer uses natural gas during a particular billing period, provided the sale of natural gas to
the customer is not otherwise exempt under Code Section 12-36-2120.
Note: If the sale of natural gas to the customer is exempt under Code Section 12-36-2120, such
as the sale of natural gas that is used for residential purposes (Code Section 12-26-2120(33)),
then the monthly fixed charges billed by a natural gas utility to a customer, as described in the
facts, are not subject to the sales tax.
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Facts:
It is common practice in the natural gas utility industry for the utility, under its rate schedule, to
bill a customer a monthly fixed charge component as well as a separate rate that is applied to
each unit of gas used by the customer during the billing period.
The costs to maintain and operate an underground network of main and service lines to distribute
the natural gas from the interstate natural gas transmission lines to the meters located at each
customer’s property are substantial. These costs are ongoing and are recovered through the
monthly fixed charge as well as the margin component of the rate assessed per unit of natural gas
used.
The monthly fixed charge is billed each billing period whether or not the customer uses any
natural gas during the billing period. In some cases, a customer, such as a restaurant, will use
natural gas all year for cooking purposes. In other cases, a customer, such as an insurance office,
will only use natural gas during the winter for heating purposes.
For example, the utility may charge all customers a $10 monthly fixed service charge. If the
customer does not use any natural gas during the month, the bill to the customer will state a total
due of $10. If the customer uses $100 of natural gas during the month, the bill to the customer
will state a total due of $110 ($100 charge for the natural gas used + $10 for the monthly fixed
charge).
The issue is whether or not the monthly fixed charge is subject to the sales tax even if a customer
does not use any natural gas during a particular billing period.
Discussion:
Code Section 12-36-910(A) imposes “a sales tax, equal to [six] 1 percent of gross proceeds of
sales, upon every person engaged ... within this State in the business of selling tangible personal
property at retail.”
Code Section 12-36-90 defines the term “gross proceeds of sales” and reads, in part:
Gross proceeds of sales, or any similar term, means the value proceeding or
accruing from the sale, lease, or rental of tangible personal property.
(1) The term includes:

(b) the proceeds from the sale of tangible personal property without any deduction
for:
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Code Section 12-36-1110 increased the general sales and use tax rate by 1% from 5% to 6%.

2

(i)

the cost of goods sold;

(ii)

the cost of materials, labor, or service;

(iii) interest paid;
(iv) losses;
(v)

transportation costs;

(vi) manufacturers or importers excise taxes imposed by the United States; or
(vii) any other expenses.
In Meyers Arnold v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E. 2d. 920 (1985), the
Court of Appeals, in interpreting the definition of “gross proceeds of sales” with respect to lay
away fees paid in conjunction with lay away sales, held:
Section 12-35-30 [now Section 12-36-90] defines gross proceeds of sales as “the
value proceeding or accruing from the sale of tangible personal property ... without
any deduction for service costs.” But for the lay away sales, Meyers Arnold would
not receive the lay away fees. The fees are obviously rendered in making lay away
sales. For these reasons, this court holds the lay away fees are part of the gross
proceeds of sales and subject to the sales tax.
Based on the above, the monthly fixed charge, as described in the facts, is a part of the measure
of the sales tax – “gross proceeds of sales” – and is subject to the sales tax. Using the “but for”
test established in the case of Meyers Arnold v. South Carolina Tax Commission, “but for” the
agreement to sell natural gas to the customer, the utility would not receive the monthly fixed
charges. The monthly fixed charges are a part of the overall agreement between the utility and
the customer for the sale of natural gas to the customer.
In addition, the monthly fixed charges are part of the sales price the utility has established for
natural gas so that it can cover its costs of operations, such as maintaining and operating its
underground network of main and service lines to distribute the natural gas from the interstate
natural gas transmission lines to the meters located at each customer’s property, and earn a
profit.
To paraphrase the Court of Appeals, the monthly fixed charges are obviously rendered in making
natural gas sales.
Therefore, since the monthly fixed charges are a part of the overall agreement between the utility
and the customer for the sale of natural gas to the customer, the monthly fixed charges billed by
a natural gas utility to a customer, as described in the facts, are subject to the sales tax whether or
not the customer uses natural gas during a particular billing period, provided the sale of natural
gas to the customer is not otherwise exempt under Code Section 12-36-2120.
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Note: If the sale of natural gas to the customer is exempt under Code Section 12-36-2120, such
as the sale of natural gas that is used for residential purposes (Code Section 12-26-2120(33)),
then the monthly fixed charges billed by a natural gas utility to a customer, as described in the
facts, are not subject to the sales tax.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/James F. Etter
James F. Etter, Director
March 20
, 2012
Columbia, South Carolina

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