Pennsylvania clarifies charges for delivery of natural gas to nonresidential customers
The Pennsylvania Department of Revenue recently issued Sales and Use Tax Bulletin 2023-01 stating that delivery charges on sales of natural gas to nonresidential customers whether or not separately invoiced are now subject to tax. The guidance does not include an effective date for enforcement of the new position and increases the tax and potential exposure associated with the delivery of natural gas to nonresidential customers in Pennsylvania.
Pennsylvania explains sales and use tax on natural gas delivery charges
The Pennsylvania Department of Revenue recently announced in Sales and Use Tax Bulletin 2023-01 that charges for supply and transportation (or delivery) are part of the taxable purchase price of natural gas sold to nonresidential customers, even if invoiced separately. In the new guidance the department applies the Pennsylvania Supreme Court’s decision on electric supply and distribution charges in Spectrum Arena Ltd. Partnership v. Commonwealth, 983 A.2d 641 (Pa. 2009) to the natural gas industry deregulated under the Natural Gas Choice and Competition Act (‘Gas Act’) because the Gas Act deregulated the natural gas industry in the same manner as the Electricity Generation Customer Choice and Competition Act (‘Electric Act’) deregulated the electric industry. The department adopts this treatment despite differences between the natural gas and electricity industries and laws, as well as the Commonwealth previously admitting the opposite should apply to the treatment of natural gas during the Spectrum Arena litigation.
In Spectrum Arena, the Court held that the deregulation and unbundling of electricity generation and delivery under the Electric Act did not fundamentally alter the sale of electricity for sales and use tax purposes. The Court reasoned that under a plain reading of the law a taxable sale includes the total value of all consideration received for the complete performance of the sale of tangible personal property and, same as before the Electric Act, generation and delivery are required to complete the sale. Accordingly, the Court concluded that delivery charges on the sale of electricity to nonresidential customers are subject to sales and use tax, even if separately invoiced. The Court’s treatment is consistent with a department policy statement issued shortly after the state deregulated electricity in 1997 – see Statement of Policy, 61 Pa. Code 60.23(d), Electric utility services.
The Court rejected the argument that unbundled electricity delivery charges should be treated as nontaxable delivery charges made and billed by someone other than the vendor. Under sales and use tax regulations, tax is imposed on the total value received, including delivery charges, on a sale at retail. But delivery charges made by someone other than the vendor are excluded from tax. Notwithstanding, the Court determined that since electric generation and electric delivery companies are both vendors that must work in concert to provide adequate electricity there is no truly independent electric delivery company. Further, the Court found that the Electric Act’s revenue-neutral reconciliation provision ensured that the state would be able to impose tax on the same charges that were taxable prior to deregulation. Accordingly, the Court held that all delivery charges for electricity delivered to nonresidential consumers in Pennsylvania are taxable, regardless.
In Bulletin 2023-01, the department applies an abridged version of the Court’s reasoning in Spectrum Arena to treat charges for delivery of natural gas to nonresidential customers in the same manner as delivery charges for delivery of electricity, including with respect to separately invoiced delivery. Further, the department does not appear to limit the bulletin to prospective application. To the department’s reasoning, while true the Gas Act deregulated the natural gas industry similar to the Electric Act and the electric industry, Statement of Policy 61 Pa. Code 60.23 only applies to electricity and there is no equivalent revenue neutral reconciliation in the Gas Act. In addition, the bulletin reflects a departure from the Commonwealth’s position on gas delivery charges in Spectrum Arena and is understood to be a departure from the department’s historical practice.
Businesses purchasing natural gas can now expect to pay sales and use tax on gas delivery charges if the gas is not otherwise exempt. Similarly, businesses engaged in natural gas selling and transporting natural gas can now expect expanded sales tax compliance obligations with respect to their Pennsylvania nonresidential customers. This change in position increases the benefit of a gas utility study to determine if some other exemption or exclusion, like the manufacturing, research and development, mining or public utility exemption may limit taxation.
Practitioner consensus is that the department has not historically viewed separately invoiced gas delivery charges as taxable. Also, the bulletin is not law, and, as noted, there are key differences between taxation of the natural gas industry and electric industry, including the following:
- The Gas Act does contain a revenue neutral reconciliation like the Electric Act
- The department issued a statement of policy addressing the effect of the Electric Act on electricity delivery charges by a separate vendor, but no similar policy exists for natural gas
- The Commonwealth admitted in a request for admission in Spectrum Arena that gas delivery charges are not taxable
The bulletin is not limited to prospective application. A business assessed penalties for an audit period prior to issuance of the bulletin should consider requesting penalty relief, given what appears to be a change in department policy and practice. Taxpayers purchasing natural gas in Pennsylvania or vendors selling natural gas to Pennsylvania customers should be aware of the bulletin and prepare to discuss its impact with their state and local tax advisers.