Connecticut State Department of Revenue Services

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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