REQUEST
LETTER
01-22
Response June 20
2001
NAME
ADDRESS
I am writing on
behalf of COMPANY), a STATE limited partnership registered to transact business
in Utah, to request an advisory opinion from the Tax Commission as to whether Utah
Code Section 59-12-104(28) will exempt COMPANY from Utah sales and use tax on
COMPANY purchases of natural gas for purpose of generating electricity under
the circumstances described below.
COMPANY Federal EIN is ######.
COMPANY proposes
to construct, own, and operate a 1000 megawatt “gas-fired” electrical
generating plant in COUNTY, Utah (the “Plant”). COMPANY SIC Code is 4911.
To generate electricity at the Plant, COMPANY will purchase and consume
large quantities of natural gas.
Specifically, COMPANY will burn the natural gas which it purchases in
order to drive the turbines used to generate the electricity. COMPANY will purchase the natural gas
required to generate electricity from both in-state and out-of state sellers
and will take title to the natural gas both in-state and out-of-state. The natural gas will be delivered through
pipelines connected to the proposed Plant.
A small portion of natural gas purchased by COMPANY (less than 1%) will
be used to heat the Plant buildings as part of the Plant’s HVAC system, as
opposed to generating electricity.
COMPANY will sell
at the wholesale level all of the electricity that it generates at the Plant
(with the possible exception of a de minimis amount of electricity
estimated at less than 1% of annual production that may be used to operate the
Plant). COMPANY will not directly sell
electrical power or any utility type service to residential, commercial, or
industrial users in Utah. Instead,
COMPANY will sell the electricity that it produces at the Plant solely to Utah
Power & Light and other public utilities or wholesalers in the power grid,
who will in turn resell the electricity to ultimate users.
Because COMPANY
will be acting exclusively as a wholesaler of the electrical power that it
produces, it will have no control over, and will not know, the identity or
locations of the ultimate purchases of that electrical power. It is possible that a substantial portion of
the electrical power produced by COMPANY through the burning of natural gas at
the Plant will be resold by COMPANY wholesale purchaser(s) to residential and
commercial users in Utah in transactions taxable under Utah Code Section
59-12-103(1)(c). It is also possible,
however, that all or a substantial portion of the electrical power generated by
COMPANY at the proposed Plant will be ultimately sold, consumed, or used
outside of Utah or otherwise in transactions not subject to the Utah sales and
use tax.
Because COMPANY
SIC Code is 4911, for Utah sales and use tax purposes, COMPANY will be deemed a
“ commercial user” rather than an “industrial user” of the natural gas which it
purchases for use in generating electricity.
As such COMPANY will be subject to Utah sales and use tax on its
purchases of the natural gas used to produce electricity under Utah Code
Section 59-12-103(1)(c) unless an exemption applies.
Section
59-12-104(28) of the Utah Code exempts from the Utah sales and use tax “any
sale of a service described in subsections 59-12-103(1)(b), (c) and (d) to a
person for use in compounding a service taxable under the subsections.” COMPANY will be purchasing a service
described in Code Section 59-12-103(1)(c)(i.e., natural gas) to generate and
compound another service (i.e., electricity) described in Code Section
59-12-103(1)(c). COMPANY, therefore,
believes that the Code Section 59-12-104(28) exemption from sales and use tax
will apply to COMPANY purchases of natural gas for use in generating
electricity sold to others. Because
COMPANY will be selling the electricity which it produces as a wholesaler in
the manner described above, however, some uncertainty exists as to whether the
exemption described in Code Section 59-12-104(28) will apply to COMPANY
purchases of natural gas for use at the proposed Plant. Accordingly, I respectfully request that the
Tax Commission issue as expeditiously as possible an advisory opinion
confirming that COMPANY will be exempt from Utah sales and use tax under Code
Section 59-12-104(28) on its purchases of natural gas to the extent such
natural gas is burned or otherwise used to generate electrical power at the
Plant as described above.
It is critical
that COMPANY obtain an opinion from the Tax Commission on this issue as soon as
practicable. It will not be
economically feasible for COMPANY to construct and operate the proposed Plant,
which Plant will require an enormous capital investment by COMPANY and its
owners, if COMPANY will be subject to Utah sales and use tax on the natural gas
purchased to generate electricity at the Plant.
If you have any
questions regarding this matter, please do not hesitate to contact me.
NAME
RESPONSE
LETTER
June
20, 2001
NAME
ADDRESS
RE: Advisory
Opinion – Purchase of Natural Gas by COMPANY) to
Produce
Electricity
Dear Mr. NAME
We have received your request for an advisory opinion
concerning COMPANY proposed construction of a “gas-fired” electrical generating
plant in Utah. At issue is whether
COMPANY may purchase natural gas without incurring sales and use tax liability
if the natural gas is used to generate electricity that COMPANY will sell on
the wholesale market. You further state
that COMPANY purchase of the natural gas would be for commercial use, not for
industrial or residential use.
The purchase of natural gas for commercial use is
generally taxable under Utah Code Ann. §59-12-103(1)(c), which imposes sales
and use tax on amounts paid or charged for “gas, electricity, heat, coal, fuel
oil, or other fuels sold for commercial use.”
However, Utah Code Ann. §59-12-104(28) (Section 104(28)) exempts from
taxation “any sale of a service described in Subsections 59-12-103(1)(b), (c),
and (d) to a person for use in compounding a service taxable under the
subsections.” As the sale of natural
gas is a sale of a service described in Subsection 59-12-103(1)(c), its sale to
a person for use in compounding a service that is itself taxable under these
subsections, such as electricity, is exempt.
Accordingly, the purchase of natural gas that is used commercially to
produce electricity is exempt from taxation under Section 104(28).
COMPANY would still be entitled to purchase the natural
gas tax-free even if the electricity it produces is never sold in a transaction
on which Utah sales and use tax is imposed.
Electricity is a taxable service under the subsections referenced in the
Section 104(28) exemption. The fact
that other exemptions exist on various sales of electricity (such as sales made
in interstate commerce, sales to religious and charitable organizations and
governmental entities) does not render electricity a nontaxable service. Were the Commission to interpret the
exemption in such a manner, a seller of electricity would need to separately
track the natural gas used to produce electricity sold to exempt churches,
schools, and other exempt entities and the amount of natural gas used to
produce electricity eventually sold to entities subject to Utah’s sales and use
tax. We reject such an interpretation. As a result, under the circumstances you
describe, COMPANY may purchase natural gas tax-free if it is used to produce
electricity, regardless to whom the electricity is sold.
You also mention that a small portion of the natural gas
purchased by COMPANY (less than one percent) would not be used to generate
electricity, but would instead be used to heat the plant. We consider natural gas used to heat the
production area where electricity is generated to be exempt under Section
104(28). However, the natural gas used
to heat office areas or other non-production areas would not be exempt. Nevertheless, Utah Admin. Rule 865-19S-35
(Rule 35) provides that when a fuel is furnished through a single meter where a
portion of the fuel is exempt and a portion taxable, the predominant use of the
fuels will determine the taxable status of the fuel. Accordingly, if COMPANY were to receive all its natural gas
through a single meter, it would all be nontaxable, because the majority (over
99 percent) is exempt under Section 104(28). However, if the natural gas is
delivered through separate meters and the majority of gas delivered through a
particular meter would be used to heat office areas and non-production areas,
then the gas delivered through this latter meter would be taxable.
Lastly, COMPANY will use a small portion of the
electricity it produces to operate the plant.
Ordinarily, the consumption of a taxable service such as electricity for
commercial use would be subject to sales and use tax. When the party consuming the service also produces it, the tax is
imposed on the cost of the components used to produce that service, which in
this case, would include the natural gas.
Nevertheless, that portion of the electricity consumed in the production
areas would itself be exempt under Section 104(28). Accordingly, no sales and use tax liability would accrue on the
natural gas used to produce it. So, the
only electricity on which sales and use tax would accrue would be that portion
used in the office areas and other non-production areas. Accordingly, the natural gas used to produce
this latter amount of electricity is subject to taxation, but only if, pursuant
to Rule 35, it is delivered through a meter where the majority of the natural
gas delivered is subject to taxation.
Please contact us if you have any other questions.
For
the Commission,
Marc
B. Johnson
Commissioner
MBJ/KC
01-022