Connecticut State Department of Revenue Services

Ruling 92-9

Sales and Use Taxes
Materials Used Directly in the Furnishing of Gas Services to Real Property

FACTS:

  1. A company [hereinafter, "the Pipeline Company") will own and operate a high-pressure, interstate gas pipeline which will run through Connecticut. The Pipeline Company will contract with construction contractors for the construction of the pipeline, but will itself purchase the components of the pipeline system.
  2. The pipeline system will include pipe; valve assemblies and connectors that will be used to stop the flow of gas for repair and inspection purposes; turbine meters, electric sensors and computers that will be installed at monitoring and regulating facilities which are located at each customer's location in order to regulate and monitor the flow of gas to that customer; inspection pig launchers and receivers that will be used to clean and inspect the pipes; and telecommunications equipment. All these items will be purchased by the Pipeline Company for use in Connecticut.
  3. The Pipeline Company furnishes gas only to natural gas utility companies which are the Pipeline Company's only customers and which in turn furnish the gas to consumers through their own pipelines.

ISSUES:

Whether all or part of the pipeline system constitutes materials used directly in the furnishing of gas to consumers through pipes.

Whether the services of contractors in constructing the pipeline are considered to be rendered in the construction of new real property.

DISCUSSION:

Conn. Gen. Stat. §12-412(18) provides, in pertinent part, for the exemption from sales and use taxes of "sales of and the storage or use of materials, tools and fuel or any substitute therefore, when such products are used directly ... in the furnishing of gas ... when delivered to consumers through ... pipes."

Although the Pipeline Company will not itself be delivering gas to consumers, it will deliver gas to natural gas utility companies, which in turn will deliver the gas to consumers. Under similar circumstances, it has been ruled that fuel used directly in the furnishing of electricity to electric utility companies which in turn delivered the electricity to consumers was "fuel used directly in the furnishing of electricity which is delivered to consumers" and that such fuel was exempt from sales and use taxes under Conn. Gen. Stat. §12-412(18). Declaratory Ruling No. 90-2. But, in order for Conn. Gen. Stat. §12-412(18) to be implicated, the items of tangible personal property involved must be (1) materials that (2) are used directly in the furnishing of gas to consumers.

The Connecticut Supreme Court has established principles of statutory construction that govern the applicability of a tax exemption.

First, statutes that provide exemptions from taxation are a matter of legislative grace that must be strictly construed against the taxpayer. Second, any ambiguity in the statutory formulation of an exemption must be resolved against the taxpayer. Third, the taxpayer must bear the burden of proving the error in an adverse assessment concerning an exemption.

Plastic Tooling Aids Laboratory, Inc. v. Commissioner of Revenue Services, 213 Conn. 365, 369, 567 A.2d 1218 (1990).

It is determined that the pipeline and the valve assemblies and connectors, as described, are materials. The other items, however, viz., the turbine meters, electric sensors and computers that will be installed at monitoring and regulating facilities; the inspection pig launchers and receivers that will be used to clean and inspect the pipes; and the telecommunications equipment, are determined to be either machinery or component parts thereof.

The General Assembly has not exempted from sales and use taxes machinery used in furnishing gas which is delivered to consumers, but has only so exempted sales of machinery used directly in a manufacturing production process. The Connecticut Supreme Court has recently noted that the Sales and Use Taxes Act

singled out the furnishing of electricity for special treatment in several places... [The Act separately exempted materials, tools and fuel used in the generation of gas, water, steam or electricity for distribution to consumers, and materials, tools and fuel used in "an industrial plant in the process of the manufacture of tangible personal property." General Statutes (1949 Rev.) §2096(r). The special treatment of electric companies and other public utilities suggests that the act's drafters considered such industries to be distinct from manufacturing concerns. In addition, such separate treatment implies a legislative intent not to exempt public utilities from other sections of the act unless expressly exempted.

United Illuminating Co. v. Groppo, 220 Conn. 749, 757-758, 542 A.2d 1145 (1992).

Nor are the component parts of machinery exempt under Conn. Gen. Stat. §12-412(18):

[The legislative decision to exclude components parts from the machinery tax exemption under [Conn. Gen. Stat. §12-412(34)] would be rendered superfluous if the same component parts were eligible for a tax exemption under [Conn. Gen. Stat. §12-412(18)]. It is fundamental that a legislative act must be read as a whole, and that all of its parts must be reconciled so that no part is rendered superfluous.

Clinton Nurseries, Inc. v. Commissioner of Revenue Services, 205 Conn. 761, 766, 535 A.2d 361 (1988).

Having determined that the pipeline and the valve assemblies and connectors, as described, are materials, the question remains whether they are used directly in the furnishing of gas to consumers. The Connecticut Supreme Court addressed a similar issue when it considered whether clearwells--tanks used to hold processed water--were materials used directly in the furnishing of water, qualifying for exemption under Conn. Gen. Stat. §12-412(18).

To "furnish" means "to complete, carry out, equip ... to provide or supply with what is needed ...." N. Webster, Third New International Dictionary (1986). "Furnish" implies the provision of essentials required for performing a function. The function involved here is the delivery of water from its seller to the consumer. An element essential to performing this function is a vessel to contain the water until such time as there is a consumer demand for it. Drawing the water from the "clearwell" is as much an integral part of this function as is drawing water from the mains and pipes which comprise the rest of the distribution network. We conclude that the "clearwells" are products used directly in the furnishing of water and thereby qualify for the exemption authorized by the statute.

Connecticut Water Co. v. Barbato, 206 Conn. 337, 345, 537 A.2d 490 (1988)

Similarly, the pipes deliver the gas to the natural gas utility companies and the valve assemblies and connectors, as described, contain the gas until there is a consumer demand for it, and both the pipes and the valve assemblies and connectors are hereby ruled to be used directly in the furnishing of gas.

Conn. Gen. Stat. §12-407(2)(i)(I) treats as "sales" or "selling" subject to the Sales and Use Taxes Act the rendering of services to industrial, commercial or income-producing property. Conn. Agencies Regs. §12-407(2)(i)(I)-1(c) provides in pertinent part:

(1) Buildings. Services to real property are within the purview of section §12-407(2)(i)(I) of the general statutes if and only if the services are rendered to existing industrial, commercial or income-producing real property. Services to real property that are rendered in the construction of new industrial, commercial or income-producing real property are not within the purview of said section §12-407(2)(i)(I)....

(2) Site improvements. Services involved in the making of improvements to real property that put the property affected to a new use, such as the construction of roadways, walkways (concrete or asphalt), parking lots, patios (concrete or asphalt), swimming pools, tennis courts or decks, will be considered to be rendered in the construction of new real property, whether or not the making of such improvements is directly connected with the construction of a new building (or a new addition that expands the cubic footage of an existing building). Services involved in the making of improvements to real property that merely enhance an existing use of the property affected, such as the installation of wells, septic systems, utility lines, storm water drainage systems or outdoor lighting systems will not be considered to be rendered in the construction of new real property, unless the construction of such improvements is directly connected with the construction of a new building (or a new addition that expands the cubic footage of an existing building).

The construction of a high-pressure, interstate pipeline is more fairly analogized to the construction of a roadway (where the services are considered to be rendered in the construction of new real property) in that it puts the property affected to a new use than it is to the construction of a utility line that runs from the utility right-of-way to an existing building (where the services are not considered to be rendered in the construction of new real property) where an existing use of the property is merely enhanced.

RULING:

The pipe and the valve assemblies and connectors constitute materials used directly in the furnishing of gas to consumers through pipes. The other items do not constitute such materials.

The services of contractors in constructing the pipeline are considered to be rendered in the construction of new real property.

LEGAL DIVISION

April 20, 1992