Ruling 2001-3, Sales and Use Taxes / Sales for Resale / Electricity Exemption

FACTS:

A company (the "Company") operates an electricity generation facility in the State of Connecticut. While the Company typically provides its own power, it purchases electricity in two situations. The Company purchases electricity to supplement the amount of electricity it generates to satisfy the requirements of its contracts with wholesalers and distributors of electricity. Electricity is used in the generation of electricity by powering the movement of water through the system. The wholesalers and distributors purchase electricity for resale to consumers.

The Company also purchases electricity to operate the facility when it is off-line. The electricity is used as power for the lights, heat, and office equipment as well as power to keep the components of the facility that generate electricity running in case the facility must be brought back on-line quickly.

ISSUES:

1. Whether the Company may purchase electricity on a resale basis when it will sell the electricity to supplement the amount of electricity it has contracted to sell to distributors and wholesalers.
2. Whether the Company may purchase electricity tax exempt under Conn. Gen. Stat. §12-412(3)(E) to operate the facility, including electricity to run the components that generate electricity when the facility is off-line.
3. Whether the Company may purchase electricity tax exempt under Conn. Gen. Stat. §12-412(18) as a substitute for fuel to operate the facility, including electricity to run the components that generate the electricity, when the facility is off-line.

RULINGS:

1. The Company may purchase electricity to be sold to wholesalers and distributors of electricity on a resale basis without payment of tax.
2. The Company may purchase electricity tax exempt under Conn. Gen. Stat. §12-412(3)(E) only if it is used directly in the generation of electricity, such as to operate machinery and equipment that produces electricity or to power the movement of water through the electricity generation system.  Conn. Gen. Stat. §12-412(3)(E) does not exempt sales of electricity that is not used in the actual generation or distribution of electricity, such as electricity used to light the facility, heat or cool the building or operate office equipment.
3. The Company may not purchase electricity tax exempt under Conn. Gen. Stat. §12-412(18). Electricity is not a fuel or a substitute for fuel under Conn. Gen. Stat. §12-412(18).

DISCUSSION:

The sale of electricity is the sale of tangible personal property and subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(a) unless it is otherwise exempt. When the Company purchases electricity for resale in the regular course of business to wholesalers and distributors, it may do so on a resale basis under Conn. Gen. Stat. §12-410.

Conn. Gen. Stat. §12-412(3)(E) provides a sales and use tax exemption for the sale, furnishing or service of gas, water, steam or electricity for use directly in the furnishing of gas, water, steam or electricity delivered to consumers through mains, lines or pipes. When the Company purchases electricity that it will use directly in the generation of electricity, the exemption of Conn. Gen. Stat. §12-412(3)(E) applies because the generation and distribution of electricity are included in the furnishing of electricity. The Company should provide a written statement to its electrical suppliers that it is making tax-exempt purchases of electricity under Conn. Gen. Stat. §12-412(3)(E) because the electricity is for use directly in the generation of electricity produced for sale to wholesalers and retailers of electricity who will deliver the electricity to consumers through mains, lines or pipes.

Electricity that the Company uses for administrative purposes such as heating or cooling the facility or running office equipment is not used directly in the furnishing of electricity to consumers. If the Company is purchasing electricity for both taxable and exempt uses, the Company must document the quantity of electricity that is used for each purpose and self assess use tax on electricity purchased tax exempt under Conn. Gen. Stat. §12-412(3)(E) that does not qualify for the exemption.

Conn. Gen. Stat. §12-412(18) provides a sales and use tax exemption for sales of materials, tools and fuel "used directly in the furnishing of gas, water, steam, or electricity when delivered to consumers through mains, lines or pipes." Conn. Agencies Regs. §12-412(18)-1 defines the term "fuel" to mean "a substance generally regarded as fuel, such as coal, gas or oil." Electricity is not considered a fuel under the statute or the regulation. Therefore, the sale of electricity used directly in furnishing electricity when delivered to consumers through mains, lines, or pipes does not qualify for the exemption under Conn. Gen. Stat. §12-412(18).

Ruling No. 89-56 is modified and superseded because the "furnishing of electricity" exempted by Conn. Gen. Stat. §12-412(3)(E) includes the generation of electricity for sale to wholesalers and distributors that resell such electricity to the end consumers.

LEGAL DIVISION

February 28, 2001