NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A9593
SPONSOR: Dinowitz TITLE OF BILL: An act to repeal section 1105-c of the tax law relat-
ing to reduced tax rates with respect to certain gas and electric
service
PURPOSE OR GENERAL IDEA OF BILL:
The bill would repeal Section 1105-C of the Tax Law, which exempts from
sales and use taxes receipts from transportation, transmission, or
distribution of gas or electricity when provided by someone other than
the vendor of the gas or electricity. This would also eliminate school
district, municipal, and county exemptions of sales tax on utility
delivery service charges for electricity or gas when it is purchased
from an "energy services company" ("ESCO") or other entity allowed by
the public service commission to sell utility service.
SUMMARY OF SPECIFIC PROVISIONS:
Section 1 of the bill amends the tax law to repeal Section 1105-C as
added by Chapter 85 of the Laws of 2002, to eliminate the state sales
tax exemption on receipts from retail transportation, distribution or
delivery of natural gas and electricity from sales and use tax when gas
or electricity is sold by an energy services company (ESCO) or other
person or entity who is not the provider of transportation, distribution
or delivery service.
Section 2 provides for an effective date of 180 days from the date of
enactment.
JUSTIFICATION:
In the late 1990's, the New York State Public Service Commission allowed
energy services companies ("ESCOs") to sell contracts for "unbundled"
natural gas or electricity commodity to retail utility customers.
Initially it was argued that the separate sale of the commodity elec-
tricity and gas meant that there was no sales tax on the utility's
delivery service, because services are generally exempt from sales tax,
and there was no specific statute taxing "delivery service". The State
Department of Taxation and Finance initially accepted the argument that
there was no sales tax on "delivery service", but subsequently reversed
its position and in April 1999 ruled that all electric and natural gas
service, whether or not the commodity portion is unbundled and separate-
ly sold, is subject to the sales tax because the statute clearly
required sales tax on natural gas and electric service "of whatever
nature."* The Tax Department's equal taxation ruling was sound statutory
interpretation and good competition policy, because ESCO customers would
have no public tax subsidy and ESCOs would therefore need to provide
lower costs of commodity or other value-added services to induce elec-
tric and gas customers to switch to ESCO service.
Part Y of Section 63 of the Laws of 2000, now Tax Law 1105-C, legisla-
tively overruled the Tax Department rulings. The impact of Section
1105-C is to create a tax preference to customers who switched to ESCOs.
The sparse legislative history in the Bill Jacket indicates the utility
delivery service tax break for customers who switch to ESCOs was adopted
to "promote competition in the energy marketplace and provide rate
relief to energy consumers." (Memorandum of Governor's Counsel, L. 2000,
c. 63). But from an economic perspective, this tax preference actually
enables ESCO sellers to mark up and resell wholesale electricity or gas
at prices higher than those of the traditional utilities, yet still
promise customers lower bills, because of the tax savings on utility
delivery service to ESCO customers.
The taxpayer subsidy benefitting ESCOs and their customers has grown
from $31 million/year in 2001** to $118 million in 2016*** Instead of
fostering competition, it actually distorts the competitive marketplace
by favoring ESCO providers and their customers, who will see a reduction
in the portion of tax on "delivery" service when they switch to an ESCO
for the purchase of the "commodity" electricity or natural gas, permit-
ting the ESCO to charge more for the commodity service that the utility
would have charged. See ESCO Tax Subsidies: A Hidden Cost of the New
York PSC's "Retail Access" Scheme, PULP Network, January 12, 2009. With
the 1105-C tax break in existing law, customers are encouraged to switch
to often more expensive ESCO commodity service to avoid paying utility
sales taxes on utility delivery services to the state, local govern-
ments, and local school districts. The state tax breaks, coupled with
local tax breaks in local jurisdictions that have a sales tax on utility
service, are a major selling point for ESCOs. See ESCO Advertises 9.75%
Tax Savings on Delivery Service, PULP Network, June 18, 2009.
This unlevel tax playing field allows ESCOs to charge more than identi-
cal service from the utility, but because of the tax break on utility
delivery service, the bottom line of the ESCO customer bills can be
lower. This encourages predatory and deceptive practices, in which it
can be promised that the utility bill will go down (due to the tax
break) while the customer is shifted to more expensive commodity service
from the ESCO. This skewed taxation distorts competition and rewards
arbitrage of the tax break instead of the provision of value added
service from ESCOs.
Arbitrage of this unwarranted tax break may contribute to the ineffi-
cient switchover of utility customers to more expensive and less effi-
cient ESCO commodity service which does not create real added value. The
consequent loss of tax revenue adversely affects the state, and numerous
local governments and school districts that have taxed utility service.
Each time a customer switches to an ESCO, the tax revenues to the state
and local taxing jurisdictions decrease.
EFFECT ON SCHOOL DISTRICTS, LOCALITIES AND COUNTIES THAT TAX UTILITY
SERVICE:
The state sales tax rate on utility service for nonresidential customers
is 4%. Local sales taxes on utility services including residential
service - have been adopted by numerous local governments and school
districts.For example, Albany County, Westchester County, Erie County,
Cattaraugus County, the Albany School District, Cohoes School District,
Watervliet School District, Hudson School District, Gloversville School
District, Johnstown School District, Batavia School District, Watertown
School District, Glen Cove School District, Long Beach School District,
Utica School District, Middletown School District, Rensselaer School
District, and Troy School District have a 3% tax on gas and electric
service. The Newburgh, Mount Vernon, New Rochelle, Peekskill, Rye and
White Plains school districts have a 6% sales tax on electric and gas
service. Niagara Falls and Schenectady have a 7% tax, Lackawanna has a
7.75% tax. The City of Yonkers has a 4.5% tax. Cayuga County, Auburn,
Cortland County, Niagara County, Orleans County, Oswego, and Rockland
County have a 4% tax. The full list of local governments and school
districts charging sales tax on residential gas and electric utility
service, and their tax rates, are listed in New York State Department of
Taxation and Finance Publication 718-R, September 1, 2015.
In 2009, New York City acted to eliminate the ESCO sales tax break with
respect to the New York City sales tax. In a January 20, 2010 Sales Tax
Memo TBS-M-10(I), summarizing changes to the Tax Law, the New York State
Department of Taxation and Finance announced that effective August 1,
2009, "receipts from the sale of the services of transporting, transmit-
ting, distributing, or delivering gas or electricity are subject to the
41/2% New York City local sales tax, even if purchased from someone
other than the vendor of the gas or electricity." Thus, New York City
has closed a needless loophole in the sales tax law that was, in effect,
reducing utility bills of customers of ESCOs and draining local tax
revenue and rewarding inefficient competition.
To implement these changes, the state Legislature amended Tax Law
section 1210 to permit cities with over one million residents (i.e., New
York City) to "omit the exemption" of ESCO customers from paying any
delivery sales taxes. New York City also amended its Administrative Code
by adding language to Title 11 (Taxation and Finance), section 2001
indicating that a new section "makes inapplicable section eleven hundred
five-C of the tax law, and imposes tax on receipts from every sale,
other than sales for resale, of gas service or electric service of what-
ever nature, including the transportation, transmission or distribution
of gas or electricity, even if sold separately...." The reform reduces
but does not eliminate distortion in utility service markets in New York
City, because the state sales tax exemption persists for nonresidential
customers in New York City who switch to ESCO service.
In summary, there is no valid reason to allow continued arbitrage of tax
breaks by ESCOs, financial middlemen who do not produce or distribute
electricity. This tax break can reward a less efficient ESCO "compet-
itor" which could charge more for the identical service and gives an
unfair marketing advantage to ESCOs. The bill closes the ESCO tax loop-
hole that still exists for the state, counties, cities, and school
districts that continue to exempt ESCO customers from paying tax on the
delivery of electricity and gas.
PRIOR LEGISLATIVE HISTORY:
New Bill
FISCAL IMPLICATIONS:
Repeal of the exemption would increase revenues of the state, munici-
palities, and school districts that tax electric and gas utility
service.
According to the New York State Division of Budget Tax Expenditure
Report for 2016-17, the estimated foregone sales tax revenue due to the
ESCO loophole has grown to $118 million per year in 2016. The State Tax
Expenditure Reports issued by the Division of Budget do not break out
impacts on local taxing authorities that follow the state exemption of
utility delivery service to ESCO customers.
EFFECTIVE DATE:
This act shall take effect immediately.
*See NYS Department of Taxation and Finance Memorandum TSB-M-99(1)S,
Jan. 29, 1999, and NYS Dept. of Taxation and Finance Advisory Opinion,
TSB-A-00(27)S (July 21, 2000). In 2000, however, Section 1105-C was
enacted to create the exemption, as part of Chapter 63 of the Laws of
2000.
**See NYS Division of Budget Tax Expenditure Report 2001, p. 67 at
https://www.budget.ny.gov/pubs/archive/fy0102archive/0102TaxEoend.pdf
***See NYS Division of Budget Tax Expenditure Report 2016,p.106, at
https://www.budget.ny.gov/pubs/executive/eBudget1617/fv1617ter/
TaxExpenditure2016-17.pdf
