When a power plant buys electricity, can it buy it tax-free — for resale, or as electricity used to generate its own electricity?

Plain-English summary

A company that runs an electricity generation facility in Connecticut asked DRS three questions about buying electricity tax-free. Although the plant normally makes its own power, it buys electricity in two situations: (1) to supplement the power it generates so it can meet its sales contracts with wholesalers and distributors, and (2) to run the facility when it is off-line — lighting, heat, office equipment, and keeping the generating components ready so the plant can be brought back online quickly.

DRS gave a three-part answer:

• Electricity bought to resell — tax-free. When the company buys electricity that it will turn around and sell to wholesalers and distributors (who resell it to consumers), that is a purchase for resale under Conn. Gen. Stat. § 12-410. No tax is due; the company gives its supplier a resale statement, and tax is collected further down the line.
• Electricity used directly to generate electricity — exempt, but only if it's truly "direct." Conn. Gen. Stat. § 12-412(3)(E) exempts electricity used directly in the furnishing of electricity delivered to consumers through mains, lines or pipes. Generation counts as part of "furnishing," so electricity used to run the generating machinery or to power the movement of water through the system is exempt. But electricity used to light the facility, heat or cool the building, or run office equipment is not used directly in generation and stays taxable. If the company buys electricity for both exempt and taxable uses, it has to document how much goes to each purpose and self-assess use tax on the part that doesn't qualify.
• The "fuel" exemption doesn't apply. Conn. Gen. Stat. § 12-412(18) exempts materials, tools and fuel used directly in furnishing electricity. But the regulation (Conn. Agencies Regs. § 12-412(18)-1) defines "fuel" as a substance generally regarded as fuel — coal, gas or oil. Electricity is not a fuel or a substitute for fuel, so this exemption is simply unavailable.

The ruling also modified and superseded an earlier ruling (No. 89-56), clarifying that "furnishing of electricity" under § 12-412(3)(E) includes generating electricity for sale to wholesalers and distributors who resell it to end consumers.

What this means for you

Electricity generators and power producers

If you buy power on the grid to backfill your own output and resell it under supply contracts, treat those purchases as sales for resale — buy them tax-free and let the tax fall on the ultimate retail sale. Separately, electricity you consume to actually run the generating equipment can be bought exempt under § 12-412(3)(E). The catch is the word directly: the exemption reaches the machinery that makes electricity (and moving water through the system), not the "house load" that lights and heats your building or powers the back office. Meter or otherwise document the split, and self-assess use tax on the non-generation share.

Utilities and energy companies more broadly

The same "used directly in furnishing" line governs gas, water and steam utilities, not just electricity. Support functions — office lighting, HVAC, administrative equipment — fall outside the direct-use exemption even at a facility whose whole business is furnishing the utility. And don't reach for the § 12-412(18) fuel exemption to cover electricity: DRS reads "fuel" as coal, gas or oil, so electricity itself never qualifies as exempt "fuel."

Accountants and tax professionals

Three distinct hooks are in play and they don't overlap cleanly: resale (§ 12-410), the direct-use utility exemption (§ 12-412(3)(E)), and the fuel/materials exemption (§ 12-412(18), read with Reg. § 12-412(18)-1). A client that buys electricity for mixed uses must track quantities by use and self-assess use tax on the taxable portion — a blanket exemption claim on the whole purchase is wrong. Note also that this ruling modified and superseded Ruling No. 89-56 on the scope of "furnishing of electricity."

Common questions

Q: Can a power plant buy electricity without paying Connecticut sales tax?
A: Sometimes. It can buy tax-free the electricity it resells to wholesalers/distributors (a sale for resale under § 12-410), and the electricity it uses directly to generate power (exempt under § 12-412(3)(E)). Electricity used to light, heat/cool, or run offices is taxable.

Q: What does "used directly in the generation of electricity" mean?
A: DRS reads it narrowly — operating the machinery and equipment that produces electricity, or powering the movement of water through the generation system. It does not include lighting the facility, heating or cooling the building, or running office equipment.

Q: We buy electricity for both generation and building use — how do we handle tax?
A: You must document how much electricity goes to each purpose and self-assess Connecticut use tax on any electricity you bought exempt under § 12-412(3)(E) that turns out not to qualify (the non-generation portion).

Q: Is electricity a "fuel" that qualifies for the § 12-412(18) exemption?
A: No. The regulation defines fuel as a substance generally regarded as fuel — coal, gas or oil. Electricity is not a fuel or a substitute for fuel, so the § 12-412(18) exemption does not apply to it.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(2)(a) (sale of tangible personal property subject to sales and use taxes)
• Conn. Gen. Stat. § 12-410 (purchases for resale)
• Conn. Gen. Stat. § 12-412(3)(E) (exemption for gas, water, steam or electricity used directly in furnishing gas, water, steam or electricity to consumers)
• Conn. Gen. Stat. § 12-412(18) (exemption for materials, tools and fuel used directly in furnishing gas, water, steam or electricity)

Regulations:

• Conn. Agencies Regs. § 12-412(18)-1 (definition of "fuel" as coal, gas or oil)

Prior guidance affected:

• Ruling No. 89-56 (modified and superseded by this Ruling as to the scope of "furnishing of electricity")

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2001-3

Original ruling text

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:

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.

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.

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:

The Company may purchase electricity to be sold to wholesalers and distributors of electricity on a resale basis without payment of tax.

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.

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