Was an electric utility's capacity-reservation prepayment part of the taxable electricity sales price?

Subject

Tax on an Electric-Capacity Reservation Prepayment

Plain-English summary

The capacity-reservation prepayment was taxable as part of the electricity sales price. The customer paid $3.5 million for the utility to reserve and maintain 15 megawatts of firm capacity, potentially increasing to 20 megawatts, throughout the contract.

The Department found that the payment bought reliable access to electric power and compensated the utility under the same service agreement. Even if characterized as a service rather than energy itself, reserving the power supply was a service that formed part of the taxable sale.

Common questions

Q: Did it matter that the payment was called a capacity prepayment? No. The contract's substance showed it paid for reserved power availability.

Q: Was the payment taxable even before actual energy use? Yes, under the ruling's contract analysis.

Citations and references

• Fla. Stat. § 212.05(1)(e)1.d — tax on electric power or energy
• Fla. Stat. § 212.02(16) — sales price includes related services
• Fla. Admin. Code r. 12A-1.053 — electricity rule
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-081

Original ruling text

Title:

Sale and Purchase of Electric Power or Energy

Nov 26, 1997

Re: Technical Assistance Advisement 97A-081
Section 212.02(16), F.S.
Section 212.05(1)(e)1.d., F.S.
Rule 12A-1.053, F.A.C.
XXX (herein Utility)

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated June 25, 1997, wherein you asked whether in
the sale of electricity by Utility, a municipally owned utility,
to commercial consumers of electric power, an element of the
billing noted as "capacity reservation prepayment" is part of
the taxable amount sold to such consumers. You state that the
term "capacity reservation prepayment" means that Utility is
required "... to reserve and maintain a predetermined amount of
megawatt capacity throughout the life of the contract."

You then assert that "[n]o portion of the capacity reservation
prepayment is for the actual sale and purchase of electric power
or energy." You attached to your request a copy of a document
styled Agreement For Service Pursuant To [Utility] PXT Rate
Classification Long Term Electric Service Contract (herein
Contract). Contract is typical of agreements executed between
Utility and customers which customarily require such a reserve
capacity.

Department Response

Section 212.05(1)(e)1.d., F.S., imposes sales tax at the rate of
7 percent on electrical power or energy. Rule 12A-1.053, F.A.C.,
interprets the statute.

Utility, in Section VII A. of the Contract, is required to "...
reserve and maintain fifteen (15) megawatts of firm capacity for

the use of [customer] throughout the term, including any renewal
terms of this [Contract], subject to the right of [customer] to
require such firm capacity to be increased up to twenty (20)
megawatts." In exchange for this reserve capacity, Utility is
to receive from customer, at the effective date of the Contract
the amount of $3,500,000, and additional sums in the event of
the renewal of the Contract. The Contract, in Section VII B.1.
describes these amounts as "... generation capacity
prepayments...."

In Section VIII A. of the Contract, the base rate for
electricity charged the customer by the Utility is expressed as
the sum of the separately identified charges for the energy,
state sales tax, and gross receipts tax.

A prefatory clause of the Contract states the purpose of the
agreement is the provision of "... a reliable electric
supply..." to the customer. This purpose is echoed in Section
I. which states that:

It is the intent of this [Contract] to provide [customer] a
reliable supply of electric power at an economical and
competitive rate and to provide [Utility] a predictable
demand for electric power to be paid at a rate sufficient
to fairly compensate [Utility].

Also, Section III of the Contract, which is styled Covenant to
Purchase and Sell, includes the following text:

During the term hereof, [customer] agrees to purchase and
use, and [Utility] agrees to sell and supply, in accordance
with its [rate structure], all of [customer's] firm
capacity requirements for electric service....

Section VII creates obligations in both parties to maintain, in
the instance of the Utility, reserve capacity up to 20
megawatts, and in exchange, the customer is obligated to prepay
the sum of $3,500,000.

The provisions which reveal the true nature of these prepayments
are described in Section VII C. wherein if the customer's "...

requirements exceed fifteen (15) megawatts for any three 3
consecutive months or for three (3) months during any twelve
(12) month period [customer] shall compensate [Utility] by one
of the following: ...." There follow two alternatives available
to the customer, the first of which states that customer "...
may elect to obtain such excess power (including in excess of
twenty (20) megawatts) from [Utility] on a non-firm capacity
basis, outside of this [Contract], selecting any of the tariffs
(or combinations thereof) available to other similarly situated
industrial customers...." The other alternative allows the
customer of Utility to "... elect to obtain such excess power
from [Utility] on a firm basis pursuant to the terms of this
[Contract]."

A reading of these provisions reveals that the prepayment
results in the purchase of energy as expressed in Section VII C.
wherein the customer is charged the prepayment "... to obtain
such excess power... [or] to obtain such excess power from
[Utility] on a firm basis...."

A conclusion is reached that the capacity reservation prepayment
is consideration given by the customer to Utility for the
electricity supplied customer at rates, including the
prepayment, as specified in the Contract. As a consequence,
Utility, as expressed in Section 1, cited above, is provided
"... a predicable demand for electric power to be paid at a rate
sufficient to fairly compensate [Utility]."

Consequently, the prepayment is subject to tax as imposed by the
provisions of s. 212.05(1)(e)1.d., Florida Statutes.

Even, arguendo, that the prepayment was not given, as you assert
"... for the actual sale and purchase of electric power..." the
term "sales price," as defined in s. 212.02(16), F.S., includes
any services which are a part of the sale. Thus, at minimum,
the prepayment was given to Utility in exchange for the
provision of a service which was the reservoir of electric
energy constantly available to customer should the need for such
energy arise.

This response constitutes a Technical Assistance Advisement

under s. 213.22, F.S., which is binding on the department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and
Dispute Resolution

Ctrl. No. 29559