Could IDOR decide how municipal gas taxes applied to third-party natural-gas suppliers?

Plain-English summary

A utility-tax auditor asked IDOR to address State and municipal taxes on natural gas sold by third-party suppliers after deregulation.

IDOR explained that it administered two statewide taxes. Gas Revenue Tax applied to persons distributing or selling gas at the lower of 2.4 cents per therm or 5% of gross receipts. Gas Use Tax applied to use of out-of-state gas at the lower of 2.4 cents per therm or 5% of purchase price.

Municipal gas occupation taxes under Section 8-11-2 of the Illinois Municipal Code were imposed and administered by the municipalities themselves. IDOR had no authority or jurisdiction to interpret those local taxes, which were additional to State tax.

The Department also declined to provide guidance on hypothetical transactions.

What this means for you

Questions about a municipality's own gas occupation tax must go to that municipality, even when the same transaction also involves State-administered Gas Revenue or Gas Use Tax.

Common questions

Did IDOR administer municipal gas occupation tax? No.

Was local gas tax included in the State tax? No; the letter said it was additional.

Citations and references

• 35 ILCS 615/2 and 86 Ill. Adm. Code 470.110.
• 35 ILCS 173/5-10 and 86 Ill. Adm. Code 471.105.
• 65 ILCS 5/8-11-2.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0009-gil.pdf

Original ruling text

ST 16-0009-GIL 02/04/2016 MISCELLANEOUS
Municipal gas taxes imposed under the authority provided in Section 8-11-2 of
the Illinois Municipal Code (65 ILCS 5/8-11-2) are not administered by the
Department of Revenue. (This is a GIL.)

February 4, 2016

Dear Xxxxx:
This letter is in response to your letter dated October 23, 2015, in which you
request information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
ABC is writing the Illinois Department of Revenue (“IDOR”) under the
Illinois Administrative Code Title 2: Governmental Organization, Section
1200.120, entitled General Information Letters.
BACKGROUND
Who is ABC: ABC is a utility tax auditor organized as an Illinois
corporation. ABC reviews the collection of municipal utility taxes,
franchise fees or user fees collected by natural gas, electricity and cable
utilities on behalf of municipalities within Illinois.
Basis of Inquiry: ABCs’ inquiry is on behalf of municipal clients who
have lost significant tax revenues due to deregulation of natural gas.
Deregulation has given businesses and residents the ability to switch to
third-party suppliers of natural gas. The loss in tax revenues is due to

third-party sellers of natural gas asserting that their sales are made in
“interstate commerce”, and therefore not subject to municipal taxation or
taxation by the State of Illinois in some cases.
Overview
It is ABCs’ contention that today’s sales of natural gas by new unregulated
“third-party suppliers” are not interstate sales of natural gas, but rather
local sales subject to both State and municipal taxation. Due to the history
of deregulation and the changes that have occurred since the inception of
deregulation in 1997, set forth herein, ABC believes that unregulated thirdparty suppliers are avoiding local and State taxation due to a legal fiction
that has been largely disqualified by the changes in natural gas delivery
over time in Illinois, the nexus of Illinois of unregulated third-party
suppliers selling gas, the more recent laws affection internet retail sales
and the Illinois Supreme Court’s Hartney decision (2013 IL 115130)
preventing avoidance of tax on local sales.
FACTS
Municipal Utility Tax (“MUT”): Many municipalities in Illinois impose a
tax on sales of natural gas in an amount equal to a percentage of sales.
Typically, for natural gas, the percentage tax is imposed on gross receipts
of sales. The majority of gas tax rates are 5%. This tax is permissible by
law pursuant to the Illinois Municipal Code as follows:
===========================================================
(65 ILCS 5/8-11/2) (from Ch.24, par. 8-11-2)
Sec. 8-11-2. The corporate authorities of an municipality may tax
any or all of the following occupations or privileges:

1. (Blank).
2. Persons engaged in the business of distributing supplying,
   furnishing, or selling gas for use or consumption within the
   corporate limits of a municipality of 500,000 or fewer
   population, and not for resale, at a rate not to exceed 5% of
   the gross receipts therefrom.
   ========================================================
   A sample ordinance establishing a MUT is enclosed for review and
   consideration in formulating IDOR’s response to questions posted by ABC
   at the end.
   The following discussion provides background information to assist IDOR
   in opining on whether sales of natural gas are interstate commerce or
   local sales.

DISCUSSION:
DEREGULATION AND MUNICIPAL NATURAL GAS TAXES
Deregulation in Illinois can be broken into two time periods: Pre-1997 and
1997 thereafter.
Pre-1997
Prior to 1997, deregulation of natural gas in Illinois benefited only
commercial and industrials businesses (shippers). Larger companies
purchased natural gas at points in STATE 1, STATE 2 and STATE 3 often
referred to as “wellhead purchases”1. Wellhead purchases are purchases
where title of natural gas passes from the shipper at the wellhead to the
interstate pipeline for redelivery to the local distribution company (LDC) in
Illinois2 (See accompanying chart showing Components of Distribution)
The interstate pipeline takes possession and control of the gas being
shipped at the wellhead. Below is language directly from an interstate
pipeline’s tariff. (See specifically language in yellow).
========================================================
Natural Gas Pipeline Company of America LLC FERC Gas
Tariff
Original Sheet No. 480
Seventh Revised Volume
No. 1
GENERAL TERMS AND CONDITIONS
------------------------28. POSSESSION OF GAS, TITLE AND RESPONSIBILITY
Shipper warrants that it will at the time of delivery to Natural
have good title to all gas so delivered free and clear of all
liens, encumbrances and claims whatsoever. As between
Shipper and Natural, Shipper shall be deemed to be in
control and possession of gas and responsible therefor and
shall hold Natural harmless of and from any damage or
injury caused thereby until the gas shall have been delivered
to Natural at the Receipt Point(s) after which Natural shall be
deemed to be in control and possession of such gas until it’s
delivery to Shipper or for Shipper’s account at the Delivery
Point(s) and while in such possession Natural shall be
responsible therefor and hold Shipper harmless of and from
any damage or injury caused thereby. Natural shall have no
responsibility with respect to any gas on account of anything
1

Alternatively referred to as receipt point in interstate tariff.
UTILITY CO. 1, UTILITY CO. 2, UTILITY CO. 3, and UTILITY CO. 4 are the primary companies in Illinois
referred to as LDC’s and are the primary utilities where a tax uncertainty exists.
2

which may be done, happen or arise with respect to said gas
until it is received by Natural. Shipper shall have no
responsibility with respect to said gas until it is received by
Natural. Shipper shall have no responsibility with respect to
said gas after its receipt by Natural on account of anything
which may be done, happen or arise with respect to said gas
after such receipt until its delivery to Shipper, or for Shipper’s
account, at the Delivery Point(s). The point of the division of
responsibility shall be the point of interconnection between
the facilities of Natural and Shipper, or their respective
agents, at the Receipt or Delivery Point(s), as applicable.
The foregoing provisions of the Section shall not relieve
either party from responsibility for acts of gross negligence
or willful misconduct of such party, its agents or employees.
Issued by: Bruce H. Newsome, Vice President
Issued on April 18, 2008
Effective on April 18, 2008
===================================================
1997 AND THEREAFTER
Beginning in 1997, deregulation expanded to allow residential consumers
the opportunity to purchase gas from suppliers other than their LDC. But
instead of residential customers purchasing gas at the wellhead like
businesses had done pre-1997, these new consumers purchased gas at
points in Illinois called city-gate3 and simply used the LDC to transport the
gas to their gas meter or “burner-tip”. And instead of purchasing gas from
actual producers4 of natural gas at the wellhead, residential consumers
purchased gas from third-party suppliers. In most cases, third party
suppliers became the entity that actually shipped the gas in the interstate
pipeline to be delivered to the city-gate. This practice of purchasing gas at
the city-gate from third-party suppliers became standard practice for all
consumers post-1997.
Today, with the onset of full-blown deregulation, over 25 third-party
suppliers have entered the marketplace to sell gas to local residents,
businesses and industrials, thus displacing the sales of natural gas by the
LDC. From our investigation, no sales to businesses or residents are
made by producers or third-parties at the wellhead.
Historically, given a utility’s local presence, it collected a MUT where
required by law and remitted same to the applicable municipality.
However, these new companies operating in a deregulated market have
not collected a MUT given the manner in which delivery and title have
been separated. These new players claim to operate under a custom and
practice where third-party sales are sales made in interstate commerce,
and thus they claim to not be subject to a MUT based on federal law. The
3
4

In interstate pipeline tariffs point also referred to as delivery point.
Companies that drill natural gas wells and own the production

following is language coming directly from sample contracts provided by
our municipal clients.

“Title to natural gas sold hereunder will transfer at a location
outside the State of Illinois. Currently, there are no State or
local taxes assessed on services or goods provided under
this Agreement. In the event this tax law changes, XYZ
Energy would collect from you such taxes and remit them to
the applicable taxing authority.”
========================================================
DISCUSSION
TAX IMPLICATION OF DEREGULATION
Prior to 1997, when purchases of natural gas were purchased and
shipped from the wellhead, it was clearer that those sales fell within
interstate commerce. However, today, it is much less clear that these
third-party sales fall within the realm of interstate commerce. For
example, in the Chicago metro area, the sales made by third-party
suppliers are delivered to what is called the “Chicago city-gate”. As
described above, the city-gate is a demarcation between the interstate
pipeline and the LDC. This physical point resides entirely within the State
of Illinois. And while most third-party sales still use language similar to the
above in their contracts, it would appear impossible to pass title outside
the State given the interstate tariff wherein the interstate pipeline
maintains control and possession of the gas from the wellhead until
delivery to LDC. Further, examination of the LDC tariff further prevents
passage of title outside the State:

===================================================
Northern Illinois Gas Company
Nicor Gas Company
No. 17.55

Ill.C.C. No. 16 - Gas d/b/a
2nd Revised Sheet

(Canceling Original Sheet No.
17.55, Effective July 20, 1998)
Rate 21
Intrastate Transportation and Storage Services
(Continued from Sheet No. 17.54)
Conditions of Service.
The Shipper shall arrange with the Transporter, the Receipt
Point operator if other than the Company, and the Shipper’s
broker/marketer, if applicable, to provide the Company with
the daily data for all Shipper-owned gas delivered to the

Delivery Point. Any measurement required to determine
deliveries to the Company of Shipper-owned gas at each
Receipt Point shall be done by the Transporter in
accordance with the terms of the Transporter’s currently
effective tariff, on file with either the Federal Energy
Regulatory Commission or the Illinois Commerce
Commission, as applicable and metering practices
applicable to deliveries to the Company. The Shipper shall
hold title to the gas delivered under this rate at all times.
The Company shall be deemed to be in control and
possession of the gas deliverable to the Shipper after its
receipt by the Company at the Receipt Point until its delivery
to the Shipper at the final Delivery Point. The Shipper shall
be deemed to be in control and possession of such gas at all
times at and prior to receipt at the Receipt Point, and at and
after delivery to the final Delivery Point. In no event shall the
Company be required to take any action, engage in any
activity or provide any service that would cause the
Company to become subject to the jurisdiction of the Federal
Energy Regulatory Commission or to lose its exemption from
federal Energy Regulatory Commission jurisdiction pursuant
to Section 1(b) or 1(c) or the Natural Gas Act (15 U.S.C.
717(b), 717(c).
===================================================

DISCUSSION
NATURAL GAS SALES AND INTERSTATE COMMERCE
The issue at hand is whether third-party sales of natural gas purportedly
made within interstate commerce, are subject to State and local
government taxation.
Using background from above, below is a
summation of our rationale whereby it seems apparent that third-party
sales could and should be taxed because they fail to meet the test for a
sale that would be purely interstate in nature.
a. 4-Prong Test: The Supreme Court in Complete Auto Transit, Inc,
V. Brady, 430 U.S. (1977) developed a 4-prong test to establish
whether a transaction is subject to State and local taxation. The 4prong test is comprised of the following tests:
i.

Nexus with the Taxing State: Nearly all third-party gas
suppliers have sales staff, operations staff, offices and
agents residing in the marketplace creating “substantial
nexus” to the State, as defined by the United States
Supreme Court in Nation Bellas Hess, Inc. v Illinois
Department of Revenue, 366 U.S 753 (1967) wherein the
Court ruled that a nexus required an in-state physical
presence.

ii.

Tax must be fairly apportioned: The tax would be fairly
apportioned if applied to all natural gas sales because the
rate of taxation is identical on all therms of gas sold in the
State or local jurisdiction regardless of the entity actually
making the sales at retail.

iii.

Does the tax discriminate against interstate commerce:
Assuming third-party sales are interstate commerce, there is
no discrimination between third-party sales and sales by an
LDC. To the contrary, sales tax does not discriminate
against interstate commerce, as third-party sales, for
purposes of this discussion, are not taxed when sold, but are
taxed when sold by an LDC.
Each business entity
purchases their gas identically, yet the third-party escapes
the tax simply by separating the title to the gas and the
delivery of gas.
The avoidance of the tax is done
contractually for the sole purpose of avoiding any taxation,
and thus is a pure legal fiction serving no other purpose. No
discrimination would exist with the imposition of a State or
local tax on third-party suppliers. Imposition of a local sales
tax levels the playing field between intrastate sales and
interstate sales.

iv.

Tax is fairly related to the State: Clearly, one gas enters
into the State of Illinois or the local municipalities, the
interstate pipeline enjoys the services of the State and local
municipality in terms of police, fire, and other emergency
services.

We believe it is clear that sales made by third-party suppliers in Illinois
meet the 4-prong test and thus allow municipalities and the State to
impose gross receipts taxes on sales of natural gas.
b. Pipeline Tariffs-Physical Delivery:
From our vantage point, it
appears that custom and practice, not the physical delivery
components set forth in interstate tariffs or local distribution tariffs,
have resulted in third-party gas sales being characterized as sales
occurring in “interstate commerce”; and therefore, not subject to
local taxation pursuant to the Commerce Clause. Moreover, it
appears regardless of whether it’s impossible to physically pass title
of natural gas outside the State, municipal utility taxes have gone
uncollected based on what appears to be practices prior to 1997.
Below is the physical chain of custody of a natural gas sale which
clearly makes it impossible to pass title outside the State and
makes the sales local sale in nature.
i.

Examining FERC Gas Tariffs for XYZ the primary interstate
pipeline serving the State of Illinois (see page 3 for actual
pertinent tariff language), state XYZ has control and

possession of gas once the gas enters their system
(wellhead) (receipt point) and XYZ returns possession at the
interconnection between it and the local distribution
company (city-gate) (delivery point). Given this, it would be
impossible to pass title of gas flowing through XYZ’s pipe
outside Illinois as has been contractually custom and
practice in many cases.
ii.

c.

Illinois Commerce gas Tariffs for UTILITY 1, the largest LDC
in the State of Illinois, state the LDC takes control and
possession of the gas at the delivery point (city-gate) (receipt
point) from XYZ and returns the gas at the meter (burner-tip)
(delivery point) at the consumer’s physical location. Again it
would seem impossible to pass title outside the State to be
considered interstate in nature.

IDOR Definition of Transactions in Interstate Commerce:
Based on statues governing IDOR’s assessment of taxation on
natural gas current practices at the State of municipal level are not
sales in interstate commerce. Below is specific statute:

TITLE 86: REVENUE
CHAPTER I: DEPARTMENT OF REVENUE
PART 470 GAS REVENUE TAX ACT
SECTION 470.155 TRANSACTIONS IN INTERSTATE COMMERCE
Section 470.155 Transactions on Interstate Commerce
a) The tax is not imposed upon any taxpayer with respect to any
transaction in interstate commerce to the extent that such
transactions may not, under the Constitution and statutes of the
United States, be made the subject of taxation by this State.
b) Insofar as the tax is imposed upon persons distributing,
supplying, furnishing or selling gas for use or consumption and
not for resale, the following general principles will apply in
determining whether or not transactions are in interstate
commerce:
c) Where a taxpayer delivers gas through continuous mains, lines
or pipes from a point in Illinois to a point outside of Illinois, such
transactions are in interstate commerce, and the taxpayer is not
liable for tax with respect to gross receipts therefrom.
d) Where a taxpayer not engaged in business in this State delivers
gas through continuous mains, lines or pipes from a point
outside of Illinois to a point within Illinois, the transaction is in
interstate commerce, and the taxpayer is not liable for tax with

respect to his receipts therefrom. However, if such company is
engaged in the business in Illinois of distributing, supplying,
furnishing or selling gas brought within this State for use or
consumption and not for resale, such transactions do not
constitute interstate commerce, and the tax will apply.
e) Where a taxpayer delivers gas through continuous mains, lines
or pipes from one point in Illinois to a second point within Illinois,
the transaction is not in interstate commerce, and the taxpayer
will be liable for tax with respect to his receipts therefrom. This
rule applies irrespective of the fact that a portion of the
continuous mains, lines or pipes of the taxpayer through which
gas passes are situated outside Illinois.

f) Where a taxpayer distributes supplies, furnishes or sells gas to
a single customer under a contract calling for the delivery of gas
partly within Illinois and partly outside of Illinois, the taxpayer is
liable for tax with respect to that portion of gross receipts from
the contract accruing from service furnished within this State.
===================================================
In 2015, from ABC’s vantage point, most (if not all) of the third-party sales
of natural gas in Illinois are made by companies or their agents having a
physical presence in Illinois. The ABC Utility Services believes these
sales have substantial and/or attributional nexus with State and local
governments. Passing title outside the State (and, by extension, outside
the municipality) is simply a legal fiction created to avoid taxation and
does not seem possible given pipeline tariffs or the physical location of
sale.
QUESTIONS

1. Are out-of-state third-party suppliers subject to State and
   municipal tax on sales of natural gas?
2. Given the above facts, would natural gas sales, where physical
   possession and title pass to an end-use customer at the citygate, be considered sales made within Illinois for taxation
   purposes?
3. If an entity making a sale of natural gas to end-users in Illinois
   has a substantial nexus in Illinois (as defined by the 4-prong
   test), would the sale be considered local in nature regardless of
   where contractual title passed to the end-user, i.e. wellhead,
   city-gate or burner-tip?

4. Would State definitions of interstate commerce be the same for
municipalities in Illinois as set forth in the Gas Revenue Tax
Act?

5. Are there other considerations that IDOR would suggest to
   determine the location (for taxation purposes) of a natural gas
   sale?
6. Do IDOR’s post-Hartney (2013 IL 115130 regulations affect
   IDOR’s analysis of this matter?
   DEPARTMENT’S RESPONSE:
   The provisions of 86 Ill. Adm. Code 470.110 implement the Gas Revenue Tax
   Act. 35 ILCS 615. The Gas Revenue Tax Act is a State-wide tax administered by the
   Department. Tax revenues received by the Department are deposited into the State
   General Revenue Fund. Section 2 of the Act imposes a tax upon persons engaged in
   the business of distributing, supplying, furnishing or selling gas to persons for use or
   consumption and not for resale at the rate of 2.4 cents per therm or 5% of the gross
   receipts received from each customer from such business, whichever is the lower rate.
   35 ILCS 615/2.
   The Gas Use Tax Law imposes a State-wide tax on the privilege of using in this
   State gas obtained in a purchase of out-of-state gas at the rate of 2.4 cents per therm or
   5% of the purchase price for the billing period, whichever is the lower rate. 35 ILCS
   173/5-10; 86 Ill. Adm. Code 471.105.
   Section 8-11-2 of the Illinois Municipal Code (65 ILCS 5/8-11-2) is not
   administered by the Department of Revenue; it is administered by municipalities that
   elect to impose a gas occupation tax. The Department has no authority or jurisdiction to
   provide guidance in regards to municipally-administered taxes imposed under this
   section of the Illinois Municipal Code. The local tax is in addition to any tax imposed by
   the State.
   As noted above, the purpose of a GIL is to direct taxpayers to Department
   regulations or other sources of information regarding the topic about which they have
   inquired. The Department cannot provide guidance on hypothetical transactions.
   I hope this information is helpful. If you require additional information, please
   visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
   Information Division at (217) 782-3336.
   Very truly yours,

Richard S. Wolters
RSW:bkl