Are natural gas sales involving a municipal energy cooperative subject to the section 186-a tax, and is a 501(c)(3) cooperative exempt from the section 186 franchise tax?

Plain-English summary

The School and Municipal Energy Cooperative -- an entity formed under Article 5-G of the General Municipal Law (municipal cooperation) -- asked (1) whether natural gas sales running through it are subject to the gross receipts tax under section 186-a, and (2) whether the Cooperative, as an organization exempt under IRC section 501(c)(3), is exempt from the section 186 franchise tax. The Cooperative argued the Supplier sells gas to it for resale (not taxable) and that, as a charitable organization, the Cooperative is not a "person" subject to section 186-a.

The Department held:

• Issue 1 (section 186-a): Section 186-a taxes a utility's gross operating income from sales of gas for ultimate consumption; sales for resale are not taxable, and section 186-a(2) excludes charitable organizations from "person." But on the facts submitted, it did not appear the Cooperative was genuinely purchasing and reselling the gas -- so the Supplier's sales of natural gas appear to be for ultimate consumption and are subject to section 186-a.
• Issue 2 (section 186): Being exempt from federal income tax under 501(c)(3) does not make the Cooperative not a corporation; it is therefore included within the entities that may be subject to the section 186 franchise tax. Federal exempt status is not a section 186 exemption.

What this means for you

The resale exemption depends on a real purchase-and-resale

Section 186-a does not tax sales for resale -- but only if there is a genuine purchase by, and resale from, the intermediary. Where the facts show the supplier is really selling to the ultimate consumers, the supplier's sales are taxable under 186-a, and labeling an intermediary "cooperative" does not change that.

Federal 501(c)(3) status is not a section 186 exemption

An organization that is exempt for federal income tax is still a corporation and can be within the reach of section 186. The section 186-a(2) charitable exclusion is specific to that tax; section 186 has no parallel automatic exemption.

Structure substance over labels

Whether utility sales are "for resale" or "for consumption," and whether an exempt label removes a state tax, both turn on substance. Document an actual resale chain if relying on the resale exclusion.

Common questions

Q: Are the natural gas sales through the cooperative subject to section 186-a?
A: On the facts, yes -- the supplier's sales appear to be for ultimate consumption, not genuine resale, so they are subject to 186-a.

Q: Does 501(c)(3) status exempt the cooperative from the section 186 franchise tax?
A: No. Federal exempt status does not make it a non-corporation; it is included among entities that may be subject to section 186.

Q: When are utility sales not taxed under 186-a?
A: When they are genuine sales for resale, as distinguished from sales for ultimate consumption.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186 (Article 9 franchise tax on gas/electric utilities) [repealed eff. 2000]
- Tax Law section 186-a (utility services tax; gross operating income; ultimate consumption)
- Tax Law section 186-a(2) (exclusion of charitable organizations from person)
- General Municipal Law Article 5-G (municipal cooperation)
- Internal Revenue Code section 501(c)(3) (exempt organizations)
- Internal Revenue Code section 7701(a)(3) (definition of corporation)
- School and Municipal Energy Cooperative, TSB-A-00(8)C (Apr. 4, 2000)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a00_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(8)C
Corporation Tax
April 4, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C981026A
C990114D

On October 26, 1998 and January 14, 1999, Petitions for Advisory Opinion were received
from the School and Municipal Energy Cooperative, c/o Christopher L. Doyle and James R.
Maloney, Hodgson, Russ, Andrews, Woods & Goodyear, LLP, 1800 One M&T Plaza, Buffalo, New
York 14203-2391. The Petitions, which raise related issues, have been consolidated and are
addressed in this advisory opinion. Additional information was submitted by Petitioner on July 2,
1999 and December 6, 1999.
The issues raised by Petitioner, the School and Municipal Energy Cooperative, are:
(1) whether sales of natural gas involving the School & Municipal Energy
Cooperative, as described below, are subject to the gross receipts tax under section
186-a of the Tax Law, and
(2) whether the School and Municipal Energy Cooperative, an entity formed pursuant
to Article 5-G of the General Municipal Law, is exempt from tax under section 186
of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
The School & Municipal Energy Cooperative ("Cooperative") is an unincorporated
association formed in the Fall of 1998 to cooperatively purchase energy pursuant to Article 5-G of
the New York General Municipal Law ("GML"). The Cooperative qualifies as an exempt
organization pursuant to section 501(c)(3) of the Internal Revenue Code ("IRC"). Its members are
30 public school districts (as defined in section 119-n(a) of the GML). By law, private interests will
not be permitted to be members of the Cooperative.
The members become authorized to join the Cooperative through a vote of their governing
bodies. Each member may resign from the Cooperative at any time. The members elect a Board
of Trustees to control and manage the business affairs of the Cooperative.
Petitioner indicates that the Cooperative's purpose involves the purchase of natural gas and
electricity on an aggregation basis. By aggregating its members' energy purchases, the Cooperative
can successfully lower costs through enhanced purchasing power and elimination of redundant
administrative efforts. The Cooperative will not be the ultimate consumer. All of the Cooperative's
activities take place in New York.

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Petitioner states that the Cooperative will purchase natural gas and certain related services
from a supplier ("Supplier"), and resell all such natural gas and related services to the school districts
that are members of the Cooperative. It is intended that all gas purchased by the Cooperative from
the Supplier would be purchased in New York, and that all gas sold by the Cooperative to its
members would be sold in New York, at cost. The members will consume the energy purchased
from the Cooperative in New York State. The Cooperative will not consume any of the natural gas
purchased from the Supplier.
The Supplier's prices are not subject to regulation by New York's Public Service Commission
("PSC") (i.e. the Supplier is not a "regulated utility").
The Cooperative purchases from an unrelated entity ("Marketer") certain services necessary
for effectuating the sale and delivery of gas to the Cooperative and its members. Such services
include the provision of billing, payment processing, monthly gas nominations, etc.
The Cooperative has not elected to be classified as an association for Federal income tax
purposes, nor is it taxable as a corporation under any provision of the IRC.
Applicable Law
Section 186-a of the Tax Law imposes an excise tax on the furnishing of utility services
measured as a percentage of the gross income of a utility that is subject to the supervision of the PSC
or the gross operating income of every other utility doing business in New York State. For purposes
of section 186-a, a "utility" includes a person subject to the supervision of the PSC and every person
(whether or not such person is subject to such supervision) who sells or furnishes gas or electricity,
by means of mains, pipes, or wires; regardless of whether such activities are the main business of
such person or are only incidental thereto.
Gross operating income, as defined in section 186-a.2(d) of the Tax Law, means and includes
receipts received in or by reason of any sale made for ultimate consumption or use by the purchaser
of gas or electricity, or in or by reason of the furnishing for such consumption or use of gas or
electric service in New York State, without any deductions.
The word "person" as defined in section 186-a.2(b) of the Tax Law includes persons,
corporations, companies, associations, joint-stock companies or associations, partnerships and LLCs,
except the state, municipalities, political and civil subdivisions of the state or municipality, public
districts and corporations and associations organized and operated exclusively for religious,
charitable or education purposes, no part of the net earnings of which inures to the benefit of any
private shareholder or individual.

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Corporation Tax
April 4, 2000

Section 186 of the Tax Law imposes an annual franchise tax upon every corporation,
joint-stock company or association formed for or principally engaged in the business of supplying
gas, when delivered through mains or pipes, or electricity, "for the privilege of exercising its
corporate franchise or carrying on its business in such corporate or organized capacity in this state".
For purposes of section 186 of the Tax Law, the term "corporation" includes an association within
the meaning of section 7701(a)(3) of the IRC.
Section 7701(a)(3) of the IRC provides that the term "corporation" includes associations,
joint-stock companies and insurance companies. Section 301.7701-2(a) of the Treasury Regulations
states that "for purposes of this section and §301.7701-3, a business entity is any entity recognized
for federal tax purposes ... that is not properly classified as a trust ... or otherwise subject to special
treatment under the Internal Revenue Code." Section 301.7701-2(b)(2) of the Treasury Regulations
provides that the term Corporation includes an association (as determined under section 301.7701­
3).
Discussion
With respect to Issue “1", section 186-a of the Tax Law imposes an excise tax measured by
the gross operating income of utilities not subject to PSC supervision. A “utility” includes a
“person” which includes corporations, associations, partnerships and LLCs as well as natural
persons. Gross operating income includes receipts received by reason of any sales of gas or
electricity or furnishing of gas or electric service for ultimate consumption or use by the purchaser.
Accordingly, sales for resale, as distinguished from sales for consumption, are not taxable.
Additionally, section 186-a(2) excludes, among others, charitable organizations from the definition
of “person” subject to tax.
Petitioner asserts that Supplier is not selling the natural gas for ultimate consumption, but is
selling the natural gas to the Cooperative for resale, and that the Cooperative, as an exempt
organization under section 501(c)(3) of the IRC, would not be a "person" subject to tax under section
186-a. Accordingly, Petitioner reasons, no receipts from sales of natural gas in this manner would
be subject to tax under section 186-a of the Tax Law. This reasoning presumes a sale from Supplier
to the Cooperative and a resale from the Cooperative to the members. Petitioner submitted certain
documentation relating to the described transactions. It cannot be concluded from the submission
that the Cooperative is indeed purchasing and reselling the natural gas. It would therefore appear
that Supplier's sales of natural gas are for ultimate consumption and are subject to tax under section
186-a of the Tax Law.
With respect to Issue "2", section 186 of the Tax Law provides that the term "corporation"
includes an association within the meaning of section 7701(a)(3) of the IRC. Section 301.7701-2
excludes from the definition of "business entity" certain entities subject to special treatment under
the IRC. Section 501(a) of the IRC provides that an organization described in section 501(c) or (d)

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or section 401(a) of the IRC shall be exempt from taxation under Subtitle A unless the exemption
is denied under section 502 or 503 of the IRC. Petitioner asserts that an organization that is
described in section 501(c) of the IRC is subject to special treatment, and is not a business entity
pursuant to section 7701(a)(3) of the IRC. Accordingly, Petitioner reasons that an organization that
is exempt from federal income tax pursuant to section 501(c)(3) of the IRC is not a corporation for
purposes of section 186 of the Tax Law. However, under section 301.7701-3(c)(v) of the Treasury
Regulations, an organization under section 501(c)(3) of the IRC is treated as having made an election
to be classified as an association within the meaning of section 7701(a)(3) of the IRC, and is
therefore included within the entities which may be subject to tax under section 186 of the Tax Law.

DATED: April 4, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.