Are purely financial 'virtual' electricity trades in NYISO's wholesale market subject to New York sales tax, and does a trader who only does virtual trades have to register as a sales tax vendor?

Plain-English summary

David Sholk, LLC is a market participant in the New York Independent System Operator's ("NYISO") virtual electric market, which lets traders who neither generate nor consume electricity submit purely financial bids — buying "virtual load" or selling "virtual supply" — to arbitrage price differences between the day-ahead and real-time wholesale electricity markets. NYISO's own materials describe these as "financial transactions only" with "no effect on Real-Time physical energy consumption": by design, whatever virtual position is taken in the day-ahead market is automatically and exactly offset in the real-time market, so zero net electricity is ever actually withdrawn or injected. David Sholk, LLC participates solely in this virtual side, never taking or being obligated to make physical delivery of electricity.

New York taxes sales of electricity and electric service under § 1105(b)(1)(A). The Department concluded that virtual transactions simply don't qualify — they're a hedging/arbitrage mechanism that lets financial players (even those, like banks, entirely outside the electricity industry) participate in NYISO's markets without ever touching the physical grid. Because David Sholk, LLC's only activity is this purely financial trading, it isn't selling or purchasing any taxable item or service, so it doesn't become a "vendor" under § 1101(b)(8) and has no obligation to register under § 1134 solely because of this trading.

This opinion later became the Department's own cited precedent in a follow-up 2008 ruling, TSB-A-08(3)S (AB Energy, Inc.), which applied the identical analysis to another virtual-market-only trader.

What this means for you

Financial traders and hedge funds in wholesale energy markets

Participating exclusively in a purely financial "virtual" trading program tied to an electricity market — where positions never result in actual physical delivery — generally creates no New York sales tax exposure or vendor-registration obligation, as long as the program structurally guarantees zero net physical energy flow, as NYISO's does.

Utilities, generators, and load-serving entities

This ruling changes nothing about your own physical-market transactions, which remain taxable sales of electric service under § 1105(b)(1)(A). The analysis here applies only to the separate, purely financial virtual side of the market.

Accountants and tax professionals

The key fact the Department relied on is the built-in structural guarantee that every virtual day-ahead position is automatically and exactly reversed in real time (per NYISO's own tariff, § 4.5), producing zero net physical energy withdrawal or injection. This is now a twice-confirmed Department position (see also TSB-A-08(3)S) — useful precedent for any similar "virtual" or purely financial commodity-market product.

Common questions

Q: Are trades in NYISO's virtual electric market subject to New York sales tax?
A: No. They're purely financial transactions that never result in actual generation, delivery, or consumption of electricity, so they don't qualify as taxable sales of electricity or electric service.

Q: Does a company that only trades virtually need to register as a New York sales tax vendor?
A: No, not solely because of that virtual trading. Since it isn't selling any taxable item or service through virtual transactions, it isn't a "vendor" under § 1101(b)(8) on that basis.

Q: Has the Department confirmed this position more than once?
A: Yes. This 2007 opinion was later cited and followed by the Department's 2008 opinion for AB Energy, Inc. (TSB-A-08(3)S), addressing the identical virtual-market fact pattern.

Q: Can another trader rely on this exact ruling?
A: No. This Advisory Opinion binds the Department only as to David Sholk, LLC and the facts it described, though the Department has reached the same conclusion in at least one later, similar ruling.

Citations and references

Statutes, regulations, and tariff provisions:

• Tax Law § 1101(b)(8) (definition of "vendor")
• Tax Law § 1105(b)(1)(A) (tax on gas, electricity, refrigeration, and steam service)
• Tax Law § 1134(a)(1)(i) (vendor registration requirement)
• NYISO Market Administration and Control Area Services Tariff §§ 2.194b, 4.2.2, 4.5
• NYISO Technical Bulletin 074, Virtual Bidding in the Day-Ahead Market

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_20s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-07(20)S
Sales Tax
July 26, 2007

Office of Tax Policy Analysis
Taxpayer Guidance Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S051110A

On November 10, 2005, the Department of Taxation and Finance received a Petition for
Advisory Opinion from David Sholk, LLC, 432 Willow Street, Lockport, NY 14094. Petitioner,
David Sholk, LLC, provided additional information pertaining to the Petition on March 24, 2006.
The issues raised by Petitioner are:

1. Whether Petitioner’s transactions in the New York Independent System Operator
   virtual electric market are subject to the New York State sales and use tax.
2. Whether Petitioner is required to be registered as a vendor for sales tax purposes.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner is a market participant in the New York Independent System Operator
   (NYISO) virtual electric market. NYISO administers the distribution of electricity across the
   state among and between generators and consumers. The persons who participate in the ISO
   markets may be resellers or entities that consume large amounts of power in their business
   operations. In administering the distribution of electricity among and between generators and
   consumers, NYISO also acts as a billing and collection agent for the sales and purchases of
   electricity by these parties.
   The NYISO regulates both virtual and physical electric markets, offering various levels
   of participation in the NYISO electric markets. All participants are required to register with
   NYISO and must otherwise meet the applicable NYISO qualifications (NYISO Technical
   Bulletin 074). Whether or not registered as market participants for other purposes, a separate
   NYISO registration as a market participant in the virtual market is also required for both current
   and prospective NYISO customers to participate in virtual bidding.
   NYISO Technical Bulletin 074, Virtual Bidding in the Day-Ahead Market, states, in part:
   Virtual bidding is the submission of bids for the financial purchase or sale of
   energy, rather than or in addition to the physical delivery or purchase of energy in the
   NYISO-administered electric markets.
   Virtual Bidding enables Qualified NYISO Customers to:
   •

buy energy (Virtual Load) in the Day-Ahead Market (DAM) at day-ahead
prices and sell it in the Real-Time (RT) Market at real-time prices and;

-2TSB-A-07(20)S
Sales Tax
July 26, 2007
•

sell energy (Virtual Supply) in the DAM at day-ahead prices and buy energy
to cover the sale in the RT market at real-time prices (Virtual Supply).

Virtual Load and Virtual Supply transactions are financial transactions only and
have no effect on real time physical energy consumption.
A virtual load and a virtual supply are established for all virtual transactions. The virtual
load and virtual supply established for virtual transactions are separate from the physical load
and physical supply which are established for physical transactions. Existing NYISO bidding
rules for physical load and physical supply are not affected by the virtual load and virtual supply
bidding rules (NYISO Technical Bulletin 074).
A NYISO News Release entitled New York ISO Announces Successful First Week of
Virtual Bidding, dated November 14, 2001, provided the following description of the Virtual
Electric Market, further describing the financial aspects of virtual trading:
Virtual supply and virtual load transactions are financial transactions only and
have no effect on Real-Time physical energy consumption, nor do they compromise the
physical commitment of energy resources for the purpose of system reliability. Instead,
they help to even out price differences between markets as traders seek to arbitrage the
price differences between markets. Virtual trading provides a means for companies
outside the electricity industry, such as financial institutions to become involved in
New York’s markets. It also provides a means for existing market players to hedge
themselves against risk.
Petitioner, as a participant in the virtual electric market, engages in this financial
arbitrage of energy prices between the Day-Ahead Market and Real-Time Market. Petitioner
neither generates nor consumes electricity. Petitioner only participates in the virtual electric
market bidding on the supply and demand of energy. Petitioner neither takes delivery of, nor is
obligated to deliver, any electricity on account of purchases and sales in the ISO virtual market.
Applicable law and regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by subdivisions
(a), (b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
following terms shall mean:
*

*

(8) Vendor. (i) The term "vendor" includes:

*

-3TSB-A-07(20)S
Sales Tax
July 26, 2007

(A) A person making sales of tangible personal property or services, the receipts
from which are taxed by this article;
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
*

*

*

(b)(1) The receipts from every sale, other than sales for resale, of the following:
(A) gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam
service of whatever nature; . . .
Section 1134(a)(1)(i) of the Tax Law provides, in part:
Every person required to collect any tax imposed by this article, other than a
person who is a vendor solely by reason of clause (D), (E) or (F) of subparagraph (i) of
paragraph eight of subdivision (b) of section eleven hundred one of this article,
commencing business or opening a new place of business . . . shall file with the
commissioner a certificate of registration, in a form prescribed by the commissioner, at
least twenty days prior to commencing business or opening a new place . . . whichever
comes first. . . .
The NYISO Market Administration and Control Area Services Tariff provides, in part:
2.194b Virtual Transaction
Any bid to purchase or offer to sell Energy in the Day-Ahead LBMP market
submitted at the load bus specified for Virtual Transactions.
*

*

*

4.2.2 Day-Ahead Load Forecasts, Bids and Bilateral Schedules
A. General Customer Forecasting and Bidding Requirements
*

*

*

(ii) Customers submitting Bids in the Day-Ahead Market, other than Prescheduled Transaction Requests, shall provide the ISO, as appropriate with:

-4TSB-A-07(20)S
Sales Tax
July 26, 2007

1.
Bids to supply Energy, including Bids to supply Energy in Virtual
Transactions;
*
4.

*

*

Bids to purchase Energy, including Bids to purchase Energy in Virtual
Transactions; and
*

*

*

E. Bids to Supply Energy in Virtual Transactions
Customers submitting bids to supply Energy in Virtual Transactions shall identify
the Energy, in [mega watts] available in the Day-Ahead Market … and the price(s) at
which the Customer will voluntarily make it available.
F. Bids to Purchase Energy in Virtual Transactions
Customers submitting bids to purchase Energy in Virtual Transactions shall
identify the Energy, in [mega watts], to be purchased in the Day-Ahead Market … and
the price(s) at which the Customer will voluntarily purchase it.
*

*

*

*

*

4.5 Real-Time Market Settlements
*

B. Settlement for Customers Scheduled to Sell Energy in Virtual Transactions in
Load Zones
The Actual Energy Injection in a Load Zone by a Customer scheduled Day-Ahead
to sell Energy in a Virtual Transaction is zero….
*

*

*

E. Settlement for Customers Scheduled to Purchase Energy in Virtual Transactions
in Load Zones
The Actual Energy Withdrawal in a Load Zone by a Customer scheduled DayAhead to purchase Energy in a Virtual Transaction is zero….

-5TSB-A-07(20)S
Sales Tax
July 26, 2007

Opinion
Petitioner is a participant in the NYISO virtual electric market. Petitioner’s purchases
and sales are only financial in nature; Petitioner neither generates nor consumes electricity.
Petitioner does not, by virtue of its participation in the virtual market, actually physically receive
or physically transfer electricity. Virtual transactions are a hedging mechanism for market
participants (generators, resellers, consumers), and NYISO allows additional participants that are
not engaged in actually generating physical supplies, reselling physical electricity and/or electric
service, or consuming physical loads to participate in the markets. Further, as provided in
section 4.5 of NYISO’s Services Tariff, zero actual energy is withdrawn or injected in a load
zone (a geographic area of energy consumption) by a customer scheduled to buy or sell energy in
a virtual transaction.
Virtual bids are separate from bids for the physical purchase and sale of electricity in the
NYISO physical markets. Petitioner does not purchase or sell any taxable items or services
when Petitioner merely buys or sells in a NYISO virtual transaction. Accordingly, Petitioner’s
transactions in the NYISO virtual electric market are not sales of electricity or electric service
subject to sales tax under section 1105(b)(1)(A) of the Tax Law. When Petitioner acts solely as a
participant in the NYISO virtual market, Petitioner is not a vendor for purposes of section
1101(b)(8) of the Tax Law and is not required to register as a vendor pursuant to section 1134 of
the Tax Law.

DATED: July 26, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.