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

Plain-English summary

AB Energy, Inc. is a New York corporation that trades solely in the New York Independent System Operator's ("NYISO") Virtual Transactions Market. NYISO runs the state's wholesale electricity markets, where real generators and utilities buy and sell actual power a day ahead and settle against real-time prices. Separately, NYISO also lets participants who neither generate nor consume electricity submit purely financial "virtual" bids — buying or selling "virtual load" or "virtual supply" — to arbitrage price differences between the day-ahead and real-time markets. By design, every virtual position taken in the day-ahead market is automatically unwound in the real-time market, so zero actual electricity is ever produced, delivered, or consumed as a result of a virtual trade. AB Energy participates only in this virtual side — never the physical generation or consumption side.

New York taxes sales of electricity and electric service under § 1105(b)(1)(A). The Department concluded that virtual transactions simply aren't sales of electricity or electric service at all — they're financial instruments used for hedging and arbitrage that never touch the physical grid. Because AB Energy's only activity is trading in this purely financial market, it isn't buying or selling any taxable item or service, and it doesn't become a "vendor" under § 1101(b)(8) just by participating. That means it has no obligation to register as a sales tax vendor under § 1134 solely because of its virtual trading. The Department reached the same conclusion in an earlier, similar opinion involving another virtual-market 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 (or similar commodity) market — where your positions never result in actual physical delivery — generally doesn't create New York sales tax exposure or a vendor-registration obligation, as long as the structure genuinely nets out with zero physical energy flow, as NYISO's virtual market is designed to do.

Utilities, generators, and load-serving entities

This ruling doesn't change anything about your own physical-market transactions, which remain taxable sales of electric service under § 1105(b)(1)(A). The exemption here is specific to the purely financial virtual side of the market, not the physical side.

Accountants and tax professionals

The key fact the Department relied on was the built-in, structural guarantee that a virtual trade's day-ahead position is automatically reversed in real time, producing zero net physical energy withdrawal or injection. If a "virtual" or financial product ever deviated from that — allowing an actual physical settlement — this analysis likely wouldn't apply.

Common questions

Q: Are trades in NYISO's Virtual Transactions 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: Does this apply to actual physical electricity sales too?
A: No. Real sales of electricity and electric service — the day-ahead and real-time physical markets — remain fully taxable under § 1105(b)(1)(A). This ruling addresses only the separate, purely financial virtual market.

Q: Can another trader rely on this ruling directly?
A: No. This Advisory Opinion binds the Department only as to AB Energy, Inc. and the facts it described, though the Department reached the same conclusion in an earlier ruling on a similar virtual-trading fact pattern.

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

Prior opinions cited:

• David Sholk, LLC, Adv Op Comm T&F, July 26, 2007, TSB-A-07(20)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_3s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(3)S
Sales Tax
January 8, 2008

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

PETITION NO. S070626A

On June 26, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from AB Energy, Inc., 948 Avon Crest Boulevard, Niskayuna, New York
12309.
The issue raised by Petitioner, AB Energy, Inc., is whether Petitioner’s transactions in the
New York Independent System Operator virtual electric market are subject to New York State
sales and use taxes.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
The New York Independent System Operator (“NYISO”) is a not-for-profit corporation
responsible for the operational control of New York State’s bulk transmission system and the
administration of spot markets for the wholesale trading of electricity, capacity and related
ancillary services. The electricity spot markets administered by NYISO utilize a bidding process
that sets prices competitively. Electric generators bid the price they are willing to accept for the
electricity they produce, and load-serving entities (“LSEs”) bid the amount of load they need to
serve (i.e., the amount of electricity they need to buy) and the maximum price they are willing to
pay.
NYISO operates a two-settlement system where electricity prices are determined in day­
ahead and real-time markets. The day-ahead and real-time markets allow electric generators and
LSEs to establish binding financial commitments to buy and sell electricity one day ahead of the
actual physical operating day. The real-time market is the physical market where the price of
electricity is a function of the actual amount of energy that is produced by generators to meet
LSEs’ actual load requirements. Commitments established in the day-ahead market are settled
against the real-time market based on the differences between energy production and
consumption scheduled in the day-ahead market and actual real-time production and
consumption during the operating day. For example, a generator that actually produces 90
megawatts but was committed in the day-ahead market to provide 100 megawatts would be paid
for 100 megawatts at the day-ahead price but would be required to pay the costs of 10 megawatts
at the price determined in the real-time market.
In addition to, and separate from, the markets for the trading of physical energy discussed
above, NYISO also operates a virtual market (the “Virtual Transactions Market”). The Virtual
Transactions Market is designed to allow entities that neither generate electricity nor serve load
to submit “virtual” bids for purely financial purchases or sales of virtual electricity, rather than
purchases or sales associated with the physical generation, delivery, or consumption of
electricity. NYISO’s virtual bidding procedures allow qualified entities to buy virtual electricity

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(“virtual load”) or sell virtual electricity (“virtual supply”) in the day-ahead market at day-ahead
prices.
Virtual bids are submitted to NYISO separately from physical bids. NYISO knows
which bids are virtual and which ones are physical. While virtual bids affect prices in the day­
ahead market, the bids have no impact on the actual amount of electricity that is dispatched or
the amount of electricity that is consumed in the real-time market. Once a virtual load or supply
bid is scheduled into the day-ahead market, NYISO’s Virtual Transactions Market automatically
sells in the real-time market at real-time prices the same amount of virtual electricity that was
bought in the day-ahead market or buys in the real-time market at real-time prices the same
amount of virtual electricity that was sold in the day-ahead market. Unlike the bids submitted
by generators and LSEs that are associated with the actual physical generation, delivery,
and consumption of electricity, virtual transactions are financial transactions only. Virtual
transactions can never involve the physical generation, delivery, or consumption of electricity
because, by design, the same amount of virtual electricity that is sold/bought in the day-ahead
market is automatically bought/sold in the real-time market.
Virtual transactions assist the electricity markets by allowing the arbitrage of price
differences between the day-ahead and real-time markets and increasing price liquidity in the
electricity markets.
Petitioner is a New York corporation with its principal place of business in Niskayuna,
New York. Petitioner neither generates electricity nor serves load in NYISO’s administered
electricity markets. Petitioner trades solely in NYISO’s Virtual Transactions 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:
(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:

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Sales Tax
January 8, 2008

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:
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*

(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.
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4.2.2 Day-Ahead Load Forecasts, Bids and Bilateral Schedules
A. General Customer Forecasting and Bidding Requirements
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(ii) Customers submitting Bids in the Day-Ahead Market, other than Pre­
scheduled Transaction Requests, shall provide the ISO, as appropriate with:
1.
Bids to supply Energy, including Bids to supply Energy in Virtual
Transactions;
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*

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January 8, 2008

4.

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

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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.
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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….
*

*

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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.
Opinion
Petitioner is a participant in the NYISO Virtual Transactions 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

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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.
David Sholk, LLC, Adv Op Comm T&F, July 26, 2007, TSB-A-07(20)S, included the
following description of the financial aspects of the Virtual Transactions Market:
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.
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 Transactions 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. See David Sholk, LLC, supra.

DATED: January 8, 2008

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.