Are late-payment fees charged by South Carolina utilities included in taxable gross proceeds?

Plain-English summary

The South Carolina Department of Revenue ruled that a utility's fee for failing to pay on time was not a finance charge. It resulted from customer default, rather than being consideration for an agreed extension of credit.

That distinction generally put a late fee into the utility's gross proceeds when the underlying cable-television or telephone service was taxable. If the underlying service was exempt, however, the related late fee was part of an exempt sale and was not taxed.

Electricity and natural gas received an express statutory rule: late-payment interest, fees, or charges on those bills were excluded from gross proceeds whether or not tax applied to the underlying electricity or gas sale.

What this means for you

Cable and telephone providers

A separately stated default charge did not become a nontaxable financing charge merely because it was calculated as a dollar amount or percentage over time. Its treatment followed the taxable or exempt underlying sale.

Electric and natural-gas utilities

The ruling applied the specific exclusion for late-payment charges on electricity and natural-gas bills.

Accountants and customers

Distinguish a charge agreed as the price of extending credit from a penalty or fee imposed after payment default. This ruling treated the latter as gross proceeds except where the statute or an exemption said otherwise.

Common questions

Q: Was a utility late fee a finance charge?
A: No. It was imposed because the customer failed to pay on time, not as a condition of extending credit.

Q: Was a late fee on taxable cable or telephone service taxable?
A: Yes. It entered gross proceeds of the taxable sale.

Q: What if the cable or telephone service itself was exempt?
A: The related late fee was part of that exempt sale and was not subject to sales tax.

Q: Were electricity and natural-gas late fees taxable?
A: No. The ruling applied an express statutory exclusion for those late-payment charges.

Citations and references

• S.C. Code §§ 12-36-910 and 12-36-90 (sales tax and gross proceeds)
• S.C. Code § 12-36-90(2)(i) (exclusion for electricity and natural-gas late-payment charges)
• S.C. Code § 12-36-2120 (exempt transactions)
• S.C. Code §§ 37-2-109 and 37-3-109 (credit-service and loan-finance charges exclude default charges)
• S.C. Regulation 117-318.2 (financing charges and gross proceeds)
• SC Revenue Ruling 98-4 (superseded by this ruling)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR09-6.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING # 09-6

SUBJECT:

Late Fees Charged by Utilities
(Sales and Use)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

SC Revenue Ruling #98-4 and all previous documents and any
oral directives in conflict herewith.

REFERENCES:

S. C. Code Ann. Section 12-36-910 (2000, Supp. 2008)
S. C. Code Ann. Section 12-36-1110 (Supp. 2008)
S. C. Code Ann. Section 12-36-90 (2000, Supp. 2008)
S. C. Code Ann. Section 37-2-109(1) (2002)
S. C. Code Ann. Section 37-3-109(A) (2002)
Sc Regulation 117-318.2

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2008)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public and to Department personnel. It is an advisory opinion
issued to apply principles of tax law to a set of facts or general
category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court
decision, or another Departmental advisory opinion.

Question:
Is the fee charged by an electric power company, cable television company or telephone
company (“utility”) when a customer does not pay his bill on time a finance charge and,
therefore, not includible in the utility’s gross proceeds of sales and not subject to the sales
tax?
Conclusion:
The fee charged by a utility when a customer does not pay his bill on time is not a
finance charge.
Therefore, such charges are includible in the utility’s gross proceeds of sales and are
subject to the sales tax, unless the charge for failure to pay on time is imposed with

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respect to sales of electricity, natural gas or both. Charges imposed on a customer for late
payment of a bill for electricity, natural gas or both are not subject to the sales and use tax
pursuant to Code Section 12-36-90(2)(i).
Note: Code Section 12-36-2120 exempts certain transactions from the sales and use tax.
If the sale of cable television service and telephone service falls within an exemption in
Code Section 12-36-2120, then any charge for failure to pay on time by the cable
television company or telephone company with respect to the exempt sale would be
includible in gross proceeds of sales of an exempt sale and not subject to the sales tax.
Facts:
Utilities generally charge their customers an additional amount when they do not pay
their bills on time. This additional amount may be applied as a fixed dollar amount (e.g.
$5); a percentage of the amount due for each month the bill remains unpaid (e.g. 1% per
month); a fixed dollar amount per month for each month the bill remains unpaid (e.g. $5
per month); or by some other method.
The question has arisen whether such charges are includible in a utility’s gross proceeds
of sales and, therefore, subject to sales tax.
Discussion:
Code Section 12-36-910 imposes “a sales tax, equal to [six]1 percent of gross proceeds of
sales, … upon every person engaged . . . within this State in the business of selling
tangible personal property at retail.”
The measure of the sales tax, “gross proceeds of sales,” is defined at Code Section 12-3690, in part, as:
... the value proceeding or accruing from the sale, lease, or rental of
tangible personal property.
(1) The term includes:

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Code Section 12-36-1110, which increased the state sales and use tax rate from 5% to 6% on June 1,
2007, states:
Beginning June 1, 2007, an additional sales, use, and casual excise tax equal to one
percent is imposed on amounts taxable pursuant to this chapter, except that this additional
one percent tax does not apply to amounts taxed pursuant to Section 12-36-920(A), the
tax on accommodations for transients, nor does this additional tax apply to items subject
to a maximum sales and use tax pursuant to Section 12-36-2110 nor to the sale of
unprepared food which may be lawfully purchased with United States Department of
Agriculture food coupons. (Emphasis added.)

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(b)

the proceeds from the sale of tangible personal property
without any deduction for:
(i) the cost of goods sold;
(ii) the cost of materials, labor, or service;
(iii)interest paid;
(iv) losses;
(v) transportation costs;

(2) The term does not include:

(i)

interest, fees, or charges however described, imposed on a
customer for late payment of a bill for electricity or natural
gas, or both, whether or not sales tax is required to be paid
on the underlying electricity or natural gas bill. (Emphasis
added.)

In addition, SC Regulation 117-318.2 provides:
When the seller has an established price for the goods he sells, that price is
the amount to be included in gross proceeds of sales even though the
established price may include an amount to cover a carrying charge.
Where they seller has an established cash price and when selling on an
extended payment basis, adds a separate charge for financing, the
additional charge is not to be included in gross proceeds of sales.
In no event may finance or carrying charges be deducted from gross
proceeds of sales when not shown as a separate item in the seller's billing
to his customer.
Therefore, an issue that must be addressed is whether, per SC Regulation 117-318.2, fees
imposed by utilities when customers fail to pay their bills on time are finance charges. If
they are finance charges, then they are not includible in gross proceeds of sales. If they
are not finance charges, then they are includible in gross proceeds of sales unless the fee
for failure to pay a bill on time is charged with respect to sales of electricity, natural gas
or both.

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While the term “finance charge” is not defined in the South Carolina Code of Laws, the
terms “credit service charge” and “loan finance charge” are defined. “Credit finance
charges” are applicable to “consumer credit sales” as defined in Chapter 2 of the
Consumer Protection Code. “Loan finance charges” apply to “consumer loans,” as
defined in Code Section 37-3-104 of the Consumer Protection Code.
Code Section 37-2-109(1) of the South Carolina Consumer Protection Code defines
“credit service charges,” in part, as “all charges payable directly or indirectly by the
buyer and imposed directly or indirectly by the seller as an incident to the extension of
credit.” Subsection (2) of that section provides that “[t]he term does not include charges
as a result of default ....”
Code Section 37-3-109(a) of the South Carolina Consumer Protection Code defines “loan
finance charges,” in part, as “all charges payable directly or indirectly by the debtor and
imposed directly or indirectly by the lender as an incident to the extension of credit.”
Subsection (b) of that section provides that “[t]he term does not include charges as a
result of default ....”
In addition, Black’s Law Dictionary, Seventh Edition, defines the term “finance charge,”
in part, as:
An additional payment, usu. in the form of interest, paid by a retail buyer
for the privilege of purchasing goods and services in installments.
Based on the above discussion, the fees in question are not imposed as a condition for the
extension of credit (i.e. not finance charges). They are imposed for failure to pay on time.
Therefore, the fees are includible in gross proceeds of sales and subject to the sales and
use taxes, unless the charge for failure to pay on time is imposed with respect to sales of
electricity, natural gas or both. Charges imposed on a customer for late payment of a bill
for electricity, natural gas or both are not subject to the sales and use tax pursuant to Code
Section 12-36-90(2)(i).
Note: Code Section 12-36-2120 exempts certain transactions from the sales and use tax.
If the sale of cable television service and telephone service falls within an exemption in
Code Section 12-36-2120, then any charge for failure to pay on time by the cable
television company or telephone company with respect to the exempt sale would be
includible in gross proceeds of sales of an exempt sale and not subject to the sales tax.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director
, 2009
May 19
Columbia, South Carolina
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