Could a city impose consumer utility tax when an affiliate bought natural gas and caused it to be delivered through pipelines it did not own?

Subject

Taxation of natural gas; pipeline distribution company.

Plain-English summary

Virginia held that the city could tax the plant's natural-gas consumption, but remanded the later years to check the statutory rate cap. An affiliated fuel manager bought gas, resold it to the plant, and arranged delivery through a commercial pipeline and then the city's pipeline.

The affiliate qualified as a pipeline distribution company even though it did not own or operate the pipeline. The statutory definition required transmission by pipeline, and Virginia read that to include causing gas to be transmitted to the purchaser.

For January 2001 through December 2003, the plant fit a city transportation classification covering customer-owned gas moved through the city system. Its failure to pay in 1999 did not make the lawful later rate zero, so those assessments were upheld.

For January 2004 through February 2008, the local tax could not exceed 20% of the amount the affiliate charged for natural-gas utility service. The cap was not limited to the city's pipeline transportation fee. The city had to recompute if necessary, and the taxpayer had to document the affiliate's charges for each period.

What this means for you

• A gas provider can meet the pipeline-company definition without owning the physical pipeline.
• Local utility tax applies to the utility service, not merely a pipeline transportation fee.
• Different statutory rate rules applied to the 2001-2003 and 2004-forward periods in this case.
• Preserve invoices separating gas charges, transportation fees, and tax periods.

Common questions

Did Virginia cancel all assessments after 2003?

No. It remanded those years only to determine whether the amounts exceeded the 20% cap.

What if the taxpayer could not document the affiliate's charges?

The city's assessments would remain presumed correct.

Citations and references

• Va. Code §§ 58.1-3983.1, 58.1-3814 A, H, and J, and 58.1-2600.
• City of Richmond v. Confrere Club of Richmond, 239 Va. 77, 387 S.E.2d 471 (1990).
• Commonwealth ex rel. Moore v. P. Lorillard Co., 129 Va. 74, 105 S.E. 683 (1921).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-51

Original ruling text

April 5, 2011

Re: Appeal of Final Local Determination

Locality: *

Taxpayer: *

Consumer Utility Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * (the "Taxpayer") with the Department of Taxation. You appeal assessments of consumer utility taxes issued to the Taxpayer by the *** (the "City") for the January 2001 through February 2008 tax periods. I apologize for the delay in responding to your letter.

During the tax periods in question, the consumer utility tax was imposed by the locality. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of certain local business tax assessments, including consumer utility tax assessments exceeding $2,500. On appeal, a consumer utility tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.

FACTS

The Taxpayer is a parent holding company for numerous subsidiaries, including * (Energy). Energy performs fuel management services for all of the Taxpayer's operating facilities. Energy purchases various types of fuel from utilities and other vendors, sells the fuel to the Taxpayer and its subsidiaries, and facilitates the delivery of the fuel to operating facilities.

In 1997, the Taxpayer acquired a facility (the "Plant") that generates electric power in the City. Soon thereafter, Energy began purchasing and managing natural gas for use in the Plant's operations. The natural gas was transported by pipelines owned by a pipeline distribution company to a pipeline owned by the City. The City-­owned pipeline connected the Plant and other natural gas consumers to the pipeline distribution company's line. The Taxpayer paid the City a fee for transporting natural gas through the pipeline.

In 2004, the City initiated an audit and determined that the Taxpayer was subject to consumer utility tax on the natural gas used at the Plant. Assessments were issued for the January 2001 through December 2004 tax periods. The Taxpayer timely filed an appeal of these assessments in March 2005. A subsequent audit resulted in assessments for the January 2005 through February 2008 tax periods followed by another timely appeal filed by the Taxpayer.

In August 2009, the City issued its final determination in both cases. The City found that: (1) the Taxpayer was a consumer of natural gas subject to the consumer utility tax; (2) Energy was a pipeline distribution company required to collect the tax; (3) the City's assessment did not conflict with the "revenue neutrality" amendments enacted by the General Assembly in 2000.

The Taxpayer has appealed the City's final determination to the Tax Commissioner. The Taxpayer argues the consumer utility tax applies only to natural gas provided by a pipeline distribution company or gas utility, and the City failed to impose the tax within the limitation imposed by the General Assembly's amendments enacted in 2000.

ANALYSIS

Consumer Utility Tax

The Taxpayer asserts that the plain language of the statute permits only the taxation of natural gas when it is provided by a pipeline distribution company or a gas utility. The City counters that the law allows it to levy its consumer utility tax on the consumption of natural gas. According to the City, the Taxpayer was a consumer of natural gas.

Virginia Code § 58.1-3814 H permits localities to "impose a tax on consumers of natural gas provided by pipeline distribution companies and gas utilities." In reading the plain language, Va. Code § 58.1-3814 H appears to limit the authority to impose consumer utility taxes on natural gas services to those provided by pipeline distribution companies and gas utilities.

In City of Richmond v. Confrere Club of Richmond, Virginia, Inc. , 239 Va. 77, 387 S.E.2d 471 (1990), the Virginia Supreme Court concluded that "when a statute is clear and unambiguous, its plain meaning must be accepted without resort to extrinsic evidence or to the rules of construction." Additionally, tax statutes are generally strictly construed most strongly in favor of the taxpayer, and are not be extended by implication beyond the plain meaning of the language used. See Commonwealth Ex Rel. Moore v. P. Lorillard Co., Inc. , 129 Va. 74, 105 S.E. 683 (1921). See also 1991 Att'y Gen. Ann. Rep. 270. Consequently, the tax can only be imposed on those consumers that receive natural gas from a gas utility or a pipeline distribution company.

Pipeline Distribution Company

According to the Taxpayer, Energy was the provider of natural gas to the Plant, but was neither a gas utility nor a pipeline distribution company. The City agrees that Energy was not a gas utility, but argues that it was a pipeline distribution company.

For purposes of the consumer utility tax on natural gas, Va. Code § 58.1-3814 J provides that the term "pipeline distribution company" has the same meaning as provided in Va. Code § 58.1-2600. Under this code section, a pipeline distribution company is "a corporation, other than a pipeline transmission company, which transmits, by means of a pipeline, natural gas, manufactured gas or crude petroleum and the products or by-products thereof to a purchaser for purposes of furnishing heat or light."

In this case, Energy purchased natural gas from utilities and other suppliers and contracted with a pipeline company to deliver the gas to the City's pipeline where the gas was sold to the Plant. The Taxpayer argues that Energy did not transmit or deliver gas to the Plant by means of a pipeline or otherwise and did not operate any natural gas pipeline.

The City, on the other hand, concluded that Energy was a pipeline distribution company because it transmitted the gas through a pipeline to the Plant. The City points out that the statutes do not require a pipeline distribution company to physically deliver the gas to a purchaser.

The Taxpayer and the City also differ on the meaning of the term "transmits" in the statutory definition of a pipeline distribution company. In Black's Law Dictionary (Eighth Edition, 2004, p. 1537) the term "transmit" means "to send or transfer (a thing) from one person or place to another." Neither the term "send" nor "transfer" infer a requirement that the physical activity of sending or transferring be completed by the entity doing the sending or transferring. Further, the plain language of the definition under Va. Code § 58.1-2600 contains no requirement that a pipeline distribution company own or operate a pipeline.

For purposes of the consumer utility tax under Va. Code § 58.1-3814 H, therefore, it would appear that a pipeline distribution company could include a corporation that transmits or causes to be transmitted natural gas through a pipeline, whether owned or operated by such corporation or not, to a purchaser for purposes of furnishing heat or light.

Revenue Neutrality

The Taxpayer asserts that even if the City had the authority to impose the tax on the gas consumed at the Plant, it violated the initial maximum rate allowed for the January 2001 through December 2003 tax periods. In 2000, the General Assembly changed the rate of consumer utility tax from a percentage of the amount charged to a measure based on volume. Virginia Code § 58.1-3814 H limits the maximum rate on the new measure to "the annual amount of revenue received and due from each of the nonresidential gas purchase and gas transportation classes in calendar year 1999." The Taxpayer argues that it did not fit into any of the gas transportation classes in the City ordinance in 1999. The Taxpayer, therefore, believes the maximum rate it can be charged by City is 0% for the January 2001 through December 2003 tax periods.

The City asserts that it took the limitations imposed by the General Assembly into account when it established its initial rates beginning on January 1, 2001. The Taxpayer does not argue that the City's rates are incorrect, only that because it was not assessed in 1999, the City cannot assess the consumer utility tax for the January 2001 through December 2003 tax periods. The fact that a taxpayer did not pay a tax in one taxable period does not preclude a taxing authority from imposing the tax at the appropriate rate when it discovers the taxpayer's failure to comply.

For all of the tax periods from 1999 through 2003, one of the City's transportation service classifications included all gas owned by a customer that is transported to and on the City's gas distribution system. According to the Taxpayer, Energy sold gas to the Plant with title passing at the point where it enters the City's pipeline.

Maximum Rate

The Taxpayer further contends the City's assessments violate the maximum rate permitted for tax periods beginning on and after January 1, 2004. Pursuant to Va. Code § 58.1-3814 A, a locality may not impose the consumer utility tax "at a rate in excess of 20 percent of the monthly amount charged to consumers of utility service…." The Taxpayer avers that the City's limitation should be based on 20% of the amount of the fee changed for the use of the City's pipeline.

The consumer utility tax is imposed on consumers of a utility service, not the transportation of product through, a pipeline. See Va. Code § 58.1-3814 A. In the case of natural gas, the 20% limitation would apply to the amount charged by the pipeline distribution company or gas utility.

DETERMINATION

Based on the plain language of Va. Code § 58.1-2600, Energy was a pipeline distribution company for consumer utility tax purposes. Accordingly, the Taxpayer was a consumer of natural gas provided by a pipeline distribution company on which the City could impose the tax.

Further, the Taxpayer owned gas transported through the City's gas distribution system. Thus, the Taxpayer did meet the requirements of one of the City's transportation classifications and was, therefore, subject to the consumer utility tax at the City's initial rates for the January 2001 through December 2003 tax periods. While it could be argued that the Taxpayer may have affected the initial consumer utility tax rate if it had paid tax in 1999, it is clear that the Taxpayer's rate would not be 0%. Accordingly, the City's assessments for the January 2001 through December 2003 tax periods are upheld.

In addition, the Department finds that the City's assessments for the January 2004 through February 2008 tax periods would be limited to 20% of the amount charged by Energy for the natural gas supplied to the Plant. Accordingly, this case will be remanded back to the City with instruction to determine whether the January 2004 through February 2008 tax periods exceed the 20% limitation.

The Taxpayer must provide the City with sufficient documentation to show how much it was charged by Energy for utility service for each tax period at issue. If sufficient documentation is not provided, the City's assessments will be presumed to be correct.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-3895375265.o