Could a city impose consumer utility tax on natural gas used by a combined-cycle power plant, and did the gas supplier qualify as a pipeline distribution company?

Plain-English summary

The city could impose consumer utility tax on the natural gas used at the combined-cycle power plant. The gas powered combustion turbines, and the plant captured the resulting heat to make steam for another turbine. The Commissioner concluded that the plant used the gas to furnish heat even though its ultimate product was electricity.

The gas supplier also qualified as a pipeline distribution company for this tax. The incorporated statutory definition did not say that the supplier had to own or operate the pipeline. The fact that the State Corporation Commission did not regulate it as a public service corporation did not control the Department's application of the definition to the local consumer utility tax.

The Commissioner upheld the city's assessments for January 2001 through December 2003 at the city's initial rates. For January 2004 through February 2008, the assessments were limited to 20% of the amount the supplier charged for natural gas. The city had to apply that limitation, and the taxpayer needed to provide adequate documentation of the charges or the city's assessments would remain presumed correct.

Common questions

Q: Was the gas outside the tax because the plant produced electricity rather than building heat?
A: No. Captured heat was an integral part of the combined-cycle operation, and the statute did not limit furnished heat to climate control.

Q: Did the supplier have to own the pipeline?
A: No. The definition applied in the ruling did not impose an ownership or operation requirement.

Q: Were all assessment periods upheld without adjustment?
A: No. The 2004-through-February-2008 periods were subject to a 20% limit based on the supplier's charges.

Citations and references

• Va. Code §§ 58.1-3814(H), (J), 58.1-2600, and 58.1-2627.1.
• Va. Code §§ 58.1-3983.1 and 58.1-3984.
• 23 VAC 10-20-165(F).
• City of Richmond v. Confrere Club of Richmond, Virginia, Inc., 239 Va. 77, 387 S.E.2d 471 (1990).
• Virginia Public Document 11-51 (April 5, 2011).

Subject

A pipeline distribution company was a consumer of natural gas which the City could impose tax.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-171

Original ruling text

November 2, 2012

Re: Appeal of Final Local Determination

Locality: *

Taxpayer: *

Consumer Utility Tax

Dear *:

A final state determination, published as Public Document (P.D.) 11-51 (4/5/2011), was issued in response to the application for correction filed on behalf of * (the "Taxpayer") upholding a final determination by the (the "City") that the Taxpayer was a consumer of natural gas subject to the consumer utility tax. The Department's determination also concluded that ** (Energy) was a pipeline distribution company for consumer use tax purposes and required to collect the tax from the Taxpayer. The Taxpayer requests reconsideration of the determination.

The consumer utility tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of consumer utility tax assessments. 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.

FACTS

In P.D. 11-51, the Department ruled that Energy was a pipeline distribution company for consumer utility tax purposes. The Department also ruled that the Taxpayer was a consumer of natural gas provided by a pipeline distribution company on which the City could impose the tax for the January 2001 through February 2008 tax periods. The Taxpayer's request for reconsideration asserts the Department erred in its interpretation of the statute.

ANALYSIS

Virginia Code § 58.1-3983.1 D 4 states that an appeal to the Department is to be treated and an application made pursuant to Va. Code § 58.1-1821. Under Virginia's regulation interpreting Va. Code § 58.1-1821, the Department will accept a taxpayer's request for reconsideration if one of four requirements is met. See Title 23 of the Virginia Administrative Code (VAC) 10-20-165 F. Because local business tax appeals are handled in the same manner as appeals filed under Va. Code § 58.1-1821, the Department may entertain reconsideration requests of local business tax determinations.

Many of the Taxpayer's assertions restate the same arguments made in the initial appeal. The Department addressed these issues in P.D. 11-51 and finds no reason to restate its position in this letter. However, the Taxpayer has asked the Department to consider a matter of law not previously addressed and provided additional documentation concerning whether Energy is a pipeline distribution company.

Heat or Light

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." [Emphasis added.]

The Taxpayer argues that the gas consumed at the Taxpayer's facility (the "Plant") in the City is not used to provide heat or light. The Plant is a combined-cycle station that uses the gas to run turbine engines, each of which run a generator. The engines produce heat. Instead of letting the heat escape into the atmosphere, the Plant uses it to create steam that is used to run a steam turbine engine that runs another generator. The Taxpayer argues that the gas is used to produce electricity, not heat or light.

The City asserts that the terms "heat" and "light" in no way limit the applicability of Va. Code § 58.1-3814 H to the Taxpayer. It argues that the heat produced at the Plant is more than in indirect byproduct of its use of the gas provided by Energy. According to the City, the heat produced by the combustion engines is an integral part of the operations of a combined-cycle facility.

It is clear that the Plant is not using the gas to furnish light. Thus, the issue becomes whether the gas used in the Plant eras used for the purpose of furnishing heat.

The term "heat" is not defined in the statute. While heat may most commonly be used to provide climate control for homes and businesses, the statue does not limit furnished heat to this purpose. Heat is used in a number of manufacturing processes to produce products for market. Without a statutory limitation, gas used to furnish heat for such purposes would be subject to the consumer utility tax.

Pipeline Distribution Company

In P.D. 11-51, the Department ruled that, for purposes of Va. Code § 58.1-3814 H, a pipeline distribution company could include a corporation that transmits natural gas through a pipeline, whether owned or operated by such corporation or not, to a purchaser for purposes of furnishing heat or light. Under the Department's analysis, Energy could be considered a pipeline distribution company and could be required to collect the consumer utility tax.

The Taxpayer disputes this finding, contending the State Corporation Commission (SCC) does not regulate Energy. The consumer utility tax definition of a "pipeline distribution company" has been adopted from statutes relating to taxes administered by the SCC. According to the Taxpayer, Energy is not required to make annual reports to the SCC as required under Va. Code § 58.1-2627.1 and is not subject to any of the special regulatory taxes administered by the SCC. The Taxpayer goes on to attest that the SCC is well aware of Energy's activities, citing two 1999 SCC decisions regarding the approval to transfer certain assets and contracts from the Taxpayer to Energy. As such, the Taxpayer asserts that because Energy is not considered to be a public service corporation by the SCC, it cannot be considered to be a pipeline distribution company as defined in Va. Code § 58.1-2600.

The Department acknowledges that the SCC is charged with the administration of the statutes contained within Chapter 26 of Title 58.1 of the Code of Virginia and will not dispute its authority to interpret what constitutes a pipeline distribution company for purposes of the taxation of public service corporations. While Chapter 26 of Title 58.1 of the Code of Virginia includes a number of other provisions that further clarify what constitutes a pipeline distribution company in order to be a public service corporation, the Department is limited to the language in Va. Code § 58.1-2600 when applying the definition to the consumer utility tax under Va. Code § 58.1-3814 H.

The primary purpose of Va. Code § 58.1-3814 H is to permit localities to impose a tax on certain consumers of natural gas. The statute designates pipeline distribution companies and gas utilities as the collectors of this tax. Within this context, the Department is limited by the plain language of the definition of a pipeline distribution company contained in Va. Code § 58.1-2600. See City of Richmond v. Confrere Club of Richmond, Virginia, Inc. , 239 Va. 77, 387 S.E.2d 471 (1990). The statutory language in Va. Code § 58.1-2600 is silent as to whether a pipeline distribution company must own or operate a pipeline through which natural gas is transmitted to a purchaser for purposes of furnishing heat or light.

DETERMINATION

Based on the evidence, Energy was a pipeline distribution company for purposes of the consumer utility tax. Further, the Taxpayer used the natural gas to furnish heat and was a consumer of natural gas provided by a pipeline distribution company on which the City could impose the tax.

In addition, the Department reiterates its findings in P.D. 11-51. The Taxpayer did meet the requirements of one of the City's transportation classifications and, therefore, was subject to the consumer utility tax at the City's initial rates for the January 2001 through December 2003 tax periods. The Taxpayer's rate would not be 0%. As such, the City's assessments for the January 2001 through December 2003 are upheld. 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.

The City must determine whether the January 2004 through February 2008 tax periods exceed the 20% limitation. The Taxpayer should 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.

This letter constitutes the Department's final determination in this matter. If the Taxpayer wishes to pursue an appeal of this matter, it should apply to the appropriate circuit court for judicial review of the determination as provided under Va. Code § 58.1-3983.1 G and § 58.1-3984. 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/1-4783451131.o