State Tax Department Levies New Energy Tax

A reinterpretation of state tax law may cost commercial energy users across the state S45 million and, according to one business person, kill deregulation on the electricity side." An executive with a local energy company calls the move contrary to the policies explained by Gov. George Pataki.

Prior to April 1, purchases inside the state were subject to sales tax; purchases made outside the state were subject to a use tax. Energy was exempt from the use tax. But In January of last year, the New York State Department of Taxation and Finance (State Tax Department) reinterpreted the tax law and said that sales and use taxes would apply to all sales and use of gas and electricity. A memo from the department dated Aug. 4 explains: "Historically, electricity or gas, along with the service of getting it to the consumer was provided by one party, the utility, and the entire charge was subject to sales tax. In a restructured environment, one company will be selling electricity or gas and another company will be providing the service of getting the electricity or gas to the customer." Therefore, the memo says, both parties involved in providing

energy are subject to tax.

But some exemptions previously provided Linder the law are not affected. Purchases by residential customers remain exempt from the 4-percent state sales tax and most local taxes. Likewise, purchases by taxexempt organizations are not subject to the tax. Neither are purchases of electricity or gas used directly and exclusively in manufacturing or research and development.

However, as of April 1, commercial enterprises are no longer exempt.

Keith M. Belanger, senior vice president of M&T Bank, in a letter to the Legislature, says, "The proposed phaseout of the Gross Receipts Tax (GRT) and Gross Earnings 'Fax (GET) is welcome; in fact, it can't be enacted soon enough." Belanger estimates that these two taxes, .vhen eliminated in 2005, will provide the bank with annual sav ings of $227,000 on its approximately $7 million annual energy expenditure.

But Belanger says removing the exemption on commercial energy use will cost the bank $225,000 annually, for a net 'increase of $450,000 across five years.

Edward Beideck, vice president for property management for the M&T Bank in Buffalo, warns that the tax "will kill deregulation on the electricity side."

James R. Maloney, ail associate in the Buffalo law offices of Hodgson Russ Andrews Woods & Goodyear, LLP, points out in a letter to the Legislature that the "true beneficiaries of the current [pre-April 1] tax law are consumers. Imposing new taxes in an effort to close loopholes will increase costs to consumers and will likely be viewed by consumers as a 'tax increase.'"

Maloney adds that, because of deregulation and other factors, many consumers do not pay the GRT or GET. Therefore, reduction or repeal of these taxes would not result in savings for many businesses.

Previous efforts to impose the sales or use tax on energy have been thwarted. When the State Tax Department decided to reinterpret the tax law to eliminate exemptions for energy users in January of last year, a group led by the National Energy Marketers Association (NEM) lobbied the department and succeeded in postponing imposition of the tax to April 1, 1999, and again to April 1, 2000. In a recent press release, NEM President Craig Goodman says, "Imposing taxes on natural gas and electricity competition before the retail energy markets are fully developed in the state of New York is not consistent with Governor Pataki's competitive energy policy and commitment to reducing taxes throughout the state." Goodman, former director of Energy Tax Policy under Presidents Reagan and Bush, says "If New York is compelled to tax energy transportation, it should do so after competitive retail energy markets have developed."

Michael Meath, vice president of Agway Energy Products and a member of the board of NEM, adds, [This tax] is contrary to the governor's state of the state address on tax policy. We must allow competition to develop so that all industry is taxed equally." He points out that today, fewer than 5,000 of Niagara Mohawk's 125 million residential customers have switched to buying electricity on the open market.

Marc Carey, a spokesperson for the State Tax Department, offers. a counterpoint. He says that when the GRT is eliminated, as Pataki has proposed, across-the-board savings for all users-residential, industrial, and commercial-will amount to $500 million a year. At the same time, the sales tax on energy will cost commercial and residential customers $45 million a year. Carey says that the governor's proposals in regard to energy "will play out in a way that's extremely beneficial for everyone."

Copyright Central New York Business Journal Apr 07, 2000
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