Information Release

ST 1999-02 - Production, Transmission, Distribution and Sales of Electricity - October, 1999

Am. Sub. S. B. 3 of the 123rd General Assembly deregulates the production and sale of electricity in Ohio. The bill includes several changes to the Ohio sales and use tax statutes. These changes were made to conform Ohio sales and use tax law to the new structure of the electric industry. The purpose of this information release is to explain these statutory changes and the way the Department of Taxation will apply them.

Under the terms of Am. Sub. S. B. 3, the deregulation of electricity will take place on January 1, 2001. However, the sales and use tax law changes take effect October 5, 1999.

O. R. C. Section 5701.03 - Definition of Personal Property

Section 5701.03 of the Revised Code defines personal property for Ohio tax purposes. That section has been amended to exclude electricity from the definition of personal property. One consequence of this amendment is to remove sales of electricity from Ohio sales and use tax, since those taxes apply only to the sales of tangible personal property and certain defined services. Under prior law, electricity sold by an electric company was exempt from the Ohio sales tax. Since this provision effectively exempted all purchases of electricity under the existing industry structure, there is no substantive change in the application of sales and use taxes.

O. R. C. Section 5739.011 - Manufacturing Exception

Section 5739.011 of the Revised Code sets forth the application of sales and use tax to manufacturers. Prior to the effective date of S. B. 3, division (B)(8) of that section excepted from sales tax all sales of:

Electricity, coke, gas, water, steam, and similar substances used in the manufacturing operation; machinery and equipment used for, and fuel consumed in, producing or extracting those substances; and machinery, equipment, and other tangible personal property used to treat, filter, pump, alter voltage, or otherwise make the substance suitable for use in the manufacturing operation(.)

As amended by Am. Sub. S. B. 3, that section reads:

Coke, gas, water, steam, and similar substances used in the manufacturing operation; machinery and equipment used for, and fuel consumed in, producing or extracting those substances; machinery, equipment, and other tangible personal property used to treat, filter, pump, or otherwise make the substance suitable for use in the manufacturing operation; and machinery and equipment used to produce electricity for use in the manufacturing operation(.)

Coke, gas, water and steam are all tangible personal property that would be subject to the sales and use tax if not otherwise excepted or exempted. Since the statutory definition of personal property now excludes electricity, it was unnecessary to except purchases of it from the sales and use tax. Therefore, the reference to electricity in this section was removed. Since the reference to items that alter voltage makes no sense when referring to coke, gas, water or steam, that language was also removed.

To replace the deleted language, an exception was added for items used by a manufacturer to produce electricity for its own use in the manufacturing operation. As used in this section, the term "produce" means to generate electricity and put it into a form usable in the manufacturing process. Therefore, the exception includes items used to alter the voltage of self-produced electricity to a level necessary to operate the manufacturing machinery or process.

Am. Sub. S. B. 3 makes no change to the exception found in division (B)(9) of section 5739.011 of the Revised Code for items used to transmit or transport electricity to the production machinery or process. For manufacturers, the exception for items used to transport or transmit electricity from the point of receipt to the production machinery or process will be interpreted to include items used to alter the voltage of the electricity to a level necessary to operate the machinery or process

O. R. C. Section 5739.02 - Exemptions

Since electricity is excluded from the definition of tangible personal property, it is not subject to sales or use tax. Currently, division (B)(7) of section 5739.02 of the Revised Code provides an exemption for:

Sales of natural gas by a natural gas company, of electricity by an electric company, of water by a water-works company, or of steam by a heating company, if in each case the thing sold is delivered to consumers through wires, pipes, or conduits, and all sales of communications services by a telephone or telegraph company, all terms as defined in section 5727.01 of the Revised Code(.)

Am. Sub. S. B. 3 removes the language in boldface above. The exemption for electricity sold by an electric company is unnecessary since electricity is no longer tangible personal property and, therefore, is not subject to sales or use tax. In fact, the retention of this language might have been read as a limit on the exemption for sales of electricity and subjected deregulated electricity sold by non-utilities to sales or use tax. Therefore, the reference to electricity was removed from this section. Since only electricity travels through wires, the reference to wires was also removed.

Finally, Am. Sub. S. B. 3 inserts a new exemption in division (B)(43) of section 5739.02 of the Revised Code. The new language provides exemption for:

Sales of tangible personal property and services to a provider of electricity used or consumed directly and primarily in generating, transmitting, or distributing electricity for use by others, including property that is or is to be incorporated into and will become a part of the consumer’s production, transmission, or distribution system and that retains its classification as tangible personal property after incorporation; fuel or power used in the production, transmission, or distribution of electricity; and tangible personal property and services used in the repair and maintenance of the production, transmission, or distribution system, including only those motor vehicles as are specially designed and equipped for such use. The exemption provided in this division shall be in lieu of all other exceptions in division (E)(2) of section 5739.01 of the Revised Code to which a provider of electricity may otherwise be entitled based on the use of the tangible personal property or service purchased in generating, transmitting, or distributing electricity.

The second sentence of this new section provides that this exemption is intended to replace the exception for items used directly in the rendition of a public utility service that previously applied to the electric utility industry. After deregulation takes effect, persons that are not public utilities will be generating electricity for consumers. Therefore, the public utility exception would no longer serve the entire electric industry. Rather than have separate exceptions or exemptions for different portions of the electric industry, this new exemption was created for all portions of the industry.

The exemption is available to any person that is a provider of electricity. As the term is used in this section, "provider of electricity" includes any person engaged in the production, transmission or distribution of electricity for use by others. It does not include a person engaged in the production, transmission or distribution of electricity for that person's own use. For example, an individual that purchases a gasoline generator to light his or her house or business in the case of a power outage would not be able to claim exemption on the purchase of the generator under this provision.

The equipment purchased must be used "directly and primarily" in the generation, transmission, or distribution of electricity for use by others. This language will be applied to purchases made by a producer, transmitter or distributor of electricity in the same manner the direct use in the rendition of a public utility service exception has been applied. In other words, the "essentiality" test enunciated by the Ohio Supreme Court in the case Cincinnati Gas & Electric Co. v. Kosydar (1974), 38 Ohio St. 2d 71, will continue to be applied to determine the taxable or exempt status of purchases by a provider of electricity.

A producer of electricity for use by others may claim exemption on purchases of generating equipment, including foundations for that equipment, fuel to run the generating equipment and equipment necessary for handling and storing the fuel. The exemption also applies to parts, tools and supplies for maintaining or repairing exempt equipment, computer equipment used to control the operations of exempt equipment, and any other tangible personal property essential for the operation of the electric generation process. The producer can also claim exemption on purchases of services necessary to the generation of electricity. Such services include repair and maintenance of production equipment or employment services when providing workers that will be engaged in the production of electricity.

The exemption does not apply to items used in the office or business functions of the producer. For example, office furniture, record storage equipment, or computers used for accounting or sales functions would not qualify for exemption. The exemption also does not apply to purchases of items the producer intends to incorporate into real property. An example of this would be if a producer purchases glass to replace a broken window at a generation plant. Services not used directly and primarily in the production of electricity, such as employment services providing office workers or building security services, would not be exempted.

For fungible items, such as fuel, only that percentage of the fuel used to produce electricity for use by others will qualify for exception. Fuel used to heat the producer's offices, or fuel used to produce electricity to run the office computers of the producer would be subject to tax.

A provider of electricity engaged in transmission or distribution can claim exemption on purchases of tangible personal property and services that are necessary to physically transmit or distribute electricity. This includes such items as wires, poles, and substation equipment. The provider can also claim exemption on parts, supplies, tools and services used to repair or maintain transmission or distribution equipment or lines, including right-of -way maintenance. Motor vehicles used in the repair or maintenance of the transmission or distribution system are exempt only if they are "specially designed or equipped for such use." The exemption also applies to equipment that is essential for customer service, such as equipment used to take customer requests for service and to produce work orders. Purchases of items the transmitter or distributor intends to incorporate into realty do not qualify for exemption. An example of this would be if a transmission company purchased fencing materials to enclose a substation. The exemption does not apply to purchases of items used for office or business functions such as billing supplies or promotional materials.

Providers of electricity that make exempt purchases on or after October 5, 1999 must provide their vendors with exemption certificates. The certificates should state that the exempted purchase or purchases are to be "used directly and primarily in the production, transmission, or distribution of electricity for use by others." Providers who have previously given suppliers exemption certificates claiming direct use in the rendition of a public utility service should furnish new exemption certificates for purchases made on or after October 5, 1999 citing the new exemption. Of course, holders of direct payment permits are not required to issue exemption certificates.

If you have any questions regarding this matter, you should call us at 1-888-405-4039.

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