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.
OHIO RELAY SERVICES FOR
THE HEARING OR SPEECH IMPAIRED
Phone: 1-800-750-0750