New Sales Tax Could Kill Energy Choice in NY
A recent administrative action in New York that would subject
the delivery of electricity, including power purchased from
third-party suppliers, to the state's sales tax has the potential
to undermine fledgling efforts to restructure the retail power
market, say utilities and marketers.
On Jan. 1, counsel for New York's Department of Taxation and
Finance effectively repealed a decades-old energy law exempting the
delivery of electricity from the state's sales tax, said Craig
Goodman, president of the National Energy Marketers Association
(NEMA). New York State Electric and Gas (NYSEG) agreed that the
state's action amounted to "overthrowing of prior precedent." The
department's action is expected to result in a 7-8% tax for
commercial customers and a 4% tax for residential customers,
according to utilities and marketers. Industrial customers would be
NYSEG petitioned the finance department on Jan. 8 to clarify
several aspects of its action. For one, the scope of the ruling -
whether it applies to natural gas as well as to power - is fuzzy,
says Shad Rafferty, senior vice president and CFO for the utility.
"The question that we have is how can you make electricity taxable
by itself. Electricity and gas are treated the same - either they
both are [taxable] or they both aren't." The utility contends
neither should be subject to sales tax.
NEMA's Goodman doesn't believe the department's action per se
applies to delivery of natural gas, "but legally and technically it
could, and it's a concern to some people" in the industry. "We're
hoping that it will not be expanded to include the gas market." New
York customers have not paid a sales tax on the transportation
component of gas service since the mid-1980s, NYSEG noted.
There also was considerable confusion about the effective date
of the tax. Both Goodman and Rafferty initially believed the tax
took effect Jan. 1, but then heard "rumors" that it was delayed
until April 1. "...I've not seen anything in writing to that
effect," Rafferty noted. The New York Department of Taxation last
week confirmed April 1 as the effective date.
Goodman called the energy tax a "real setback" to the advent of
state-wide competition in New York's retail power market. He said
it would be a "very regressive" levy, meaning that it would hurt
lower income consumers most, and directly would affect those
electricity consumers that elect to choose their service providers,
"which is exactly the opposite of what you want to do when you're
trying to start a restructured program in the state." It will cause
marketers to flee the New York power market and will rob customers
of promised savings, he believes.
"Previously people could switch their supplier from a local
utility to say an energy service company, and they would avoid a
sales tax on the delivery portion of the bill. Now, they're saying
'yes, you do have to pay for the delivery service and it doesn't
matter where you buy it from,'" NYSEG's Rafferty told NGI.
"Part of the benefit of customers switching is the fact that
they can avoid the sales tax on the transportation or delivery of
electricity... Quite frankly, it's a large portion of the financial
incentive for them to switch," he said. New York's action "hurts
our retail-access program as well as other utilities in the state."
NYSEG plans to offer choice to all of its power customers by Aug.
1, he noted.
States shouldn't change their energy tax programs until after
they have fully implemented retail choice, said Goodman, an expert
on energy tax law. "And then there should be a full restructuring
of all the taxes so that [they're] fair and competitively neutral."
Retail choice is still in the pilot stage for many New York
Not only will energy consumers suffer, but Goodman believes the
state itself will be a big loser. "...[W]hen I did a quantitative
analysis of these type of taxes, [I] found that the state lost more
in revenues by imposing this kind of a tax than they did by
allowing energy prices to decline." The lower revenues were largely
owing to the decreased profitability of businesses located within
the state and lower consumer spending, Goodman said.
NEMA isn't taking the tax lying down. "We have a three-front
approach: we're appealing directly to the governor; we are
appealing to the legislature; and we're looking into legal
measures," he noted. "Technically, there shouldn't be a new tax on
choice unless the legislature voted for it," which Goodman said it
never did. NYSEG officials agreed, saying the New York Department
of Taxation was attempting an end-run around the legislature.
NEMA was created specifically to work with federal and state
regulators and legislators, and consumer groups to devise "fair and
effective ways" to implement restructuring of both the natural gas
and electricity markets. Some of its largest members include
Columbia Energy, Dynegy Inc., Amerada Hess, ConEd Solutions,
PSE&G Technologies and The Williams Cos.