Insight: Wholesaler of Electricity Is Subject to Gross Receipts Tax

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The Pennsylvania Commonwealth Court recently ruled that an electric wholesaler is subject to the state’s gross receipts tax. In this article, Cozen O’Connor’s Joseph C. Bright discusses the ruling and its impact.

Joseph C. Bright

By Joseph C. Bright

Joseph C. Bright is a member of Cozen O’Connor.

The Pennsylvania Commonwealth Court en banc affirmed the decision of a panel that a taxpayer engaged in the business of the wholesale of electricity was subject to the gross receipts tax (formerly titled the utilities gross receipts tax). American Electric Power Service Corp. v. Commonwealth, No. 861 F.R. 2013 (Pa. Commw. Mar. 15, 2018). The taxpayer sold electricity in Pennsylvania on a wholesale basis. It did not provide electricity to end-user customers and was not subject to the jurisdiction of the Pennsylvania Public Utility Commission (PUC). As a wholesaler, the taxpayer was regulated solely by the Federal Energy Regulatory Commission. The taxpayer sold electricity to the Letterkenny Industrial Development Authority (LIDA), which was formed by Franklin County pursuant to the Economic Development Financing Law, 72 P.S. §§ 7101-10004. LIDA assumed control of the electrical distribution system at the Letterkenny Army Depot; the system served the Cumberland Valley Business Park and an industrial area retained by the U.S. Army. The court held that the taxpayer was subject to the Gross Receipts Tax, notwithstanding that it was not a utility nor subject to the PUC, citing Hanley & Byrd v. Commonwealth, 590 A.2d 1382 (Pa. Comm. 1991). Hanley & Bird relied on the discussion by this author that the tax applies to taxpayers according to the function they perform, not whether they are subject to PUC jurisdiction. J. Bright, Pennsylvania Taxation § 5:13 (West. Co. 2017). The court determined that the taxpayer was an electric distribution company, because the Electricity Generation Customer Choice and Competition Act states that the phrase engaged in electric light and power business as used in the gross receipts tax includes the direct or indirect engaging in business for the purpose of establishing or maintaining a market in the sales of electric energy. 66 Pa. C.S. § 2810(j); 72 P.S. § 8101(b). The court further found that the sales by the taxpayer to LIDA did not constitute sales for resale as defined in the gross receipts tax because LIDA was a political instrumentality of the commonwealth and was not itself subject to the gross receipts tax. The court rejected the argument that because LIDA sold electricity to tenants it was acting as a private corporation. Finally, the court held that the commonwealth was not barred from its arguments because of an untimely response to a request for admission, because the request essentially amounted to a request to admit a conclusion of law.

The decision may be correct under the applicable statutes, although it results in a pattern that is different from the sales and use tax. The sales tax is imposed at the consumer level and generally all prior sales are exempt as sales for resale. However, the gross receipts tax is imposed on the distributor to the consumer. If there is more than one distributor, the first distributor is taxed unless the sale is to another distributor that will pay the tax. The result is to keep the tax one level away from the consumer.

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