Sales Tax Slice: Sales Taxes Under the Heat Dome



Much of the U.S. has been under a sweltering heat wave over the past week, with temperatures well into the 90s and heat indexes in the triple digits. Late last week, the largest metro areas in the country, New York City, Chicago, and Los Angeles, were all under heat alerts at the same time (apparently for the first time in a decade) In short: it’s summer, it’s very hot, and we’re working hard to stay cool.

For most of us, that means relying on air conditioning at work and at home to avoid the hazards associated with extreme heat. It also means energy usage, of electricity in particular, is way up. Those who follow the markets know that spot power prices rose sharply last week—up 65 percent in Boston and 51 percent in New York. And, we’re all going to see stinging electric bills in the very near future.

Because it’s always all about sales and use taxes in our little arc of the heat dome[1], let’s consider whether that upcoming summer season bill will also include a tax liability. In New York, a major hotspot in more ways than one right now, residential use of electricity is exempt from the state’s sales tax on utility services. But, commercial use of electricity in New York to cool offices or other facilities is subject to tax, unless the electricity is used directly in manufacturing, processing, or agriculture, or exclusively for research and development in a laboratory. Unfortunately for New York City residents, the city’s local sales tax applies to just about all sales of electricity. Illinois and California both exempt from sales and use tax electricity delivered to customers through lines or wires. Similar to their New York City counterparts, Chicago residents trying to beat the heat will likely see municipal excise taxes on their utility bills.

Examples of other states that exempt, for sales and use tax purposes, residential use of electricity include Connecticut, Massachusetts, Pennsylvania, and Vermont. Rhode Island exempts electricity no matter how it’s used, but Utah taxes electricity purchased for either commercial or residential use. And, although there’s no indication that this most recent heat wave has hit Alaska, that state, which has no general sales tax of its own, gives its local boroughs the authority to impose a sales and use tax on utilities.

This heat wave also is a reminder that more efficient products can help lower energy bills, and hopefully, any related taxes. Florida, Georgia, Missouri, North Carolina, Texas, and Virginia, all hold or have held annual sales tax holidays for purchases of Energy Star or energy-efficient appliances. Purchasers in those states, all which have a reputation for hot weather, can buy energy-saving products like air conditioners, tax-free during the typically three-day tax holiday. Presumably their purchases will net them a savings in utility taxes as well as a savings in energy costs. Maybe “pay[ing] up to stay cool” can come with a little tax relief on the side.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does sales and use tax policy have any role to play in the seemingly increasing need for electricity and other energy to cool (and, when the winter arrives, heat) our households and businesses?

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By René Y. Blocker


[1] According to an article on Scientific American’s website, a heat dome occurs when “a dome of high pressure traps hot air underneath it.”