Senate Bill S7340

                                 BILL NUMBER:  S7340

 TITLE OF BILL :  An act to repeal section 1105-c of the tax law
relating to reduced tax rates with respect to certain gas and electric
service

 PURPOSE :

The bill would repeal Section 1105-C of the Tax Law, which exempts
from sales and use taxes receipts from transportation, transmission,
or distribution of gas or electricity when provided by someone other
than the vendor of the gas or electricity. This would also eliminate
school district, municipal, and county exemptions of sales tax on
utility delivery service charges for electricity or gas when it is
purchased from an "energy services company" ("ESCO") or other entity
allowed by the public service commission to sell utility service.

 SUMMARY OF PROVISIONS :

Section 1 of the bill amends the tax law to repeal Section 1105-C as
added by Chapter 85 of the Laws of 2002, to eliminate the state sales
tax exemption on receipts from retail transportation, distribution or
delivery of natural gas and electricity from sales and use tax when
gas or electricity is sold by an energy services company (ESCO) or
other person or entity who is not the provider of transportation,
distribution or delivery service.
              

Section 2 provides for an effective date of 180 days from the date of
enactment.

 JUSTIFICATION :

In the late 1990's, the New York State Public Service Commission
allowed energy services companies ("ESCOs") to sell contracts for
"unbundled" natural gas or electricity commodity to retail utility
customers. Initially it was argued that the separate sale of the
commodity electricity and gas meant that there was no sales tax on the
utility's delivery service, because services are generally exempt from
sales tax, and there was no specific statute taxing "delivery
service". The State Department of Taxation and Finance initially
accepted the argument that there was no sales tax on "delivery
service", but subsequently reversed its position and in April 1999
ruled that all electric and natural gas service, whether or not the
commodity portion is unbundled and separately sold, is subject to the
sales tax because the statute clearly required sales tax on natural
gas and electric service "of whatever nature."* The Tax Department's
equal taxation ruling was sound statutory interpretation and good
competition policy, because ESCO customers would have no public tax
subsidy and ESCOs would therefore need to provide lower costs of
commodity or other value-added services to induce electric and gas
customers to switch to ESCO service.

Part Y of Section 63 of the Laws of 2000, now Tax Law 1105-C,
legislatively overruled the Tax Department rulings. The impact of
Section 1105-C is to create a tax preference to customers who switched
to ESCOs. The sparse legislative history in the Bill Jacket indicates
the utility delivery service tax break for customers who switch to
ESCOs was adopted to "promote competition in the energy marketplace
and provide rate relief to energy consumers." (Memorandum of
Governor's Counsel, L. 2000, c. 63). But from an economic perspective,
this tax preference actually enables ESCO sellers to mark up and
resell wholesale electricity or gas at prices higher than those of the
traditional utilities, yet still promise customers lower bills,
because of the tax savings on utility delivery service to ESCO
customers.

The taxpayer subsidy benefitting ESCOs and their customers has grown
from $31 million/year in 2001** to $118 million in 2016*** Instead of
fostering competition, it actually distorts the competitive
marketplace by favoring ESCO providers and their customers, who will
see a reduction in the portion of tax on "delivery" service when they
switch to an ESCO for the purchase of the "commodity" electricity or
natural gas, permitting the ESCO to charge more for the commodity
service that the utility would have charged. See ESCO Tax Subsidies:
A Hidden Cost of the New York PSC's "Retail Access" Scheme, PULP
Network, January 12, 2009. With the 1105-C tax break in existing law,
customers are encouraged to switch to often more expensive ESCO
commodity service to avoid paying utility sales taxes on utility
delivery services to the state, local governments, and local school
districts. The state tax breaks, coupled with local tax breaks in
local jurisdictions that have a sales tax on utility service, are a
major selling point for ESCOs. See ESCO Advertises 9.75% Tax Savings
on Delivery Service, PULP Network, June 18, 2009.

This unlevel tax playing field allows ESCOs to charge more than
identical service from the utility, but because of the tax break on
utility delivery service, the bottom line of the ESCO customer bills
can be lower. This encourages predatory and deceptive practices, in
which it can be promised that the utility bill will go down (due to
the tax break) while the customer is shifted to more expensive
commodity service from the ESCO. This skewed taxation distorts
competition and rewards arbitrage of the tax break instead of the
provision of value added service from ESCOs.

Arbitrage of this unwarranted tax break may contribute to the
inefficient switchover of utility customers to more expensive and less
efficient ESCO commodity service which does not create real added
value. The consequent loss of tax revenue adversely affects the state,
and numerous local governments and school districts that have taxed
utility service. Each time a customer switches to an ESCO, the tax
revenues to the state and local taxing jurisdictions decrease.

 EFFECT ON SCHOOL DISTRICTS, LOCALITIES AND COUNTIES THAT TAX UTILITY
SERVICE :

The state sales tax rate on utility service for nonresidential
customers is 4%. Local sales taxes on utility services including
residential service - have been adopted by numerous local governments
and school districts.For example, Albany County, Westchester County,
Erie County, Cattaraugus County, the Albany School District, Cohoes
School District, Watervliet School District, Hudson School District,
Gloversville School District, Johnstown School District, Batavia
School District, Watertown School District, Glen Cove School District,
Long Beach School District, Utica School District, Middletown School
District, Rensselaer School District, and Troy School District have a
3% tax on gas and electric service. The Newburgh, Mount Vernon, New
Rochelle, Peekskill, Rye and White Plains school districts have a 6%
sales tax on electric and gas service. Niagara Falls and Schenectady
have a 7% tax, Lackawanna has a 7.75% tax. The City of Yonkers has a
4.5% tax. Cayuga County, Auburn, Cortland County, Niagara County,
Orleans County, Oswego, and Rockland County have a 4% tax. The full
list of local governments and school districts charging sales tax on
residential gas and electric utility service, and their tax rates, are
listed in New York State Department of Taxation and Finance
Publication 718-R, September 1, 2015.

In 2009, New York City acted to eliminate the ESCO sales tax break
with respect to the New York City sales tax. In a January 20, 2010
Sales Tax Memo TBS-M-10(1), summarizing changes to the Tax Law, the
New York State Department of Taxation and Finance announced that
effective August 1, 2009, "receipts from the sale of the services of
transporting, transmitting, distributing, or delivering gas or
electricity are subject to the 41/2% New York City local sales tax,
even if purchased from someone other than the vendor of the gas or
electricity." Thus, New York City has closed a needless loophole in
the sales tax law that was, in effect, reducing utility bills of
customers of ESCOs and draining local tax revenue and rewarding
inefficient competition.

To implement these changes, the state Legislature amended Tax Law
section 1210 to permit cities with over one million residents (i.e.,
New York City) to "omit the exemption" of ESCO customers from paying
any delivery sales taxes. New York City also amended its
Administrative Code by adding language to Title 11 (Taxation and
Finance), section 2001 indicating that a new section "makes
inapplicable section eleven hundred five-C of the tax law, and imposes
tax on receipts from every sale, other than sales for resale, of gas
service or electric service of whatever nature, including the
transportation, transmission or distribution of gas or electricity,
even if sold separately...." The reform reduces but does not eliminate
distortion in utility service markets in New York City, because the
state sales tax exemption persists for nonresidential customers in New
York City who switch to ESCO service.

In summary, there is no valid reason to allow continued arbitrage of
tax breaks by ESCOs, financial middlemen who do not produce or
distribute electricity. This tax break can reward a less efficient
ESCO "competitor" which could charge more for the identical service
and gives an unfair marketing advantage to ESCOs. The bill closes the
ESCO tax loophole that still exists for the state, counties, cities,
and school districts that continue to exempt ESCO customers from
paying tax on the delivery of electricity and gas.

 LEGISLATIVE HISTORY :

None.

 FISCAL IMPLICATIONS :

Repeal of the exemption would increase revenues of the state,
municipalities, and school districts that tax electric and gas utility
service.

According to the New York State Division of Budget Tax Expenditure
Report for 2016-17, the estimated foregone sales tax revenue due to
the ESCO loophole has grown to $118 million per year in 2016. The
State Tax Expenditure Reports issued by the Division of Budget do not
break out impacts on local taxing authorities that follow the state
exemption of utility delivery service to ESCO customers.

 EFFECTIVE DATE :
This act shall take effect immediately.
*See NYS Department of Taxation and Finance Memorandum TSB-M-99(1)S,
Jan. 29, 1999, and NYS Dept. of Taxation and Finance Advisory Opinion,
TSB-A-00(27)S (July 21, 2000). In 2000, however, Section 1105-C was
enacted to create the exemption, as part of Chapter 63 of the Laws of
2000.
**See NYS Division of Budget Tax Expenditure Report 2001, p. 67 at
https://www.budget.nv.gov/pubs/archiveN0102archive/0102TaxEoendepdf
***See NYS Division of Budget Tax Expenditure Report 2016,p.106, at
https://www.budget.ny.gov/pubs/executive/eBudget1617/fv1617ter/
TaxExpenditure2016-17.pdf