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Sales and Use Tax TAA 14A-031 - Gross Receipts – Electricity

QUESTION : ARE THE SALES OF ELECTRICITY MADE BY THE TAXPAYER TO THE CITY SUBJECT TO GROSS RECEIPTS TAX?

ANSWER: YES.

December 18, 2014

Re: Technical Assistance Advisement – TAA 14A-031 Taxability of the sale of Utility Services
Gross Receipts Tax
Chapter 203, Florida Statutes (F.S.)

XXXX (the Taxpayer) FEI #: XXXX

Dear XXXX:

This is in response to your letter dated XXXX, requesting this Department’s issuance of a Technical Assistance Advisement (“TAA”) pursuant to Section 213.22, F.S., and Rule Chapter 12-11, Florida Administrative Code (F.A.C.), regarding the taxability of gross receipts derived from the sale of electric power. An examination of your letter has established that you have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request for a TAA.

ISSUE

The issue is whether sales of utility services, by the Taxpayer, to XXXX (City), are subject to gross receipts tax.

FACTS

Pursuant to the Taxpayer’s Charter (the Charter), enacted in 1923, the Taxpayer was created “and made part of the government of the [City] . . . which shall consist of five members.” Section 9(1), of the Charter, indicates the Taxpayer’s authority to “acquire, establish, construct, maintain and/or operate electric generating plants, electric lines and facilities . . . within the boundaries of [] County and [] County . . . .” Section 9(1)(b), of the Charter, provides the authority for the Taxpayer to “connect with facilities of one or more electric utilities, to include, but not be limited to, any municipal electric utility, investor- owned utility, rural electric cooperative, cogeneration facility, nonutility generator, and other form of electric producer or marketer, and may enter into contracts with one or more electric utilities as referenced above whereby [the Taxpayer] shall agree to sell, purchase or interchange electric energy on a firm, scheduled, economy or emergency basis or otherwise through connection or interchange facilities.”

From 1923 until 1982, the Taxpayer had to first obtain the approval of the City Council of the City in order to issue bonds. In 1982, the Florida Legislature changed State law to give the Taxpayer bonding authority without having to obtain the prior approval of the City.

Section 6, of the Taxpayer’s Charter, provides:

[The Taxpayer] shall have full authority over the management and control of the electric light and water works plants of the City [] and shall elect and discharge at their pleasure all employees of said City whose services are performed in any manner in connection with said electric light and water works plants or the operation thereof. ...

Section 10, of the Taxpayer’s Charter, provides:

It shall be the duty of [the Taxpayer] to agree upon rates for supplying the City [] with both water and electricity and to collect from the said City for the supplying of said Utilities and in all other respects the said City [] shall meet its obligations and observe the rules and regulations of said [the Taxpayer] the same as any individual consumer of said Utilities. ...

Section 15(1), of the Taxpayer’s Charter, provides:

[The Taxpayer] is authorized to issue bonds for the purpose of financing or refinancing its electric power, fuel supply and water supply facilities, and may exercise all powers in connection with the authorization, issuance and sale of bonds as the same are conferred upon municipalities by Chapter 166, Part II, Florida Statutes, provided, however, that such bonds may be validated in accordance with Chapter 75, Florida Statutes.

The Taxpayer’s Annual Report (2013), provides, in part:

[Taxpayer] was created in 1923 by a Special Act of the Florida Legislature as a statutory commission of the State of Florida and is governed by a Board (the Board) consisting of five members including the Mayor of the City []. The Act confers upon [Taxpayer] the rights and powers to set rates and charges for electric and water services. [Taxpayer] is responsible for the acquisition, generation, transmission and distribution of electric and water services to its customers within [] counties. In addition, [Taxpayer] provides chilled water and lighting services.

The City’s Comprehensive Annual Financial Report (FY ended September 20, 2013), provides, in part:

The City provides limited information regarding the [Taxpayer] and the [] in the notes on page 106. Further information regarding these agencies, their financial statements, and/or operations may be obtained by contacting the agencies directly.

***

Approximately 83% and 99% of the Wastewater System and the Solid Waste Management operating revenue from user charges, respectively, and 93% of Utility Services Tax are billed and collected by [Taxpayer] as agent for the City.

***

Annually, the [Taxpayer] provides payments to the City from its revenues. These payments are divided into two elements: a franchise fee equivalent and a contribution (dividend) portion. The franchise fee equivalent is based upon 6% of [Taxpayer’s] gross electric and water revenues and 4% of chilled water revenues for retail customers within the corporate limits of the City. The City considers the franchise fee equivalent as compensation for the use of the City’s rights of Way.

The City’s Comprehensive Annual Financial Report also includes an organizational chart showing the various City departments and offices. The Taxpayer is not part of the organizational chart.

The Taxpayer can initiate litigation in its own name and can be named as a defendant. A search of the county clerk’s office shows the Taxpayer as both plaintiff and defendant in such actions as: premises liability, eminent domain, auto negligence and breach of contract.

TAXPAYER ARGUMENT

Your request indicates, in part, the following:

***

We believe that the DOR should conclude that [the Taxpayer] is an agency or department of the City for purposes of [Chapter 203], Fla. Stat. and is not required to pay sales tax on the gross receipts derived from sales of electricity to the City.

***
Your request provides your interpretation of Technical Assistance Advisements 93(B)6-001A and 03A-06

(TAAs), which, you assert, supports your position that the Taxpayer is an agency or department of the City.

In a teleconference with the Department, you pointed to the following to support your position: (1) the Taxpayer is exempt from ad valorem taxes based on its relationship with the City; (2) from a budgetary standpoint, the Taxpayer is part of the City; and (3) the Taxpayer was “born out of” the City via its Charter first adopted in 1923. We agreed during our teleconference that there were no Florida appellate court decisions on this specific question (for purposes of Chapter 203, F.S.) and the published decisions analyzing the relationship between the Taxpayer and the City (not related to Chapter 203, F.S.) were somewhat evenly split depending on the question and circumstances presented.

In a letter dated October 21, 2014, you also assert that the enabling legislation creating the Taxpayer clearly specifies that it is an agency of the City. You add that Section 203.04, Florida Statutes, is relevant to any analysis because the Taxpayer was created before the adoption of the gross receipts tax.

DISCUSSION

The Taxpayer is a distribution company within the meaning of the gross receipts tax statute and gross receipts tax is due on sales of utility services that it makes to retail consumers. However, if the Taxpayer is “the City” (in other words, it is producing electricity for itself), then gross receipts tax would not be due because there is no sale between it (a distribution company) and a retail consumer (the City).

The issue presented (the nature of the relationship between the Taxpayer and the City for purposes of Chapter 203, F.S.), has not been addressed in any Florida appellate decision. But in dicta from Lederer v. City Utilities Commission, 981 So.2d 521 (Fla. 5th DCA 2008), it was observed that “... the distinction between a municipal department and a municipal or quasi-municipal agency is not always clear. Generally, a municipal department is not a separate legal entity and does not have the capacity to sue or be sued. Examples of such subordinate entities comprising an integral part of a municipality would generally include a police or fire department, planning department or city attorney's office.” (Id., at 526)

So while the Taxpayer’s Charter provides that the Taxpayer is made part of the government of the City, there are a number of other factors that lead us to conclude that the Taxpayer is not “the City” for purposes of gross receipts tax. We find the following factors significant:

  • The Taxpayer has authority to issue bonds without first obtaining the City’s approval.
  • The Taxpayer, in its Annual Report, describes itself as a “statutory commission” and does not

describe itself anywhere in the Annual Report as being part of the City government.

  • The City’s Comprehensive Annual Financial Report treats the Taxpayer as a separate agency and not as a department or other office of the City government.
  • The City’s Comprehensive Annual Financial Report includes an organizational chart showing the various City departments and offices. The Taxpayer is not part of the organizational chart.
  • The City’s Comprehensive Annual Financial Report describes the Taxpayer as the City’s “agent.”
  • The Taxpayer makes payments to the City. These payments are divided into two elements: a franchise fee equivalent and a contribution (dividend) portion. The City considers the franchise fee equivalent to be compensation for the use of the City’s rights of way. This treatment seems to indicate the City sees the Taxpayer as a separate entity and not part of the City government.
  • The Taxpayer can initiate litigation in its own name and can be named as a defendant.

Accordingly, the sales of utility services by the Taxpayer to the City subject the Taxpayer to gross receipts tax based on the provisions of Section 203.01(1)(c)1., F.S., because the Taxpayer and the City are different entities for purposes of Chapter 203, F.S., (i.e., the Taxpayer is the “distribution company” separate and distinct from the City which is the “retail customer”). The applicable tax rate is 2.5%.1

As to your contention regarding previously issued TAAs, it is important to note that a Technical Assistance Advisement has no precedential value except to the taxpayer who requests the advisement. Moreover, such an advisement is not an order or rule or policy of general applicability. See Section 213.22(1), F.S. We note that the facts presented in the two (2) TAAs you cite are different between each other as well as the facts presented in your request.

CONCLUSION

Sales of utility services, by the Taxpayer to the City, are subject to gross receipts tax at the rate of 2.5%. The Taxpayer should remit tax based on the total amount of gross receipts received from the City from charges for utility services.

This response constitutes a Technical Assistance Advisement under Section 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in Section 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes, or judicial interpretations of the statutes or rules, upon which this advice is based, may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response, your request and related backup documents are public records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this response, deleting names, addresses and any other details which might lead to identification of the taxpayer. Your response should be received by the Department within 15 days of the date of this letter.

If you have any further questions with regard to this matter and wish to discuss them, you may contact me directly at (850) 717-6306.

Sincerely,

R. Clay Brower
Revenue Program Administrator
Technical Assistance & Dispute Resolution

Record ID: 165627

End Notes

1 Section 203.01 F.S., was amended in the 2014 legislative session to provide for an additional 2.6% gross receipts tax for electricity charges taxable under ss. 212.05(1)(e)1.c. or 212.06(1), F.S., unless exempt from the tax imposed under these sections. See s. 203.01(1)(a)3 and (1)(b)4, F.S. However, s. 212.08(6)(a), F.S., exempts from tax imposed by chapter 212, F.S., in part, sales made to municipalities when payment is made directly to the dealer by the municipality. As a result, sales of electrical power or energy made by the Taxpayer to the City would not be subject to this additional gross receipts tax of 2.6% (as long as the payment is made directly to the utility by the City).

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