Sales and Use Tax – TAA 15A-003 – Taxability of Electric Power Fees

QUESTION: ARE CERTAIN POWER FEES CHARGED BY A DATA CENTER SUBJECT TO SALES AND USE TAX?

ANSWER: NO.

February 24, 2015

Re: Technical Assistance Advisement – TAA 15A-003 Taxability of Electric Power Fees
Gross Receipts Tax
Section 203.01, 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 power fees. 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 certain power fees charged by a data center are subject to gross receipts tax.

FACTS

The Taxpayer owns and operates a data center in XXXX, Florida. The Taxpayer is one of 14 affiliated data center companies, owned by XXXX, that are engaged in the business of owning and operating multi- tenant data centers across the country. The subject data center houses customers’ networking, storage and communications technology infrastructure, including servers, storage devices, switches, routers and fiber optic transmission equipment. Your request indicates in part the following:

[The Taxpayer’s] XXXX data center is a 45,200 square foot multi-tenant facility that houses equipment and provides connectivity to more than 40 companies, including [content delivery networks], network providers, [manage service providers], and regional enterprises. [The Taxpayer] receives electrical service at the data center from XXXX, and [the Taxpayer] pays all applicable sales and gross receipts taxes charged on those services. [The Taxpayer] is not an electric utility and does not generate electricity for use by its customers, except on very rare occasions when temporary generators may be used to provide emergency back-up power in the event of a natural disaster or prolonged utility power outage. Pursuant to an agreement, termed, “Master License and Service Agreement” (MSA), the Taxpayer’s customers can opt to pay the Taxpayer, for power usage, a “Breakered Power Fee.” The fee is an agreed upon monthly recurring power fee paid by customers to use a specific alternating or direct current power circuit. The fee is paid regardless of any usage; however, a customer is only allowed to utilize 80 percent of a power circuit’s breakered capacity limit. Should a customer require additional power for its equipment, it must pay for additional power circuits with sufficient capacity to accommodate its additional power draw needs. You also provided that the Taxpayer does not purify or manipulate power received from XXXX.

TAXPAYER ARGUMENT

It is your position the power fees do not represent payments for resold electricity. Further, you assert these fees are not subject to gross receipts tax. You provide in part the following:

A. [The Taxpayer] is Not Reselling Electricity Under Its Breakered Power Fee Model.

First, [the Taxpayer] is not reselling electricity to its customers under its Breakered Power Fee model. The facts above and documents attached demonstrate that [the Taxpayer] charges the monthly recurring Power Fee and Redundant Additional Power Fee 1 right to license an electrical circuit of a specified capacity on the data center’s critical power infrastructure, regardless of whether the customer ever draws any electricity over that circuit. Whether the customer draws 10% of the circuit’s capacity one month versus 80% of its capacity the next month, the charge for that circuit remains the same each month. [The Taxpayer] concedes that these fees are subject to the commercial rentals tax in this context (as the auditor determined),2 but there is no resale of electricity from [the Taxpayer] to its customer.

Rather, [the Taxpayer] is compensated for licensing the use of space and the power circuit to its customer, and providing other services to the customer in relation to such space. [The Taxpayer] provisions electricity service that [the Taxpayer] pays for and owns, allowing the customer to access and use that electricity to conduct its business. But the customer never owns any amount of that electricity, nor does the customer pay [the Taxpayer] to purchase such electricity. [The Taxpayer] is not an “electric utility” selling power subject to sales tax. There is only one sale of electricity under [the Taxpayer]’s Breakered Power Fee model, and that is [the Taxpayer]’s purchase of electricity from XXXX, on which [the Taxpayer] pays all applicable taxes.

In any event, [the Taxpayer] does not “mark-up” utility charges to its customers, within the meaning of the last sentence in current Rule 12A-1.070(4)(e). [The Taxpayer] does not charge its customers an amount per kilowatt hour that exceeds the price charged to [the Taxpayer] by FP&L for those kilowatt hours. Rather, [the Taxpayer] charges its customers a set monthly recurring amount for the licensed circuits, regardless of whether the customers use all of their circuits’ capacity or whether they use any electricity at all. The price charged by [the Taxpayer] is a license fee per circuit, not an amount per kilowatt of electricity drawn. There is simply no correlation between the two, and the audit staff mixes apples and oranges in attempting to equate them.

B. GrossReceiptsTaxDoesNotApplyto[theTaxpayer]’sBreakeredPowerFeeModel.

Second, [the Taxpayer]’s Power Fee and Redundant Additional Power Fee charges under its Breakered Power Fee model are not subject to the gross receipts tax under the plain terms of the tax laws, for several reasons:

• [The Taxpayer] does not deliver “utility services” to its customers under its Breakered Power Fee model, as that term is defined in Section 203.012(3). [The Taxpayer] does not transport, deliver, transmit and distribute electricity, as those terms are commonly understood and applied in the industry, all of which are required in order to constitute taxable “utility services” for gross receipts tax purposes.

• [The Taxpayer]’s charges for its the Power Fee and Redundant Additional Power Fee under its Breakered Power Fee model are not “subject to the tax levied pursuant to s. 212.05(1)(e)1.c. or s. 212.06(1)” as provided in Section 203.01(1)(a)3. [The Taxpayer] is not an “electric utility” subject to Rule 12A-1.053(1)(a). Rather, these charges are subject to the commercial rentals tax under Section 212.031 and Rule I 2A- 1.070, as additional consideration for the customer’s license to use real property.

• [The Taxpayer] is not a “distribution company” within the meaning of Section 203.012(1) and Rule 12B-6.001(2)(b), and is therefore not subject to the gross receipts tax under Section 203.01(1)(c)l. [The Taxpayer] does not own or operate local electric distribution facilities for the transmission, delivery, and sale of electricity, as those terms are commonly understood and applied in the industry. Further, [the Taxpayer] does not charge its customers for both electricity and transportation of electricity, as required by Section 203 .01(1)(c)1.

• [The Taxpayer] is not subject to the gross receipts tax in Section 203.01(1)(d)1., because it is not a “distribution company” for the reasons discussed above, and because [the Taxpayer] does not charge its customers under its Breakered Power Fee model for “the number of kilowatt hours delivered.”

For these reasons, [the Taxpayer] is not reselling electricity to its customers under its Breakered Power Fee model and its Power Fee and Redundant Additional Power Fee charges are not subject to the gross receipts tax. (Emphasis in original.)

LAW AND DISCUSSION

Regarding gross receipts tax, s. 203.01(1)(c)1., F.S., provides:

The tax imposed under subparagraph (a)1. shall be levied against the total amount of gross receipts received by a distribution company for its sale of utility services if the utility service is delivered to the retail consumer by a distribution company and the retail consumer pays the distribution company a charge for utility service which includes a charge for both the electricity and the transportation of electricity to the retail consumer. The distribution company shall report and remit to the Department of Revenue by the 20th day of each month the taxes levied pursuant to this paragraph during the preceding month.

The definition of a distribution company can be found in s. 203.012(1), F.S., which provides:

“Distribution company” means any person owning or operating local electric or natural or manufactured gas utility distribution facilities within this state for the transmission, delivery, and sale of electricity or natural or manufactured gas. The term does not include natural gas transmission companies that are subject to the jurisdiction of the Federal Energy Regulatory Commission.

Based on the facts of this case, the Taxpayer is not a distribution company selling electricity. Nor is it selling the transportation of any electricity. The company is charging a set rate based on the number of circuits utilized. This amount is properly treated as the consideration for the license to use real property (and taxed accordingly for sales and use tax).

RESPONSE

The subject power fees charged in connection with the “breakered power fee model” are not subject to gross receipts tax, because, the Taxpayer is not a distribution company, it charges a set rate based on circuits (and not usage), and it does not manipulate or purify electricity it buys from XXXX.

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: 184997

End Notes:

1 This fee is charged if a customer desires an additional circuit in the unlikely event the primary circuit fails.

2 The Taxpayer is not currently under audit.