Document Number
04-48
Tax Type
Retail Sales and Use Tax
Description
Public utility engaged in the transmission, distribution and sale of natural gas.
Topic
Exemptions
Date Issued
08-13-2004


August 13, 2004



Re: Request for Ruling: Retail Sales and Use Tax

Dear *************:

This is in response to your letter requesting a ruling concerning the application of the retail sales and use tax to electronic receiver transmitter ("ERT") units purchased by ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS

The Taxpayer is a public utility engaged in the transmission, distribution and sale of natural gas. The Taxpayer purchases ERT units for installation on new and used gas meters. The ERT units read customer usage data and broadcast that data to a mobile or fixed automatic meter reading ("AMR") system.

The Taxpayer was denied a refund for retail sales and use tax paid on purchases of the ERT units. The basis for this denial, in part, hinges upon the ruling issued in Public Document (P.D.) 00-69 (5/11/00). In that ruling, the Tax Commissioner determined that ERT units used by an electric utility are taxable. The Taxpayer claims that P.D. 00-69 is erroneous with respect to the ERT units because:

· ERT suppliers deliver ERT units directly to out-of-state meter manufacturers who install them on meters prior to delivery into Virginia.
· ERT units are directly installed on meters and should be treated as component parts of meters.
· Newer meters can now be delivered with ERT units preinstalled.

Regardless of whether the ERT units are shipped directly to Virginia for installation on existing meters or shipped directly to third-party vendors in other states for retrofitting on meters prior to delivery into Virginia, the Taxpayer is the purchaser of the ERT units. The Taxpayer cites several Department rulings in support of its position.
RULING

Virginia Code § 58.1-609.3(3) provides an exemption from the retail sales and use tax for tangible personal property sold or leased to a public utility for use or consumption by the utility directly in the rendition of its public service. Interpreting this exemption, Title 23 of the Virginia Administrative Code ("VAC") 10-210-3020(D) provides the following:
    • Direct usage refers to those activities that are an integral part of the rendition of a public utility service, including all steps of ... a utility's transmission or distribution process, but not including incidental public utility functions such as administration and management.
    • Items of tangible personal property that are used directly in the rendition of a public utility service are those which are both indispensable to the actual provision of a utility service and used or consumed immediately in the performance of such service. The fact that a particular item may be considered essential to the rendering of a public utility service because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in the rendition of a public utility service.

In addition, Title 23 VAC 10-210-3020(E) provides that "[t]angibie personal property used by a public utility in performing administrative and managerial functions ... is subject to the tax."

You cite P.D. 90-68 (4/12/90), which exempts meters used for reading water usage. Those meters were exempted because they are used directly in an exempt distribution function and constitute the final step of that distribution process. This conforms to the policy set out in P.D. 00-69 that meters are used in an exempt distribution function. In this case, meters have not been purchased. Rather, the Taxpayer has only purchased ERT units, which are intended to improve the administration of its billing system.

Because some ERT units are preinstalled on meters prior to delivery to the Taxpayer in Virginia, you maintain that the ERT units and meters should be treated as one unit. As support, you cite P.D. 98-25 (02/13/98), which treats a computer equipment and software transaction as a single transaction. That transaction differs from the transactions in the instant case because the ERT units were purchased separately from the meters. In fact, the meter vendor merely charged the Taxpayer for the meters and the installation of the ERT units onto the meters. The meter vendor clearly did not sell a meter and an ERT unit to the Taxpayer. Had the meter and the ERT unit been purchased as a single unit, the transaction would have qualified for the public utility exemption. The transactions at issue in this case, however, are not the Taxpayer's purchase of meters, but rather the purchase of ERT units.

You also cite P.D. 87-276 (12/23/87), which exempted meter stands if they are determined to be "a component part of exempt utility machinery and not affixed to realty." In the instant case, you maintain that "the ERT units are not only physically attached [to themeter], but also perform a meter function." Although you maintain that the ERT units are exempt based on the reasoning set forth in P.D. 87-276, that ruling references the manufacturing regulation to set out several "component part" principles applicable to the public utility exemption. In this regard, P.D. 91-183 (8/26/91) also sets out applicable "component part" principles. For instance, that ruling treats steel supports purchased separately as component parts of exempt machinery if they remain tangible property upon installation, are attached to the exempt machinery, and are used solely to support the exempt machinery. In addition, the supports have to be essential for the operation of the machinery, i.e., the machinery could not be operated without such supports.

In this case, we must also examine the functional use of the ERT units. As stated above, the ERT units serve only a billing purpose function. Although attached to gas meters, the ERT units, by themselves, are not used in an exempt distribution activity, but rather are used in a taxable administrative activity. The presence or absence of an ERT has no effect on the availability and delivery of gas to the customer. The gas flows with or without it.

Although some ERT units purchased separately are preinstalled on meters prior to delivery into Virginia, the cost price of those ERT units is subject to the retail sales and use tax at the time that they enter Virginia. Based on all of the foregoing, the ERT units in this case are taxable. Accordingly, the policy set out in P.D. 00-69 is applicable.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this ruling, you may contact ******* in the Department's Office of Policy and Administration, Appeals and Rulings, at ********.
                • Sincerely,


                • Kenneth W. Thorson
                  Tax Commissioner


AR/43380R


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46