Bulletin Number
VTB 01-1
Tax Type
General Provisions
Description
Taxation of Exempt Electric Cooperatives
Topic
Reports
Date Issued
01-04-2001
Taxation of Exempt Electric Cooperatives
Generally
In 1999, the General Assembly enacted the Virginia Electric Utility Restructuring Act (Senate Bill 1269; Chapter 411 of the 1999 Acts of Assembly) and a separate bill (Senate Bill 1286, Chapter 971 of the 1999 Acts of Assembly) that changed the manner in which electric utilities are taxed in Virginia. Under this legislation, the current gross receipts tax will no longer be imposed on electric suppliers. In place of the gross receipts tax, the corporate income tax and a new electric utility consumption tax will be imposed on electric suppliers and electric consumers, respectively. Electric cooperatives will not be subject to the corporate income tax so long as they are also exempt from federal income taxation. Instead, these exempt cooperatives will be subject to a modified net income tax. These changes are effective for taxable years beginning on and after January 1, 2001.
The procedures for computing modified net income tax, pursuant to Code of Virginia § 58.1-400.2, for the 2001 taxable year are set forth below in this Tax Bulletin. The Department is in the process of issuing permanent regulations for administering this tax that will be effective for taxable years beginning on and after January 1, 2001.
DEFINITIONS
The following words and terms, when used in this regulation, shall have the following meaning unless the context clearly indicates otherwise:
“Electric service” means all sales of electricity.
“Electric supplier” means any corporation, cooperative, partnership, or other business entity providing electric service.
“Expenses entirely attributable to electricity sales to nonmembers” means those expenses that can be recognized as being incurred solely to provide electricity to nonmembers. Examples of such expenses are the cost of generating, transmitting, and distributing the electricity to nonmembers.
“Expenses which cannot be entirely attributed to either member or nonmember sales of electricity” means those expenses that cannot be recognized as being incurred solely to provide electricity to either members or nonmembers. Examples of such expenses are the cooperative’s administrative costs, compensation of officers, directors, etc., salaries and wages, depreciation, and maintenance.
“Members” means those customers of a cooperative who receive allocations of patronage capital from the cooperative.
“Modified net income tax” means the tax imposed under Code of Virginia § 58.1-400.2(C).
“Nonmembers” means those customers of a cooperative that are not members.
“Nonmember ratio of electric sales” means the ratio of nonmember sales of electricity within the Commonwealth to total electricity sales within the Commonwealth.
“Ordinary and necessary expenses paid or incurred” means the ordinary and necessary expenses of a cooperative, the amount of which will be determined according to generally accepted accounting principles.
TAX ADMINISTRATION AND IMPOSITION
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- Effective for taxable years beginning on and after January 1, 2001, an electric cooperative shall be subject to the modified net income tax if it is exempt from federal income taxation pursuant to § 501 of the Internal Revenue Code of 1986, as amended. If a cooperative is not exempt from federal income taxation pursuant to § 501 of the Internal Revenue Code of 1986, as amended, it shall be subject to the tax imposed by Code of Virginia § 58.1-400.
MODIFIED NET INCOME TAX ON ELECTRIC COOPERATIVES
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- A. Generally. Effective for taxable years beginning on and after January 1, 2001, a cooperative may be subject to the modified net income tax. The modified net income tax will be applicable to electric suppliers that operate as cooperatives and are exempt from federal income taxation under the provisions of § 501 of the Internal Revenue Code of 1986, as amended.
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- B. Determination of Modified Net Income. For each taxable year, the modified net income of a cooperative is computed by subtracting the following amounts from all of the revenue of the cooperative derived from the sale of electricity within the Commonwealth:
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- 1. All revenue derived from the sale of electricity to members within the Commonwealth,
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- 2. Nonmember share of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on the sale of electricity to nonmembers.
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Example 1: Cooperative A has total electricity sales in the Commonwealth of $10,000,000, total electricity sales to members in the Commonwealth of $9,000,000, and total nonmember share of all ordinary and necessary expenses (as determined in Subsection C below) of $100,000. The modified net income for Cooperative A is computed as follows:
$10,000,000 Total electricity sales in the Commonwealth
<9,000,000> Total electricity sales to members in the Commonwealth
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- <100,000> Total nonmember share of expenses
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In this example, Cooperative A has a modified net income of $900,000. That amount is the result of subtracting $9,000,000 total electricity sales to members in the Commonwealth and $100,000 total nonmember share of ordinary and necessary expenses from Cooperative A’s total sales of electricity in the Commonwealth of $10,000,000.
C. Nonmember Share of Ordinary and Necessary Expenses
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- Each cooperative’s nonmember share of ordinary and necessary expenses shall be determined by using either one of two methods. The expense allocation method selected and used by a cooperative in the first year the cooperative is subject to the modified net income tax must be used consistently unless permission to change methods is granted by the Commissioner. The methods are:
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- 1. Adding the following amounts:
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- a. All expenses entirely attributable to electricity sales to nonmembers within the Commonwealth, and
b. The product of multiplying all expenses which cannot be entirely attributed to either member or nonmember sales of electricity within the Commonwealth by the nonmember ratio of electric sales, or
- a. All expenses entirely attributable to electricity sales to nonmembers within the Commonwealth, and
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- 2. Multiplying all expenses attributable to electricity sales within the Commonwealth by the nonmember ratio of electric sales.
Example 2: Cooperative A, which has elected to use the first method, has total electricity sales in the Commonwealth of $10,000,000, total electricity sales to nonmembers in the Commonwealth of $1,000,000, total expenses entirely attributable to nonmember sales of electricity in the Commonwealth of $200,000, and total expenses not entirely attributable to either member or nonmember sales of electricity in the Commonwealth of $100,000. Cooperative A’s nonmember share of ordinary and necessary expenses is computed as follows:
($100,000 Total expenses not entirely attributable to either) 1,000,000 Total electricity sales to nonmembers
10,000,000 Total electricity sales
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- = $100,000 x .10 {or 10%} = $10,000 Total expenses not entirely attributable to either
- = $100,000 x .10 {or 10%} = $10,000 Total expenses not entirely attributable to either
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+ 10,000 Total expenses not entirely attributable to either
$210,000 Total nonmember share of expenses
In this example, Cooperative A has a total nonmember share of all ordinary and necessary expenses of $210,000. This amount is the result of determining the nonmember ratio of electric sales which is the total of nonmember electric sales in the Commonwealth divided by the total electric sales in the Commonwealth, then multiplying that ratio by the total expenses not entirely attributable to either member or nonmember sales of electricity in the Commonwealth. The result is $10,000 of expenses attributable to nonmember sales of electricity in the Commonwealth. After adding the $10,000 to the $200,000 of total electricity sales entirely attributable to nonmember sales, the total nonmember share of all ordinary and necessary expenses is $210,000.
Example 3: Cooperative B, which has elected to use the second method, has total electricity sales in the Commonwealth of $10,000,000, total nonmember electricity sales in the Commonwealth of $1,000,000, and total expenses attributable to electricity sales in the Commonwealth of $500,000. Cooperative B’s nonmember share of ordinary and necessary expenses is computed as follows:
($500,000 Total expenses entirely attributable to electric sales) 1,000,000 Total electricity sales to nonmembers
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- 10,000,000 Total electricity sales
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= $500,000 x .10 {or 10%} = $50,000 Total expenses attributable to nonmember sales
In this example Cooperative B has a total nonmember share of ordinary and necessary expenses of $50,000. This amount is the result of determining the nonmember ratio of electric sales and multiplying by the total expenses attributable to electricity sales in the Commonwealth.
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- D. Tax Credit Allocation. Each cooperative is eligible to receive income tax credits available to electric suppliers in proportion to their nonmember ratio of electric sales for that taxable year. To determine the proper proportion of each tax credit that a cooperative may receive in a taxable year, the full amount of the credit must be multiplied by the nonmember ratio of electric sales for that taxable year. Cooperatives may not carryover any unused portion of the full amount of each credit. However, cooperatives may carryover, in accordance with the provisions of each tax credit, any unused portion of the tax credit once it has been multiplied by the nonmember ratio of electric sales for the taxable year in which the credit was originally taken.
Example 4. Cooperative A has a modified net income tax liability of $10,000 for the current year, a tax credit of $20,000 earned for the current year, and a nonmember ratio of electric sales for the current year of .10 (or 10%). Cooperative A’s proper proportion of the tax credit and modified net income tax liability are computed as follows:
($20,000 Full amt. of tax credit) x (.10 nonmember sales ratio)
= $2,000 allowable tax credit for the current year.
$ 10,000 Current year modified net income tax
<2,000> Tax credit
$ 8,000 Current year modified net income tax liability
In this example, Cooperative A has a credit in the current year of $2,000 as a result of multiplying the full amount of the credit earned by the nonmember ratio of electric sales to total sales. The $2,000 credit is then applied to Cooperative A’s current year tax liability of $10,000 resulting in a new Virginia modified net income tax liability amount of $8,000. The remaining $18,000 of the tax credit is lost and cannot be recovered in any future taxable year.
Example 5. In 2001, Cooperative B has a modified net income tax liability of $1,000, a nonmember ratio of electric sales of .10 (or 10%), and a Virginia Coal Employment and Production Incentive Tax Credit (“Coal Credit”) of $20,000. In 2002, Cooperative B has a modified net income tax liability of $8000, and no additional tax credits. Cooperative B’s proper proportion of the tax credit and modified net income tax liability for years 2001 and 2002 are computed as follows:
($20,000 Full amt. of Coal Credit) x (.10 nonmember sales ratio)
= $2,000 allowable Coal Credit for 2001.
$ 1,000 Modified net income tax liability for 2001
<2,000> Coal Credit
$ 0 Modified net income tax liability for 2001
2001 2002
Virginia Tax Liability $1,000 $8,000
Coal Credit <1,000> <1,000>
$ 0 $7,000
In this example, any amount of the credit not usable for the taxable year may be carried over to the extent usable for the next five succeeding taxable years. In this example, Cooperative B has a Coal Credit in 2001 of $2,000 and a Virginia modified net income tax liability of $1,000; therefore, only $1,000 of the Coal Credit is usable in 2001. In 2002, Cooperative B may use the remaining $1,000 of the 2001 Coal Credit against its 2002 Virginia modified net income tax liability. The remaining $18,000 of the Coal Credit is lost and cannot be recovered in any future taxable year.
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- E. Estimated Payments. Each cooperative shall make estimated payments based on the amount of nonmember sales of electricity within the Commonwealth during the taxable year. Payments will be made using the Virginia Estimated Income Tax Vouchers (Form 500ES) for the corporate income tax.
F. Reporting. Each cooperative will be subject to the same reporting requirements proscribed for the tax imposed under § 58.1-400 of the Code of Virginia. Each cooperative will file a return on forms proscribed by the Commissioner. If a cooperative does not have nonmember sales of electricity within the Commonwealth for a taxable year, the cooperative will not be required to file a return for that taxable year.
- E. Estimated Payments. Each cooperative shall make estimated payments based on the amount of nonmember sales of electricity within the Commonwealth during the taxable year. Payments will be made using the Virginia Estimated Income Tax Vouchers (Form 500ES) for the corporate income tax.
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