Got into an interesting debate with a Kentucky Department of Revenue agent about whether sales tax applies to the demand charge portion of a commercial electric bill. In Kentucky, sales tax applies to the retail sale of electricity. The question is whether the demand charge constitutes a sale of electricity or a service charge. After some back and forth they confirmed that in Kentucky, sales tax applies to the total bill including demand charges. But I have heard it is different in other states. Anyone have experience with this?
Does sales tax apply to demand charges? Depends where you are
In Connecticut, sales tax on utility bills is applied to the total bill including demand and all surcharges. Eversource does not break it out differently. However, there was a brief period around 2011 where certain renewable energy surcharges were exempt from sales tax and Eversource was applying tax to them anyway. Found about $3K in refunds on a large commercial account from that.
Texas is different — the sales tax exemption for manufacturing applies to the total bill including demand charges, but for partially exempt accounts (where only part of the usage is for manufacturing) you have to prorate the exemption based on the manufacturing percentage. Some utilities in Texas apply the exemption only to the energy charge and not the demand charge, which is incorrect. Found this error on a food processing plant in Houston — they had the manufacturing exemption on file but the utility was still taxing the demand charges. Refund was $22K.
Amir that is a great catch. So the takeaway is that even if the exemption is on file, you need to verify it is being applied correctly to ALL applicable line items. Adding that to my checklist.