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BGE Sales Tax POR Filing Could Result in Suppliers Remitting More Tax than Received Under POR, PSC Staff Says

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December 14, 2010

Maryland PSC Staff have recommended deferring action on Baltimore Gas & Electric's revised electric Purchase of Receivables tariff, addressing tax issues, so that a working group may address several Staff concerns.  Staff is concerned that the filed tariff could allow BGE to earn an unintended profit, and Staff also raised logistical issues with respect to sales tax obligations for uncollectible accounts.

As only noted in Matters (11/8), BGE filed revisions to the electric POR tariff to reflect its current practice with respect to sales tax.  In cases of utility consolidated billing, the filed tariff provides that BGE will bill and collect sales tax from the customer and will remit the sales tax net of POR discount to the supplier.  The supplier is responsible for remitting all sales taxes on supplier charges to the state.  For dual billing, the supplier is responsible for collection of sales tax in addition to remittance.

Sales tax for electricity is not paid by residential customers.  Electricity used as an input in a manufacturing process is exempt from sales tax, and COMAR 03.06.01.10 provides additional exemptions from the sales tax on electricity.

"BGE is proposing to apply the discount rate to the sales tax portion of revenue meaning a Supplier would be required to remit to the State more than it receives from BGE for sales tax," Staff said.

"Depending on how the discount rate is determined, the sales tax revenue for BGE could allow the Company to earn an unintended profit.  POR revenue would not be considered electric distribution revenue by the Company in an electric distribution rate case," Staff said.

"It is possible that BGE is setting the discount rate to account for the sales tax revenue it receives.  This would mean that the Company would only be collecting the appropriate amount of revenue if the discount rate is applied to the full amount billed by the Supplier, including sales tax.  However, even if the discount rate does factor in sales tax revenue, applying it to the sales tax portion of the bill, it may not be appropriate," Staff continued.  

"This is because ultimately sales tax is an obligation of the customer not the Supplier.  Based on a discussion with the Office of the Comptroller, Staff believes that if a vendor is unable to collect payments from a customer and ultimately writes the services provided to that customer off as a loss, that vendor would be entitled to a sales tax credit.  This credit would essentially refund any sales tax paid that the vender was unable to collect from the customer.  If there is no obligation to pay sales tax on uncollectible amounts, the discount rate, which includes an uncollectible component, should not apply to sales taxes. Applying the discount rate to sales taxes assumes that sales tax is owed by the vendor whether a customer pays or not and leads to higher costs for Suppliers that could ultimately result in higher prices to customers.  Additionally, it is unclear to Staff under POR how the Supplier or utility would receive sales tax credits from the State as the procedure used by Suppliers to remit sales tax is not known," Staff said.

Staff recommended that the tariff be suspended to allow the supplier coordination working group to address the issue, and develop uniform sale tax policies for all of the state's POR programs.  Staff noted that under BGE's gas tariff, BGE, and not the Supplier, is responsible for remitting sales tax to the state.  "This policy would simplify the issues discussed above and could potentially offer a better solution than the Company's proposal," Staff said.

Staff said that the following issues need to be resolved before the Commission determines how sales taxes should be paid under POR:

1. How does the discount rate account for sales tax revenue and is this uniform across all utilities?

2. Are uncollected sales tax revenues included in uncollectibles for the purpose of calculating the discount rate?

3. Under POR how can suppliers or utilities receive sales tax credits when customers do not pay their bills?

4. Is it possible to require utilities to be responsible for remitting sales tax rather than Suppliers, and what actions would need to be taken to make that required?


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