August 21, 2008
STATE FUEL AND PETROLEUM PRODUCTS TAXES AND TAX EXEMPTIONS
By: Judith Lohman, Chief Analyst
You asked the several questions about state taxes on, and tax exemptions for, fuel and other petroleum products. Questions and answers appear separately below.
WHY IS COMMERCIAL HEATING OIL SUBJECT TO STATE SALES TAX?
Sale of heating fuel is currently exempt from the sales tax only if it is used in a residential dwelling or if at least 75% of the fuel for any building, location, or premise is used directly (1) in agricultural production, (2) for fabricating finished products for sale, or (3) in an industrial manufacturing plant (CGS § 12-412 (16)). Thus, sale of any other heating oil for commercial purposes is subject to sales tax.
The General Assembly first enacted the state sales tax in 1947. The original sales tax law exempted sales of fuel used exclusively for domestic purposes from the tax. Thus, the original 1947 sales tax applied to sales of fuel for commercial and industrial purposes (§ 334i (p), 1947 Supplement to the Connecticut General Statutes).
In 1971, the General Assembly specified that sale of gas and electricity, as well as fuel, for domestic purposes was tax-exempt (PA 8, June 1971 Special Session, § 7).
In 1974, the General Assembly limited the exemption to heating fuel but expanded the heating fuel exemption to cover commercial and industrial as well as domestic uses. It also eliminated the 1971 references to gas and electricity from the heating fuel exemption (these fuels were and still are covered by other exemptions), thus limiting the exemption to heating oil (PA 74-4)
The General Assembly enacted the current law in 1989, as part of a massive $684 million emergency certified revenue bill (SB 1068, PA 89-251). The bill contained extensions and increases in many state taxes and fees, including an increase in the sales tax rate from 7.5% to 8%. One part of the bill limited the heating fuel exemption to residential dwellings and to agricultural, manufacturing, and industrial buildings. In summarizing the bill on the Senate floor, the Finance Committee's co-chairperson, Senator DiBella, mentioned that it contained “a tax on business utilities, including oil and excluding the manufacturing process,” which was expected to raise $75 million. An amendment to eliminate the change along with several other tax increases (Senate “F”) was defeated by a vote of 15 to 21 (Senate Proceedings, May 25, 1989).
WHAT TYPES OF FUEL AND PETROLEUM PRODUCTS OR TYPES OF USES FOR SUCH PRODUCTS ARE SUBJECT TO AND EXEMPT FROM STATE SALES AND FUEL TAXES?
Connecticut has four state taxes that apply to some or all types of fuel (petroleum fuels, electricity, and natural gas) or petroleum products. These taxes are the (1) sales tax, (2) motor vehicle fuels tax, (3) petroleum products gross earnings tax, and (4) public service company tax. For each tax, we show below the types of goods or situations to which they generally apply followed by a list of the fuels or petroleum products or uses that are exempt from each one. Products or uses not specifically exempted are taxable.
Sales tax applies to retailers' gross receipts from (1) the sale of tangible personal property at retail (including fuel and petroleum products), (2) renting or leasing tangible personal property, or (3) rendering specified services. The general tax rate is 6%. The table below shows the fuel-related sales tax exemptions. Only statutory exemptions that expressly mention either “fuel” in general or a particular type of fuel, such as gas or electricity, are listed.
TABLE 1: SALES TAX EXEMPTIONS FOR FUEL
Gas or electricity for residential use or for direct use in (a) agricultural production, (b) making a finished product for sale, and (c) use in a manufacturing plant (§ 12-412 (3) (A))
If not otherwise exempt under the above provision, $150 of electricity service per month (§ 12-412 (3) (D))
Gas or electricity directly used to furnish gas, water, steam, or electricity delivered to customers through mains, lines, or pipes (§12-412 (3) (E))
Motor vehicle fuel (a) used in vehicles licensed to operate on a public highway or (b) for any other use, if state motor fuel tax has been paid and not refunded under Chap. 221 (see motor fuels tax refunds below) (§ 12-412 (15))
Fuel used for heating in a residential dwelling or in any building or other location used (a) for agricultural production, (b) for making a finished product for sale, or (c) as a manufacturing plant (§12-412 (16))
Fuel to be used directly (a) in the fishing industry; (b) as a component or ingredient in making a finished product for sale; (c) in furnishing power to a manufacturing plant; or (d) to deliver gas, water, steam, or electricity to customers through mains, lines, or pipes (§12-412 (18))
Fuel for high-occupancy commuter vehicles (§12-412 (37))
Aviation fuel used exclusively and directly in the experimental testing of any product (§12-412 (59))
Aviation fuel used exclusively for aviation purposes (§12-412 (75))
Fuel for an aircraft manufacturing facility (§12-412 (78))
Marine fuel for vessels with displacements greater than 4,000 deadweight tons or primarily engaged in interstate commerce (bunker fuel oil, intermediate fuel, marine diesel oil, and marine gas oil) (§12-412 (79))
Fuel used directly in the biotechnology industry (§12-412 (89))
Diesel fuel used exclusively in portable generators larger than 150 kilowatts (§ 12-412 (107))
Fuel used in a fuel cell manufacturing facility (§12-412 (113))
50% exemption for fuel used as an ingredient or component part of tangible personal property that will be used or consumed in manufacturing or producing products for sale (§ 12-412i)
Motor Vehicle Fuels Tax
The motor vehicle fuels tax applies to motor vehicle fuel used or sold in Connecticut. The current per-gallon tax is 25¢ for gasoline and gasohol; 43.4¢ for most diesel fuel; and 26¢ for natural gas, propane, and any diesel fuel sold exclusively for use in portable power generators larger than 150 kilowatts. Exemptions and exclusions are shown in Table 2A. Fuel uses eligible for motor fuel tax refunds are shown in Table 2B.
TABLE 2 A: MOTOR FUELS TAX EXEMPTIONS AND EXCLUSIONS
(§§ 12-455A (C) AND 12-458)
Fuel for aircraft, motorboats, road rollers, baggage trucks used in railroad stations, electric battery-operated wheelchairs operated by a physically handicapped person at speeds of 15 mph or under, agricultural tractors, farm implements, and vehicles that run only on rails or tracks
Fuel for a Connecticut motorbus company deriving at least 75% of its revenue from operation in Connecticut
Fuel sold to the U.S. government
Fuel used by a contractor performing services for a municipality under a contract
Fuel sold to municipalities, transit districts, or the state for use in vehicles owned or leased and operated by them
Fuel sold for use in a school bus
Fuel sold to licensed fuel distributors
Fuel transferred from storage in the state to a location outside the state
Fuel used for farming by a farmer with a farming sales tax exemption permit
Fuel for industrial fabrication or the fishing industry
Compressed natural gas, liquefied petroleum gas, and liquefied natural gas (exemption expired 7/1/08)
Fuel to furnish gas, water, steam, or electricity delivered through pipes, mains, or lines
Fuel for aviation purposes sold to an aircraft owner or operator or to a licensed dealer with a business location on an established airport in Connecticut
Diesel sold exclusively for use in portable power generators larger than 150 kilowatts
TABLE 2 B: MOTOR FUEL TAX PAYMENTS ELIGIBLE FOR REFUNDS
Fuel used in vehicles, other than farming vehicles, not licensed or required to be licensed to operate on public highways (refund is limited to 26¢ per gallon - § 12-458h (c))
Fuel used by Connecticut motorbus companies
Fuel used by licensed livery services
50% refund for fuel used by taxicabs, airport livery services, and airport motorbuses
Fuel used in hospital-owned ambulances
Fuel used in ambulances owned by nonprofit civic groups
Fuel used in high-occupancy motor vehicles
Fuel used by Meals on Wheels programs
Fuel used by the U.S. government
Fuel used in any school bus
Fuel used by the state, a municipality, or a transit district
Fuel used in farming
Fuel used by a contactor to haul waste for the Connecticut Resources Recovery Authority's Mid-Connecticut plant
Petroleum Products Gross Earnings Tax
This tax applies to gross earnings of companies distributing petroleum products in Connecticut. The tax is 7% of the revenue from the first sale of a taxable petroleum product in the state. Petroleum products are those that contain or are made from petroleum or a petroleum derivative, including gasoline, aviation fuel, kerosene, benzol, distillate fuels, residual fuels, and crude oil. Petroleum derivates include paint, detergents, antiseptics, fertilizers, nylon, asphalt, and plastics. Exemptions are listed in Table 3.
TABLE 3: PETROLEUM PRODUCTS GROSS EARNINGS TAX EXEMPTIONS
(§12-587, 2008 SUPPLEMENT TO THE GENERAL STATUTES)
Petroleum products sold for export out of state
#2 heating oil used for heating
#2 heating oil used in commercial fishing vessels
Kerosene used for residential heating
Propane gas used for heating
Bunker fuel oil, intermediate fuel, marine diesel oil, and marine gas oil used in vessels displacing more than 4,000 dead weight tons
Propane gas used as motor vehicle fuel (expired 7/1/08)
# 6 fuel oil used by manufacturers
# 2 heating oil used in vessels primarily engaged in interstate commerce
Paraffin and microcrystalline waxes
Petroleum products used in fuel cells
Commercial heating oil blends containing at least 10% alternative fuel derived from agricultural produce, food waste, waste vegetable oil, or municipal solid waste including biodiesel and low-sulfur-dyed diesel
Diesel fuel other than diesel fuel used in an electric generating facility
Public Service Company Tax
The tax applies to gross earnings from sales by gas, electric, and power companies and electric distribution companies. Tax rates are:
1. for gas, electric and power companies, 4% on earnings from sales to residential customers and 5% for all other sales and
2. for electric distribution companies, 6.8% on earnings for sales to residential and 8.5% on sales to nonresidential customers other than manufacturers.
Fuel-related public service company tax exemptions are shown in Table 4.
TABLE 4: PUBLIC SERVICE COMPANY TAX EXEMPTIONS FOR FUEL
Sales for resale of steam, gas, and electricity to public service corporations and municipal utilities
Natural gas sold to out-of-state users or entities
Gas and electric sales to manufacturers
Gas company sales of natural gas or propane for motor vehicle fuel (expired 7/1/08)
Retail sales of steam
Sale of natural gas to an existing combined cycle generating plant consisting of three gas turbines with a total generating capacity of 775 MW and used to generate electricity
IS SALES TAX PAID ON HEATING OIL FOR COMMERCIAL USE A DEDUCTIBLE BUSINESS EXPENSE FOR PURPOSES OF CALCULATING THE FEDERAL AND STATE CORPORATION TAX LIABILITY?
This response provides general information. It does not purport to determine the tax deductibility of any particular expense in any particular case.
General Rule for Deducting Certain Taxes as a Business Expense
Connecticut fuel and sales taxes are not separately deductible, but they can be included as part of the cost of the fuel or item purchased. This means that if the fuel or item purchased is deductible as a business expense, so are the taxes the business paid when buying it.
According to the IRS publication on Business Expenses (Publication 535), businesses may generally deduct ordinary and necessary expenses paid or incurred in a tax year in carrying on a trade or business. As long as state and local taxes are directly attributable to a trade or business, they are deductible business expenses. According to the IRS publication:
1. excise taxes are deductible if they are an ordinary and necessary part of carrying on the taxpayer's trade or business;
2. fuel taxes (taxes on gasoline, diesel fuel, and other motor fuels used in a business) can be included in the cost of the fuel and deducted as part of deductible fuel expenses; and
3. sales taxes are deductible when the services or goods to which they apply are a deductible business expense, in which case the tax is considered part of the cost of those goods or services.
These deduction provisions apply whether the business is a corporation subject to separate corporation taxes or a pass-through entity whose members or partners are subject to federal and state personal income taxes on the business' income.
Federal and State Corporation Tax Deductions
The federal corporation tax is based on a business' taxable income, which is the difference between its total income and its total allowable deductions. Connecticut's corporation tax requires a business to calculate its tax liability in two ways and then pay the higher of the two. One method is based on the company's net income and the other on the company's so-called “capital base,” which is the sum of its outstanding stock, profits, and reserves. The net income method uses the federal taxable income as its starting point and therefore incorporates most federal income definitions, deductions, rules, and exclusions. The capital base method incorporates profits, which also takes account of federal deductions. Thus, a federally deductible expense is already incorporated into Connecticut's corporation tax calculation without requiring a separate state deduction. (OLR Report 2003-R-0397 provides a general description of the federal and state corporation tax calculations if you need a fuller explanation.)