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American Electric Power Service Corporation v. Commonwealth

Commonwealth Court of Pennsylvania

May 4, 2017

American Electric Power Service Corporation, Petitioner
Commonwealth of Pennsylvania, Respondent

          Argued: April 6, 2017




         American Electric Power Service Corporation (AEPSC) seeks review of the Board of Finance and Revenue (Board) order finding that under the Tax Reform Code of 1971 (Tax Code), [1] it was subject to the utilities gross receipts tax (GRT) and that its sales of electricity to the Letterkenny Industrial Development Authority (LIDA) did not qualify for the resale exemption because LIDA was not a political subdivision.

         The provision of the Tax Code that imposes a tax on gross receipts received from the sale of electric energy within the Commonwealth is Section 1101(b), 72 P.S. § 8101(b). That provision also specifies what entities are subject to the tax and what transactions are excluded from the gross receipt calculation. It provides:

(b) Electric Light, Waterpower and Hydro-electric Utilities.--Every electric light company, waterpower company and hydro-electric company now or hereafter incorporated or organized by or under any law of this Commonwealth, or now or hereafter organized or incorporated by any other state or by the United States or any foreign government and doing business in this Commonwealth, and every limited partnership, association, joint-stock association, copartnership, person or persons, engaged in electric light and power business, waterpower business and hydro-electric business in this Commonwealth, shall pay to the State Treasurer, through the Department of Revenue, a tax of forty-four mills upon each dollar of the gross receipts of the corporation, company or association, limited partnership, joint-stock association, copartnership, person or persons, received from:
(1) the sales of electric energy within this State, except gross receipts derived from the sales for resale of electric energy to persons, partnerships, associations, corporations or political subdivisions subject to the tax imposed by this subsection upon gross receipts derived from such resale. . . .

72 P.S. § 8101(b). (Emphasis added.)

         Under this provision, "electric light companies" and any person "engaged in [the] electric light and power business" are subject to the tax. It also takes out of gross receipts sales for resale made to, among others, political subdivisions. The Tax Code does not define the terms "electric light company, " "electric light and power business" or "political subdivision." Now to the underlying facts as stipulated by the parties.


         AEPSC, a New York corporation having its principal office in Columbus, Ohio, makes wholesale sales of electricity to customers located in Pennsylvania. It is not a public utility and does not hold a license from the Public Utility Commission (PUC), but AEPSC is regulated by the Federal Energy Regulatory Commission (FERC) as a wholesale seller of electricity. AEPSC first began making wholesale sales to LIDA in 2009.

         LIDA was formed in 1997 under Pennsylvania's Economic Development Financing Law (EDFL)[2] when the Letterkenny Army Depot (Depot) was closed by Franklin County. An industrial development authority created under the EDFL is described as "a public instrumentality of the Commonwealth and a public body corporate and politic. . . ." Section 6(a) of the EDFL, 73 P.S. § 376(a). LIDA is governed by a 15-member board of directors appointed by the Franklin County Commissioners.

         After LIDA was created, it assumed control of the Depot's Electrical Distribution System (EDS). It purchases power as a wholesale customer from a third-party wholesale supplier and then sells that electricity to the customers in the Cumberland Valley Business Park (Business Park), which LIDA developed, as well as to the Army for use in its retained industrial area.[3] LIDA contracts with Allegheny Power to operate and maintain the EDS and bill LIDA's customers.

         Two years before AEPSC began making wholesale sales to LIDA, Sandra Keller, AEPSC's Tax Counsel, had a telephone conversation with Gary Meredith of the Department of Revenue's Corporate Tax Division concerning the resale exemption to GRT and AEPSC's sales to municipalities. Mr. Meredith told Ms. Keller that all sales made to municipalities should be reported on AEPSC's GRT Report as exempt unless the municipality itself consumes the electricity. See 1101(b)(1) of the Tax Code, 72 P.S. § 8101(b)(1). AEPSC then filed a GRT Report for 2010 reflecting its sales to LIDA and the Borough of Pitcairn (Pitcairn), another of its customers, [4] but claimed the gross receipts from those sales were non-taxable because they were sales for resale. However, neither LIDA nor Pitcairn filed, reported or paid GRT on the electric energy they purchased from AEPSC in 2010.[5]

         The Department of Revenue (Revenue) found the resale exemption did not apply and assessed GRT on AEPSC's receipts from sales to LIDA, increasing AEPSC's 2010 GRT liability from $0 to $380, 546.[6] AEPSC appealed the assessment to the Board of Appeals, and when it denied relief, appealed to the Board. AEPSC argued that it was not subject to GRT because it was not an electric light company as it did not sell electricity at retail, i.e., to end-use purchasers. In the alternative, AEPSC argued that it was entitled to the resale exemption for the sales for resale to Pitcairn and LIDA.

         The Board found that AEPSC was subject to GRT, but found that it should have received the resale exemption for receipts from sales to the Borough of Pitcairn because Pitcairn is a municipality. However, the Board found AEPSC was correctly denied a resale exemption for sales to LIDA because LIDA was not a political subdivision and there was no evidence that LIDA reported GRT to the Commonwealth for the relevant time period. The Board then recalculated AEPSC's total GRT liability to $342, 744. This appeal followed.[7]


         AEPSC acknowledges that it would have been subject to GRT under Section 1101(b) of the Tax Code, 72 P.S. § 8101(b), if it had been allowed to sell electricity prior to deregulation. It contends, however, that modifications to that provision by the Electricity Generation Customer Choice and Competition Act (Competition Act)[8] made it not subject to the tax.

         By way of background, prior to 1996, only public utilities were allowed to sell electricity in Pennsylvania. In that year, the Competition Act was passed to encourage a more competitive marketplace for electricity sales and to provide cost savings to consumers. Spectrum Arena Limited Partnership v. Commonwealth (Spectrum I), 921 A.2d 585, 586 (Pa. Cmwlth. 2007), aff'd, 983 A.2d 641 (Pa. 2009) (Spectrum II). It allowed consumers to purchase electricity from any supplier and have that electricity delivered by the local utility in their area. Spectrum I, 921 A.2d at 586. Companies that were not public utilities, like AEPSC, were now allowed to make sales of electricity.

         Because this unbundling of the purchase of electricity from the distribution of electricity had tax revenue consequences, the Competition Act modified the Tax Code in several ways. To ensure that deregulation of electric utilities did not adversely affect overall tax revenues, the General Assembly also adopted the revenue-neutral reconciliation (RNR) formula as part of the Competition Act to recoup any losses caused by the restructuring of the electric industry. Spectrum I, 921 A.2d at 587 (citing 66 Pa. C.S. § 2810(a)). "By utilizing the RNR formula, the General Assembly ensured that the Commonwealth could collect the same level of revenue that was collected prior to the passage of the Competition Act." Spectrum II, 983 A.2d at 646.



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