SALES TAX EXEMPTION FOR HEATING FUELS - Virginia

EXECUTIVE SUMMARY: SALES TAX EXEMPTION FOR HEATING FUELS

JUNE, 2015 JOINT SUBCOMMITTEE TO EVALUATE TAX PREFERENCES

PREFERENCE:

Subsection 1 of ? 58.14-609.7 of the Code of Virginia.

SUMMARY:

Exempts the purchase of home heating fuels from sales and use tax.

REVENUE IMPACT:

The residential heating fuels sales tax exemption is estimated to reduce revenue by $33.4 million in Fiscal Year 2015.

JOINT SUBCOMMITTEE RECOMMENDATION:

The Joint Subcommittee did not make any formal recommendation regarding the preference.

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PREFERENCE REPORT: SALES TAX EXEMPTION FOR HEATING FUELS

JUNE, 2015 JOINT SUBCOMMITTEE TO EVALUATE TAX PREFERENCES

Preference Description

Subsection 1 of ? 58.14-609.7 of the Code of Virginia states that the sales and use tax does not apply to:

[a]rtificial or propane gas, firewood, coal or home heating oil used for domestic consumption. "Domestic consumption" means the use of artificial or propane gas, firewood, coal or home heating oil by an individual purchaser for other than business, commercial or industrial purposes. The Tax Commissioner shall establish by regulation a system for use by dealers in classifying individual purchases for domestic or nondomestic use based on the principal usage of such gas, wood, coal or oil. Any person making a nondomestic purchase and paying the tax pursuant to this chapter who uses any portion of such purchase for domestic use may, between the first day of the first month and the fifteenth day of the fourth month following the year of purchase, apply for a refund of the tax paid on the domestic use portion.

Although sales and use tax exemptions generally apply to both the state and local sales taxes, ? 58.1609.13 states that the exemption for home heating fuels does not apply to the local sales tax unless the locality chooses to exempt such by ordinance. The one exception is that imposition of the local tax is prohibited on heating fuels purchased by churches (i) that are tax-exempt under ? 501(c)(3) of the Internal Revenue Code or (ii) whose real property is exempt from local taxation.

Preference Purpose

There is no official statement of the purpose for exempting home heating fuels. It is likely that it relates to the fact that heating a home is considered a necessity, similar to medicines and food.

However, the broad exemption for all heating fuels likely arose from issues of fairness. Prior to enactment of this exemption, consumers of electricity or natural gas for home heating were not subject to the same tax burden as consumers of other heating fuels, due to an existing exemption for electricity, gas, and water delivered through mains and pipelines. The broader exemption for home heating fuels put all such fuels on equal footing.

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Legislative History & Background

The 1979 General Assembly established a joint subcommittee to study energy taxes paid by residential consumers and the tax inequities between the retail sales tax on fuel oil consumption and the applicable taxes on electricity and gas consumption. The exemption for home heating fuels, and the local option provision, were enacted in 1980 and effective beginning July 1, 1982.1 Other than an amendment prohibiting localities from imposing the tax on churches in 1985,2 the exemption has not been amended.

Revenue Impact

The residential heating fuels sales tax exemption is estimated to reduce revenue by $33.4 million in Fiscal Year 2015 and benefit 376,040 Virginia households. Taxpayers across all income groups benefit from the exemption, but lower income households benefit from a greater share of the overall tax savings. For example, households earning less than $50,000 per year make up 39% of Virginia households but account for an estimated 46% of the reduced tax liability.

1 Chapter 756 of the Acts of Assembly of 1980. 2 Chapter 88 of the Acts of Assembly of 1985.

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Residential Heating Fuels Exemption

Share of Tax Savings by Household Income

60%

Share of All Virginia Households

50%

Share of Reduced Tax Liability

40%

30% 20%

22% 18%

24% 21%

30% 29%

30% 25%

10%

0% Less than $25,000

$25,000 to $49,999

$50,000 to $99,999

Source: American Community Survey, U.S. Census Bureau, 2013

$100,000 and more

Other States

As shown in the chart below, 18 states tax heating fuels and 29 provide some type of exemption. In some states like Connecticut and Nebraska, the exemption also applies to the purchase of heating fuels by certain businesses as well as purchases for residential heating. There is some variation in the types of fuels exempt. For example, Rhode Island exempts all fuels used for residential heating and Massachusetts exempts solar, wind-power, and heat pumps used for residential heating. Utah taxes home heating fuels but at a reduced rate.

State AK AL AR AZ CA CO

Heating fuels N/A E T T T E

CT E

DC E

Comments N/A Exempt when otherwise taxed by motor fuels excise tax. N/A N/A N/A Gas, electricity, coal, fuel oil, and other energy sources are exempt from sales tax when sold for residential uses. Exempts fuel used for heating purposes in residences and certain manufacturing facilities. Sales of residential heating oil, residential natural or artificial gas and

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State

Heating fuels

DE N/A FL T

GA T

HI

T

IA

T

ID

E

IL

T

IN

T

KS T

KY E

LA E

MA E

MD E ME E

MI

E

MN E

MO E

MS E

MT N/A NC T ND E NE E

NH N/A NJ T NM T NV E NY E OH E OK T OR N/A PA E

RI

E

SC E

SD E

Comments residential electricity are exempt. N/A Household fuel; fuel for licensed day care centers; and boiler fuel for manufacturing. N/A N/A N/A Exemption applies to items used to produce heat by burning, including wood, coal, petroleum, and gas. N/A N/A N/A Natural gas classified for residential use is not subject to sales and use taxes. Excluded from tax are sales and purchases of fuel or gas, including but not limited to butane and propane. Exempts solar, wind-powered or heat pump systems for heating or energy for principal residence. State exempts wood, and refuse-derived fuel for heating An exemption applies to coal, oil, wood and all other fuels except gas and electricity, when bought for cooking and heating in residential buildings; an exemption applies to the sale and delivery of first 750 kilowatt hours of residential electricity per month; and an exemption applies to gas for cooking and heating in residential buildings (except hotels). The sale or consumption of electricity, natural gas, and home heating fuels for residential use is taxed at the reduced rate of 4%. State exempts residential heating fuels (oil, wood, steam, propane, gas, electricity). Sales of metered water service, electricity, electrical current, natural, artificial or propane gas, wood, coal or home heating oil for domestic use are exempt. sales to consumers for residential heating, lighting, or other residential noncommercial or nonagricultural use are exempt N/A N/A N/A Applies only to the heating fuel used to heat the portion of a facility that Is used in manufacturing or proecessing. N/A N/A N/A State exempts wood, coal, petroleum and gas for domestic heat. Home heating fuels are exempt. Sales of natural gas to consumers via pipes or conduits are exempt. N/A N/A State exempts steam, gas, electricity, bottled gas, fuel oil and kerosene for buyers own residential use. Every type of fuel used in the heating of homes and residential premises is exempt State exempts electricity, natural gas, fuel oil, LP gas, coal or other combustibles for residential heating. N/A

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