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Utility Gross Receipts License Tax

Over the past several years it seems that gross receipts taxes have come into vogue.  Take, for example, Kentucky’s Limited Liability Entity Tax (the “LLET”), a tax based in large part on gross receipts that, absent an exemption, broadly applies to all corporations and limited liability pass-through entities doing business in the Commonwealth.  The LLET is of relatively recent vintage as the General Assembly enacted it in 2006 ostensibly to replace another tax, albeit an alternative one, the Alternative Minimum Calculation (the “AMC”) which was enacted in 2005.  It is quite fitting that these nouveau gross receipts taxes are typically referred to by their acronyms given that one of the Commonwealth’s more aged gross receipts taxes dates back to 1966, the Utility Gross Receipts License Tax, is also referred to by its acronym - UGRLT. 

A Little UGRLT History

The 1966 General Assembly, by enactment, made available the UGRLT method for the purpose of raising money for schools.  Now, in addition to the required ad valorem real property tax, local school districts have the “home rule” power to levy an occupational license tax, an excise tax and/or a UGRLT to generate school funds. 

Currently, most county-wide school districts impose a UGRLT on the furnishing of utility services within a school district pursuant to KRS 160.613 to KRS 160.617.  Kentucky’s most populous county, Jefferson, does not, however, impose a UGRLT.  Neither do the county-wide school districts of Allen, Floyd, Greenup, Hopkins, and Muhlenberg Counties. 

Prior to July 1, 2005, each School Board imposing a UGRLT administered and collected it.  But, the 2004 General Assembly enacted legislation that transferred administration of every School Board’s UGRLT to the Kentucky Department of Revenue thus centralizing collection of this tax.  UGRLT taxpayers must pay UGRLT and submit their returns to the Department electronically. 

The Imposition of UGRLT on Utilities and their Customers

The UGRLT is imposed at a rate not to exceed 3% of gross receipts derived within the taxing district from the furnishing of utility services, which is broadly defined by statute to include the furnishing of communications services, electric power, water, and natural, artificial, and mixed gas.  UGRLT is also levied on gross receipts from furnishing cable television services and effective July 1, 2005 was expanded to include the furnishing of direct satellite broadcast and wireless cable services (which has been challenged in court - more on this in a bit).  As its name implies, the UGRLT is imposed on companies that provide utility services – utility companies. 

The UGRLT does not apply to companies that are not utility companies.  Examples best illustrate this concept.  Take a seller of bottled gas, for instance; Kentucky’s Attorney General has opined that such a company is not a utility company.  See Ky. OAG 66-555 (Aug. 26, 1966).  Sellers of bottled mineral water and drinking water have likewise been determined to not be utility companies as have companies that place fuel oil in tanks in people’s yards for use in heating their home and that place drinking water in a cistern for home consumption.  See Ky. OAG 67-51 (Feb. 10, 1967).  It would seem that one key distinction between the sellers in these examples and utility companies may be that although the sellers vend utility-type products like gas and water, they do not furnish utility services. 

A utility company may increase its rates in any school district in which it must pay a UGRLT.  See KRS 160.617.  But, it must separately state the amount and identify it on the utility bills that is sends its customers.  Regardless of the availability of a utility rate increase, the Kentucky Supreme Court has held that UGRLT “is levied upon the utility company, not its customers….”  Luckett v. Electric & Water Plant Bd. of the City of Frankfort, 558 S.W.2d 611, 613 (Ky. 1977). 

That said, the UGRLT contains a second component – a use-type tax.  A customer of a utility, i.e., a user of a utility service, pays the UGRLT when a tax-exempt supplier furnishes utility services.  This is similar to Kentucky’s sales and use tax scheme in which a consumer is generally liable for use tax on a purchase of taxable tangible personal property when sales tax is not paid to the vendor. 

UGRLT Carve Outs

There are two primary carve outs from the UGRLT tax base – amounts received for furnishing utility services to be resold and amounts received for furnishing energy and energy-producing fuels used in manufacturing.  Both of these provisions are contained in KRS 160.613(1).  Notably, there are sales and use tax exemptions that parallel these two UGRLT provisions.  This is not surprising as a sales tax is very similar to a gross receipts tax. 

Gross receipts received for furnishing utility services that are to be resold are not subject to UGRLT.  So, for example, when Electric Company A sells electricity to Electric Company B and Electric Company B sells electricity to Widget Manufacturing Company, the sale from Electric Company A to Electric Company B is exempt from UGRLT because Electric Company B has purchased the electricity to resell it to Widget Manufacturing Company. 

There is also a UGRLT exemption for amounts for furnishing energy or energy producing fuels, used in the course of manufacturing, processing, mining, or refining to the extent the cost of the energy or energy producing fuels exceeds 3% of the cost of production.  Issues often arise in determining what costs and operations should be included in such an operation’s cost of production.  This has been the subject of litigation in the context of the parallel sales and use tax provision, KRS 139.480(3), which is at issue in Department of Revenue v. Rohm and Haas Co., No. 2008-CA-000022 (Ky. App. Feb. 6, 2009), which is pending at the Kentucky Supreme Court on a Motion for Discretionary Review. 

Legal Challenge to UGRLT on Satellite TV

As alluded to above, two of the largest suppliers of direct broadcast satellite (“DBS”) services, DirecTV, Inc. and Echostar Satellite, L.L.C., (the “DBS providers”) challenged the imposition of UGRLT on DBS services, arguing that the federal Telecommunications Act of 1996 bars local taxes on DBS programming services.  That Act contains a provision that preempts local taxes on direct-to-home satellite service: “Preemption.  A provider of direct-to-home satellite service shall be exempt from the collection or remittance, or both, of any tax or fee imposed by any local taxing jurisdiction on direct-to-home satellite service.”  Pub. L. No. 104-104, Title VI, § 602(a). 

The arguments in that case, DirecTV, Inc. v. Treesh, No. 2007-SC-000714 (Ky. June 25, 2009), centered upon whether or not the UGRLT was a local tax or a state tax.  The School Boards argued that the tax was a state tax because it was imposed by the School Boards which have long been considered in Kentucky to be “state” institutions.  But, the Kentucky Supreme Court looked beyond Kentucky jurisprudence on this issue and viewed the issue before it in the light of the federal preemption statute and held that the UGRLT “entails precisely the locality-by-locality administrative burdens Congress intended to preempt.”  Accordingly, it held that the UGRLT on DBS providers was preempted. 

Future Legislation?

Back in 2008, the General Assembly considered proposed legislation, 2008 H.B. 257, that would replace the UGRLT with a truly statewide UGRLT.  Given the holding in DirecTV, it would seem that it is possible that similar legislation could be proposed in 2010.  Keep an eye out. 

  • Partner

    As a Partner and Chair of the Firm’s Tax and Employee Benefits Department, Mark’s practice focuses on resolving clients’ state, local and federal tax issues through planning, audit management, administrative protest ...

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