DIRECTIVE


Subject: Piped Natural Gas
Tax: Sales & Use Tax
Statutes: G.S. 105-164.3(20) and (25), 105-164.4(a), and 105-164.13(3)
Issued By: Sales and Use Tax Division
Date: May 5, 1998
Number: SD-98-2

This Directive sets out the Department's interpretation of the application of sales and use tax to sales of piped natural gas by a producer, a utility company, a municipality, and a natural gas marketer and to purchases of piped natural gas by a person from a seller who is not required to collect sales tax on the sale. Section I explains the law. Sections II and III reflect the Department's current administrative practice. Sections IV and V differ from the Department's past administrative practice. Section VI follows the current administrative practice in the application of tax but differs in the rate that applies. The changes become effective July 1, 1998.

If you have a question about this Directive, you may write to the Sales and Use Tax Division of the North Carolina Department of Revenue at P.O. Box 871, Raleigh, N.C., 27602-0871. You may also call the Division at (919) 733-2151.

Section I. The Law
Piped natural gas is tangible personal property and its retail sale is therefore subject to sales or use tax unless specifically exempted by statute. G.S. 105-164.3(20) defines tangible personal property as "property that may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses" (emphasis added). Piped natural gas is weighed or measured when transported, is sold in therms, and is perceptible to the sense of smell.

The general 4% State and 2% local sales and use tax rates apply to the sale of taxable tangible personal property unless G.S. 105-164.4(a) sets a different rate of tax. G.S. 105-164.4(a)(4a) sets the State rate at 3% for sales of piped natural gas by a utility, and G.S. 105-164.4(a)(1f) sets the State rate at 2.83% for sales of piped natural gas by any retailer to the farmers, manufacturers, and laundries described in that subdivision. Piped natural gas taxed at the State rate of 3% or 2.83% is not subject to local sales and use tax.

Section II. Sales By A Producer
G.S. 105-164.13(3) exempts from sales and use tax "[p]roducts of forests and mines in their original or unmanufactured state when such sales are made by the producer in the capacity of producer." Therefore, piped natural gas sold by a producer in the capacity of producer is exempt from sales and use tax.

Section III. Sales By A Utility Company
A utility, as defined in G.S. 105-164.3(25), includes a gas company that is subject to the franchise tax levied under G.S. 105-116. The 3% State tax levied in G.S. 105-164.4(a)(4a) on the gross receipts derived by a utility from sales of piped natural gas therefore applies to a utility company that is subject to tax under G.S. 105-116. A utility company must collect and remit this 3% tax on its gross receipts derived from sales of piped natural gas unless the lower rate of 2.83% applies.

Section IV. Sales By A Municipality
The sale of piped natural gas by a municipality that meets the definition of "utility" in G.S. 105-164.3(25) is subject to the 3% tax imposed by G.S. 105-164.4(a)(4a) on the gross receipts derived by a utility from sales of piped natural gas and the sale of piped natural gas by a municipality that does not meet the definition of utility is subject to the combined 6% State and local sales and use tax. The definition of "utility" includes a municipality that sells electric power. Therefore, the sale of piped natural gas by a municipality that also sells electric power is subject to the 3% State tax and the sale of piped natural gas by all other municipalities is subject to the combined 6% tax. These tax rates apply unless the lower State rate of 2.83% applies. A municipality must therefore collect and remit to the Department the applicable tax on its sales of piped natural gas.

The Department previously construed the statutes to exclude all sales of piped natural gas by municipalities from sales and use tax. Upon further review, the Department concluded that this interpretation was not supported by the statutes. The sales tax statutes contain no exemption for sales of piped natural gas by municipalities.

Section V. Sales By A Natural Gas Marketer
A natural gas marketer is a piped natural gas retailer that is not a utility. The sale of piped natural gas by a natural gas marketer is subject to the combined 6% State and local sales and use tax unless the lower State rate of 2.83% applies. A natural gas marketer that is engaged in business in this State must therefore collect and remit to the Department the applicable tax on its sales of piped natural gas.

The Department previously construed the statutes to exclude all sales of piped natural gas by natural gas marketers from sales tax. As with municipalities, however, upon further review it was determined that this interpretation was not supported by the statutes.

Section VI. Purchases From A Seller Who Is Not Required To Collect Sales Tax
A person who purchases piped natural gas for storage, use, or consumption in this State from a person who is not required to collect sales tax on the sale is subject to a use tax on the purchase under G.S. 105-164.6. The use tax is the applicable percentage of the cost price of the gas, which includes transportation charges. The applicable percentage is 6% unless the purchaser is a farmer, a manufacturer, or a laundry described in G.S. 105-164.4(a)(1f), in which case the applicable percentage is 2.83%. A purchaser who is liable for the tax must file reports with the Department reflecting such purchases and remit the use tax due thereon.