DIRECTIVE


Subject: Piped Natural Gas
Tax: Sales & Use Tax
Statutes: G.S. 105-164.3(20) and (25), 105-164.4(a), 105-164.13(3), and Chapter 22 of the 1998 Session Laws
Issued By: Sales and Use Tax Division
Date: July 10, 1998
Number: SD-98-3

This Directive replaces the Division's May 5, 1998 Directive SD-98-2 on piped natural gas. Since the Division issued that directive, the General Assembly enacted Senate Bill 1327 as Chapter 22 of the 1998 Session Laws. That act makes two significant changes to the application of sales and use tax to piped natural gas. First, for the period July 1, 1998 through June 30, 1999, the act limits the sales and use tax on piped natural gas to sales by a regulated utility, thereby exempting sales by a gas city or by a gas marketer for this period. Second, effective July 1, 1999, the act repeals the sales and use tax on piped natural gas and replaces it with a new excise tax on piped natural gas. A future directive will give information on the new excise tax. This directive incorporates the changes made by Session Law 98-22.

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 law. 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.

Effective July 1, 1998, Chapter 22 of the 1998 Session Laws exempts from sales and use tax the sale of piped natural gas by a person who is not subject to the franchise tax levied under G.S. 105-116. The tax imposed by G.S. 105-116 applies only to utilities regulated by the North Carolina Utilities Commission. Gas cities, gas marketers, and producers are not subject to that franchise tax and their sales of piped natural gas are therefore exempt from sales tax.

Sales of piped natural gas by a regulated utility are subject to sales and use tax at the rate of either 3% or 2.83%. Under G.S. 105-164.4(a)(1f), the rate of 2.83% applies to sales to the farmers, manufacturers, and laundries described in that subdivision. Under G.S. 105-164.4(a)(4a), the rate of 3% applies to all other sales of piped natural gas by a regulated utility. 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
Sales of piped natural gas by a producer have a double exemption from sales and use tax. Piped natural gas is exempt under G.S. 105-164.13(3) when sold as a product of the mine in its original or unmanufactured state by the producer in the capacity of producer. Effective July 1, 1998, Chapter 22 of the 1998 Session Laws also exempts sales by a producer because the producer is not subject to the franchise tax imposed by G.S. 105-116.

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. Until July 1, 1999, 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. Effective July 1, 1999, the sales tax is repealed and replaced with the new excise tax on piped natural gas imposed by Article 5E of Chapter 105 of the General Statutes, enacted by Chapter 22 of the 1998 Session Laws.

Section IV. Sales By A Gas City
Effective July 1, 1998, Chapter 22 of the 1998 Session Laws exempts from sales and use tax sales of piped natural gas by a gas city. The gas cities are Bessemer City, Greenville, Kings Mountain, Lexington, Monroe, Rocky Mount, Shelby, and Wilson. These eight cities are the only cities in this State that operate piped natural gas distribution systems. Therefore, all sales of piped natural gas by cities are currently exempt from sales and use tax.

Absent the exemption in Chapter 22 of the 1998 Session Laws, sales by a gas city would be subject to tax. The sale of piped natural gas by a municipality that meets the definition of "utility" in G.S. 105-164.3(25) would be 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 would be subject to the combined 6% State and local sales and use tax. These tax rates would apply unless the lower State rate of 2.83% applied.

Section V. Sales By A Natural Gas Marketer
A natural gas marketer is a piped natural gas retailer that is not a utility and is not subject to the franchise tax imposed by G.S. 105-116. Effective July 1, 1998, Chapter 22 of the 1998 Session Laws exempts from sales and use tax sales of piped natural gas by natural gas marketers. Absent this exemption, the sale of piped natural gas by a natural gas marketer would be subject to the combined 6% State and local sales and use tax unless the lower State rate of 2.83% applied.

Section VI. Purchases From A Seller Who Is Not Required To Collect Sales Tax
Effective July 1, 1998, Chapter 22 of the 1998 Session Laws exempts from use tax the purchase of piped natural gas for storage, use, or consumption in this State from a natural gas marketer who is not required to collect sales and use tax. Prior to July 1, 1998, a person who purchased piped natural gas for storage, use, or consumption in this State from a natural gas marketer who was not required to collect sales tax on the sale was subject to a use tax on the purchase under G.S. 105-164.6. The use tax was the applicable percentage of the cost price of the gas, which included transportation charges. The applicable percentage was 6% unless the purchaser was a farmer, a manufacturer, or a laundry described in G.S. 105-164.4(a)(1f), in which case the applicable percentage was 2.83%. A purchaser who was liable for the tax was required to file reports with the Department reflecting the purchases and remit the use tax due on the purchases.