In 2015, the Tax Court of Indiana ruled that sewer system development charges and connection fees that are paid by a developer or builder and not by the retail customer are not gross receipts subject to the utility receipts tax (URT). Hamilton Southeastern Utils., Inc. v. Indiana Dept. of State Revenue, 40 N.E.3d 1284 (Ind. Tax 2015). The Indiana Department of State Revenue completed an audit of Hamilton Southeastern Utilities, Inc. proposing URT assessments on receipts from sewer system development charges and connection fees. Hamilton Southeastern protested, and after an administrative hearing denied the protest, Hamilton Southeastern appealed.
In determining that the sewer system development charges and connection fees paid by a developer or builder and not by the retail customer were not subject to the URT, the court examined I.C. 6-2.3-1-4 and I.C. 6-2.3-3-10. Under I.C. 6-2.3-1-4, the court determined that ‘utility services for consumption’ simply refers to the removal of sewage and does not give indication of a broader definition. The Department of State Revenue argued that because the fees are necessary, they should be included in the URT; however, the court found that was not grounded in the words of the statute. Under I.C. 6-2.3-1-10, gross receipts “are: 1) received for an enumerated service, 2) the enumerated service is provided to a consumer, and 3) the enumerated service is directly related to the delivery of utility services to the (same) consumer.” At 1288 (emphasis in original). In the case of system development and connection fees, the charges are not paid by the retail consumer, but by the developer and builder.
The court granted summary judgment to Hamilton Southeastern under I.C. 6-2.3-1-4 and I.C. 6-2.3-1-10, but decided the issue of needing to separate receipts on records and returns of the taxpayer under I.C. 6-2.3-3-2 separately. Later, the court determined that the system development and connection fees were separated from the taxable receipts in accordance with the statute. Hamilton Southeastern Utils., Inc. v. Indiana Dept. of State Revenue, Cause No. 49T10-1210-TA-00068 (Ind. Tax April 29, 2016). Although Hamilton Southeastern did not report the amount of fees that was not required – simply separating the fees from the taxable receipts was sufficient. This was accomplished by only reporting the taxable receipts.
Although these cases involve sewer service, other utility providers such as electric, natural gas, and water utilities all collect contributions in aid of construction (“CIAC”) for the extension of new facilities, and often times, the CIAC is paid by a developer. Under I.C. 6-2.3-1-4, ‘utility services for consumption’ simply refers to the basic service of the utility, i.e. the furnishing of electrical energy, natural gas, or water. Following the Hamilton Southeastern decisions, electric, natural gas, sewer and water utilities should keep track of CIAC paid by a develop or builder separately from CIAC paid by an end-use retail consumer for purposes of reporting gross receipts under I.C. 6-2.3-1-10.
Erin Borissov is a partner in the law firm of Parr Richey Frandsen Patterson Kruse, LLP with offices in Indianapolis and Lebanon, Indiana. She advises utilities and business clients in the areas of utility regulatory law, electric cooperative law, easement and right-of-way law, commercial transactions, corporate governance, and corporate compliance.
The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.