SD25 - The Taxation of Public Service Corporations

  • Published: 1987
  • Author: General Assembly. Joint subcommittee
  • Enabling Authority: Senate Joint Resolution 135 (Regular Session, 1985)

Executive Summary:
The joint subcommittee's charge has been to undertake a two-year study of the tax structure of the "telecommunications industry and other public service corporations in light of federal deregulation, increased competition and technological change."

The joint subcommittee has examined the existing tax structure of public service corporations in Virginia and found that the gross receipts tax has been utilized since the late 1800's, and has undergone a great deal of tax rate changes, but there seems to be little rationale for why the rates are at the current levels, why utilities are taxed in the way they are, and why different types of utilities are subject to different gross receipts tax rates.

The joint subcommittee has reviewed the Mathews Commission Report on public service corporation taxation of 1976 and studied the legislation which was adopted subsequent to that study, which provided for the equalization and a five-year rollback in the gross receipts tax rates imposed on public service corporations. As the joint subcommittee has seen, public service corporations are approximately 3/4 of the way through their scheduled rate rollback, which were due to be completed in 1983. The rollback is currently in its fourth freeze and under the existing statutes they will be completed in 1989 for electric, light and power companies and in 1990 for telephone companies.

The joint subcommittee has also examined Virginia's public service corporation tax structure and compared it to that of the other southern states. The joint subcommittee found that there is little pattern in how other southern states tax public service corporations. The joint subcommittee found that most states impose a corporate income tax on public service corporations (12 of 14) while 10 of the 14 states impose a gross receipts tax. Eight states impose both a corporate income tax and a gross receipts tax on utilities. A number of states have a partial sales tax on some utility service with most of these states exempting residential use. Very few states impose the sales tax on all types of utility services. Very few states allow localities to impose a gross receipts tax and virtually no one in the South has a tax comparable either in concept or scope to Virginia's local consumer utility tax.

The joint subcommittee examined the tax burden imposed on Virginia's public service corporations to see how it compared to the other southern states. In summary, if one examines state taxes alone, Virginia ranks last of all the fifteen southern states in tax burden on public service corporations. If one includes local taxes, Virginia's state and local tax burden ranks fourth among the fifteen southern states. Clearly, our state taxes are relatively low and our local taxes, especially the local consumer utility tax, are extremely high.

The joint subcommittee has also examined the changing nature of public service corporations and the environment in which they operate. Clearly the monopoly environment of all public service corporations that we have known in the past has changed somewhat; however, the telecommunications industry and their operating environment has changed the most dramatically. The telecommunications firms in the interstate and inter lata market compete with one another and are no longer monopolies. Almost all telecommunications firms are entering new markets, yet the tax structure that applies to these firms is still that which applied when they were pure monopolists.

The joint subcommittee has been unable to complete its work and report to the 1987 Session largely because of the untimely death of its Chairman, Senate Edward E. Willey and the resignation of its Vice-Chairman, Delegate Vivian Watts, to become a cabinet Secretary. As a result, the joint subcommittee is requesting an additional year to study and make recommendations to solve the inequities in this area. Because of this one year delay the joint subcommittee is also recommending that the gross receipts tax rollback be delayed one more year pending the completion of this study.

The joint subcommittee is recommending legislation to the 1987 Session to solve an inequity at the local level whereby the same electric power can be taxed twice.