Payments Are Contributions in Aid of Construction, Writer Argues
Payments Are Contributions in Aid of Construction, Writer Argues
- AuthorsDevlin, Timothy J.
- Institutional AuthorsNational Association of Regulatory Utility Commissioners
- Code Sections
- Subject Area/Tax Topics
- Index Termsutilities, contributions in aid of construction
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 98-32990 (2 pages)
- Tax Analysts Electronic Citation98 TNT 219-38
Timothy J. Devlin of the National Association of Regulatory Utility Commissioners has argued that developer or customer payments for water or wastewater utility service line should be treated as section 118(b) contributions in aid of construction (CIAC). According to Devlin, changes in the 1996 tax law resulted the treatment of developer or customer payments for water or wastewater utility service as CIAC. As such, he says, Treasury's proposal to treat the payments as taxable is erroneous. Also, Devlin notes, the effects of treating those payments as taxable income will be to (1) increase utilities' tax burdens; (2) increases customers' utility bills; and (3) disadvantage private water and wastewater companies that have a tax-exempt municipal system near or adjacent to them.
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October 8, 1998
The Honorable Donald C. Lubick
Assistant Secretary (Tax Policy)
Department of Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220
Re: Nontaxable Customer Service Lines
Dear Mr. Lubic:
[1] This letter sets forth the National Association of Regulatory Utility Commissioners ("NARUC") Staff Subcommittee on Accounts' position that developer or customer payments for water or wastewater utility service lines should be treated as non-taxable Contributions In Aid of Construction ("CIAC").
THE ISSUE
[2] The issue involves payments received from developers or customers for the installation of customer service lines and whether those receipts are subject to income tax. A customer service line is the pipe that attaches to the main waterline or wastewater line and extends to the customer's property line. It is acknowledged by all parties that the main lines are CIAC and thus excluded from taxable income. The service line payments do not represent connection fees for the right to start or receive service, but payment for physical assets that are treated as depreciable utility plant in service.
[3] The cost of the customer service line pipe and the main distribution pipes installed in a new subdivision may be paid for by developers. For book and rate making accounting purposes, the customer service lines are accounted for as prescribed by the Uniform System of Accounts applicable to water and wastewater utilities. The accounting instructions require that services be capitalized as a component of utility plant and depreciated over their useful life. This is the same treatment afforded the main distribution pipes. Service lines represent a physical asset, just as the main line does.
[4] In the near future because of a 1996 tax law change, the Internal Revenue Service ("Service") and Treasury Department are planning to issue proposed income tax regulations concerning the taxability of services. One option being considered by the government is to classify CIAC receipts for customer service lines as taxable income. This is a position with which the NARUC Staff Subcommittee on Accounts does not agree. It is our belief that the 1996 tax law change resulted in all receipts for plant, including those for customer service lines, being classified as non-taxable CIAC.
HISTORY
[5] Under pre-1986 tax law, the water and wastewater utility industries accounted for developer and customer receipts for new subdivision tracts as CIAC. The tax law excluded CIAC from taxable income. For many years this interpretation existed and was adhered to. However, the Service eventually took the position that the portion of a payment which was for customer service lines was taxable income to the utility. During 1986, Congress amended the tax law by repealing CIAC. By doing so, all payments, including the portion related to customer service lines, became taxable.
[6] For ten years, the water and wastewater industries worked to gain reinstatement of CIAC in order to exclude receipts from taxable income. Efforts were successful in 1996 and Congress reinstated CIAC as nontaxable receipts for the water and wastewater industry.
[7] Shortly after the legislation was finalized, information from the Service to the utility industries indicated that the Service's position would be that developer or customer funded customer service lines would be classified as taxable income. The industries' interpretation of the legislation was that the new law excluded all developer and customer funded construction, including customer service lines, from taxable income. That had been the industries' and the legislators' intent throughout the legislative process. It was an important reason that straight-line depreciation rather than accelerated methods and extended tax depreciation lives were agreed to by the industries as part of the legislative changes.
RATEPAYER EFFECT
[8] If the new tax regulations were to classify funded services as taxable income, regulated water and wastewater utility companies will be burdened with an increased income tax liability. Customers will ultimately pay higher bills to cover the companies' portion of the tax. The water and wastewater companies will also be at a competitive disadvantage in areas where there are nearby or adjacent municipal systems that are exempt from tax.
CONCLUSION
[9] It is for the reasons noted above that we believe developer and customer receipts for customer service lines represent depreciable utility plant in service and should be classified as non- taxable CIAC.
Sincerely,
Timothy J. Devlin, Chairman
Staff Subcommittee on Accounts
National Association of Regulatory
Utility Commissioners
- AuthorsDevlin, Timothy J.
- Institutional AuthorsNational Association of Regulatory Utility Commissioners
- Code Sections
- Subject Area/Tax Topics
- Index Termsutilities, contributions in aid of construction
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 98-32990 (2 pages)
- Tax Analysts Electronic Citation98 TNT 219-38