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ELECTRICITY NOW TANGIBLE PERSONAL PROPERTY
FOR ILLINOIS TAX PURPOSES
The Illinois Supreme Court on February 20, 2009 issued its decision in Exelon Corporation
reversing the Appellate Court and concluding that electricity is tangible personal property for purposes of the Corporate Income and Replacement Tax. In reaching that conclusion the court not only reversed the lower courts’ decisions but also 52 years of tax policy that assumed that electricity was an intangible.
The issue presented to the court was whether Exelon was engaged in “retailing” for purposes
of claiming an investment tax credit. The term “retailing” is defined as “the sale of tangible personal property or services rendered in conjunction with the sale of tangible consumer goods or commodities. 35 ILCS 5/201(e). Exelon had filed amended returns for the 1995 and 1996 tax years claiming the investment tax credit. The Department denied the refunds and Exelon protested the denial. The parties filed cross Motions for Summary Judgment. Exelon’s Motion contained an un-rebutted affidavit and expert report concluding that as a matter of scientific fact electricity is physical and material. The Administrative Law Judge relying on Farrand Coal Co. v. Alphin
, 10 Ill 2d 507 (1957) concluded that the General Assembly did not intend to include electricity within the meaning of tangible personal property when it enacted the Investment Tax Credit. In addition, the ALJ rejected Exelon’s Uniformity Clause arguments with respect to the fact that natural gas was characterized as tangible property and thus qualified for the Investment Tax Credit. The Cook County Circuit Court relying on the language of Farrand Coal
, affirmed the Administrative Hearing decision. The Appellate Court, affirming the Circuit Court, held as a matter of law Exelon did not engage in the sale of tangible personal property.
The Illinois Supreme Court in a five to one decision (Justice Burke did not take part in the
decision) concluded that any reference in Farrand Coal
to the character of electricity was dicta
was not to be relied upon. The issue addressed in Farrand Coal
, was whether coal sold to a Springfield electric company for use in the generation of electric was exempt as a sale for resale. The company argued that it was the energy that was stored in the coal that was being purchased and then resold as electric energy. The Illinois Supreme Court rejected that argument concluding that the coal was being sold as tangible personal property for the utility’s use and not for resale as that term is defined in the Retailer’s Occupation Tax. The current court concluded that the discussion of electricity in Farrand Coal
was overly broad and not necessary to the case’s holding. Therefore, it was dicta
not to be relied upon.
The court in reaching its conclusion noted it cannot ignore the laws of physics and the un-
rebutted affidavit of the Dr. Fajans, a professor of physics at the University of California Berkley. The court also noted that a number of other state courts have expressly held that electricity constitutes tangible personal property. The parties had agreed that if electricity was tangible personal property then Exelon would be engaged in retailing as defined by Section 201(e) and the statutory requirement for the credit would be satisfied.
The classification of electricity as tangible personal property is likely to give rise to some
interesting issues. Electricity, because it had been characterized as an intangible, had been sourced for apportionment purposes using Cost of Performance. Effective January 1, 2008 the sourcing rules related to services changed. Services are now sourced to Illinois if received in the state. The services may only be attributed to the states where the company had a fixed place of business. If one cannot determine the state where the services were received or there is no fixed place of business in that state the services shall be deemed received at the office or location of the customer from which the service was ordered. If that office cannot be determined then it will be sourced to the billing address. It was thought that utility services would fall within this new approach. However, in light of the characterization of electricity as tangible personal property the destination principles applied to the sale of tangible personal property would now apply for purposes of sourcing the receipts from the sale of electricity. The more interesting issues resulting from the reversal of 52 years of policy may arise with respect to non-income taxes. Does the characterization of electricity as tangible personal property subject the commodity to a sales tax? Is the Electricity Excise Tax imposed in lieu of a sales tax? Would the manufacturing machinery and equipment exemption now apply to the generation of electricity?
The Department has 21 days from the date of the decision to file a Petition for Rehearing.
Should the Department not file a Petition a mandate will issue after 35 days remanding the matter back to the lower courts and directing the Department to issue the refund.
Horwood Marcus & Berk’s State and Local Tax Group practices in all areas of state and local
taxation. The firm’s state and local tax practitioners have extensive experience with income tax, gross receipts tax, franchise and capital stock tax, sales and use tax, utility and energy tax, and unclaimed property issues. Clients of the State and Local Tax Group include Fortune 500 companies as well as mid-size and closely-held businesses.
If you have any questions regarding this memorandum, or any other state or local tax matter,
please contact any of Horwood Marcus & Berk’s state and local tax professionals by phone or e-mail at:
Fred O. Marcus
C. Eric Fader
Marilyn A. Wethekam
David S. Ruskin
Jordan M. Goodman
Jennifer A. Zimmerman
David A. Hughes
Breen M. Higgins
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