OLR RESEARCH REPORT
August 21, 2008
2008-R-0480
STATE FUEL AND PETROLEUM PRODUCTS TAXES AND TAX
EXEMPTIONS
By: Judith Lohman, Chief Analyst
You asked the several questions about state taxes on, and tax
exemptions for, fuel and other petroleum products. Questions and
answers appear separately below.
WHY IS COMMERCIAL HEATING OIL SUBJECT TO STATE SALES
TAX?
Sale of heating fuel is currently exempt from the sales tax only if it is
used in a residential dwelling or if at least 75% of the fuel for any
building, location, or premise is used directly (1) in agricultural
production, (2) for fabricating finished products for sale, or (3) in an
industrial manufacturing plant (CGS § 12-412 (16)). Thus, sale of any
other heating oil for commercial purposes is subject to sales tax.
The General Assembly first enacted the state sales tax in 1947. The
original sales tax law exempted sales of fuel used exclusively for domestic
purposes from the tax. Thus, the original 1947 sales tax applied to sales
of fuel for commercial and industrial purposes (§ 334i (p), 1947
Supplement to the Connecticut General Statutes).
In 1971, the General Assembly specified that sale of gas and
electricity, as well as fuel, for domestic purposes was tax-exempt (PA 8,
June 1971 Special Session, § 7).
Mary M. Janicki, Director
Phone (860) 240-8400
FAX (860) 240-8881
http://www.cga.ct.gov/olr
Connecticut General Assembly
Office of Legislative Research
Room 5300
Legislative Office Building
Hartford, CT 06106-1591
Olr@cga.ct.gov
In 1974, the General Assembly limited the exemption to heating fuel
but expanded the heating fuel exemption to cover commercial and
industrial as well as domestic uses. It also eliminated the 1971
references to gas and electricity from the heating fuel exemption (these
fuels were and still are covered by other exemptions), thus limiting the
exemption to heating oil (PA 74-4)
The General Assembly enacted the current law in 1989, as part of a
massive $684 million emergency certified revenue bill (SB 1068, PA 89251). The bill contained extensions and increases in many state taxes
and fees, including an increase in the sales tax rate from 7.5% to 8%.
One part of the bill limited the heating fuel exemption to residential
dwellings and to agricultural, manufacturing, and industrial buildings.
In summarizing the bill on the Senate floor, the Finance Committee’s cochairperson, Senator DiBella, mentioned that it contained “a tax on
business utilities, including oil and excluding the manufacturing
process,” which was expected to raise $75 million. An amendment to
eliminate the change along with several other tax increases (Senate “F”)
was defeated by a vote of 15 to 21 (Senate Proceedings, May 25, 1989).
WHAT TYPES OF FUEL AND PETROLEUM PRODUCTS OR TYPES OF
USES FOR SUCH PRODUCTS ARE SUBJECT TO AND EXEMPT FROM
STATE SALES AND FUEL TAXES?
Connecticut has four state taxes that apply to some or all types of fuel
(petroleum fuels, electricity, and natural gas) or petroleum products.
These taxes are the (1) sales tax, (2) motor vehicle fuels tax, (3) petroleum
products gross earnings tax, and (4) public service company tax. For
each tax, we show below the types of goods or situations to which they
generally apply followed by a list of the fuels or petroleum products or
uses that are exempt from each one. Products or uses not specifically
exempted are taxable.
Sales Tax
Sales tax applies to retailers’ gross receipts from (1) the sale of
tangible personal property at retail (including fuel and petroleum
products), (2) renting or leasing tangible personal property, or (3)
rendering specified services. The general tax rate is 6%. The table below
shows the fuel-related sales tax exemptions. Only statutory exemptions
that expressly mention either “fuel” in general or a particular type of fuel,
such as gas or electricity, are listed.
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TABLE 1: SALES TAX EXEMPTIONS FOR FUEL
(§ 12-412)
Gas or electricity for residential use or for direct use in (a) agricultural production, (b)
making a finished product for sale, and (c) use in a manufacturing plant (§ 12-412 (3) (A))
If not otherwise exempt under the above provision, $150 of electricity service per month
(§ 12-412 (3) (D))
Gas or electricity directly used to furnish gas, water, steam, or electricity delivered to
customers through mains, lines, or pipes (§12-412 (3) (E))
Motor vehicle fuel (a) used in vehicles licensed to operate on a public highway or (b) for
any other use, if state motor fuel tax has been paid and not refunded under Chap. 221
(see motor fuels tax refunds below) (§ 12-412 (15))
Fuel used for heating in a residential dwelling or in any building or other location used
(a) for agricultural production, (b) for making a finished product for sale, or (c) as a
manufacturing plant (§12-412 (16))
Fuel to be used directly (a) in the fishing industry; (b) as a component or ingredient in
making a finished product for sale; (c) in furnishing power to a manufacturing plant; or
(d) to deliver gas, water, steam, or electricity to customers through mains, lines, or pipes
(§12-412 (18))
Fuel for high-occupancy commuter vehicles (§12-412 (37))
Aviation fuel used exclusively and directly in the experimental testing of any product
(§12-412 (59))
Aviation fuel used exclusively for aviation purposes (§12-412 (75))
Fuel for an aircraft manufacturing facility (§12-412 (78))
Marine fuel for vessels with displacements greater than 4,000 deadweight tons or
primarily engaged in interstate commerce (bunker fuel oil, intermediate fuel, marine
diesel oil, and marine gas oil) (§12-412 (79))
Fuel used directly in the biotechnology industry (§12-412 (89))
Diesel fuel used exclusively in portable generators larger than 150 kilowatts (§ 12-412
(107))
Fuel used in a fuel cell manufacturing facility (§12-412 (113))
50% exemption for fuel used as an ingredient or component part of tangible personal
property that will be used or consumed in manufacturing or producing products for sale
(§ 12-412i)
Motor Vehicle Fuels Tax
The motor vehicle fuels tax applies to motor vehicle fuel used or sold
in Connecticut. The current per-gallon tax is 25¢ for gasoline and
gasohol; 43.4¢ for most diesel fuel; and 26¢ for natural gas, propane,
and any diesel fuel sold exclusively for use in portable power generators
larger than 150 kilowatts. Exemptions and exclusions are shown in
Table 2A. Fuel uses eligible for motor fuel tax refunds are shown in Table
2B.
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TABLE 2 A: MOTOR FUELS TAX EXEMPTIONS AND EXCLUSIONS
(§§ 12-455A (C) AND 12-458)
Fuel for aircraft, motorboats, road rollers, baggage trucks used in railroad stations,
electric battery-operated wheelchairs operated by a physically handicapped person at
speeds of 15 mph or under, agricultural tractors, farm implements, and vehicles that
run only on rails or tracks
Fuel for a Connecticut motorbus company deriving at least 75% of its revenue from
operation in Connecticut
Fuel sold to the U.S. government
Fuel used by a contractor performing services for a municipality under a contract
Fuel sold to municipalities, transit districts, or the state for use in vehicles owned or
leased and operated by them
Fuel sold for use in a school bus
Fuel sold to licensed fuel distributors
Fuel transferred from storage in the state to a location outside the state
Fuel used for farming by a farmer with a farming sales tax exemption permit
Fuel for industrial fabrication or the fishing industry
Heating fuel
Compressed natural gas, liquefied petroleum gas, and liquefied natural gas (exemption
expired 7/1/08)
Fuel to furnish gas, water, steam, or electricity delivered through pipes, mains, or lines
Fuel for aviation purposes sold to an aircraft owner or operator or to a licensed dealer
with a business location on an established airport in Connecticut
Diesel sold exclusively for use in portable power generators larger than 150 kilowatts
TABLE 2 B: MOTOR FUEL TAX PAYMENTS ELIGIBLE FOR REFUNDS
(§ 12-459)
Fuel used in vehicles, other than farming vehicles, not licensed or required to be
licensed to operate on public highways (refund is limited to 26¢ per gallon - § 12-458h
(c))
Fuel used by Connecticut motorbus companies
Fuel used by licensed livery services
50% refund for fuel used by taxicabs, airport livery services, and airport motorbuses
Fuel used in hospital-owned ambulances
Fuel used in ambulances owned by nonprofit civic groups
Fuel used in high-occupancy motor vehicles
Fuel used by Meals on Wheels programs
Fuel used by the U.S. government
Fuel used in any school bus
Fuel used by the state, a municipality, or a transit district
Fuel used in farming
Fuel used by a contactor to haul waste for the Connecticut Resources Recovery
Authority’s Mid-Connecticut plant
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Petroleum Products Gross Earnings Tax
This tax applies to gross earnings of companies distributing petroleum
products in Connecticut. The tax is 7% of the revenue from the first sale
of a taxable petroleum product in the state. Petroleum products are those
that contain or are made from petroleum or a petroleum derivative,
including gasoline, aviation fuel, kerosene, benzol, distillate fuels,
residual fuels, and crude oil. Petroleum derivates include paint,
detergents, antiseptics, fertilizers, nylon, asphalt, and plastics.
Exemptions are listed in Table 3.
TABLE 3: PETROLEUM PRODUCTS GROSS EARNINGS TAX EXEMPTIONS
(§12-587, 2008 SUPPLEMENT TO THE GENERAL STATUTES)
Petroleum products sold for export out of state
#2 heating oil used for heating
#2 heating oil used in commercial fishing vessels
Kerosene used for residential heating
Propane gas used for heating
Bunker fuel oil, intermediate fuel, marine diesel oil, and marine gas oil used in vessels
displacing more than 4,000 dead weight tons
Propane gas used as motor vehicle fuel (expired 7/1/08)
# 6 fuel oil used by manufacturers
# 2 heating oil used in vessels primarily engaged in interstate commerce
Paraffin and microcrystalline waxes
Petroleum products used in fuel cells
Commercial heating oil blends containing at least 10% alternative fuel derived from
agricultural produce, food waste, waste vegetable oil, or municipal solid waste including
biodiesel and low-sulfur-dyed diesel
Diesel fuel other than diesel fuel used in an electric generating facility
Public Service Company Tax
The tax applies to gross earnings from sales by gas, electric, and
power companies and electric distribution companies. Tax rates are:
1. for gas, electric and power companies, 4% on earnings from sales
to residential customers and 5% for all other sales and
2. for electric distribution companies, 6.8% on earnings for sales to
residential and 8.5% on sales to nonresidential customers other
than manufacturers.
Fuel-related public service company tax exemptions are shown in
Table 4.
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TABLE 4: PUBLIC SERVICE COMPANY TAX EXEMPTIONS FOR FUEL
(§ 12-264)
Sales for resale of steam, gas, and electricity to public service corporations and
municipal utilities
Natural gas sold to out-of-state users or entities
Gas and electric sales to manufacturers
Gas company sales of natural gas or propane for motor vehicle fuel (expired 7/1/08)
Retail sales of steam
Sale of natural gas to an existing combined cycle generating plant consisting of three
gas turbines with a total generating capacity of 775 MW and used to generate electricity
IS SALES TAX PAID ON HEATING OIL FOR COMMERCIAL USE A
DEDUCTIBLE BUSINESS EXPENSE FOR PURPOSES OF
CALCULATING THE FEDERAL AND STATE CORPORATION TAX
LIABILITY?
This response provides general information. It does not purport to
determine the tax deductibility of any particular expense in any
particular case.
General Rule for Deducting Certain Taxes as a Business Expense
Connecticut fuel and sales taxes are not separately deductible, but
they can be included as part of the cost of the fuel or item purchased.
This means that if the fuel or item purchased is deductible as a business
expense, so are the taxes the business paid when buying it.
According to the IRS publication on Business Expenses (Publication
535), businesses may generally deduct ordinary and necessary expenses
paid or incurred in a tax year in carrying on a trade or business. As long
as state and local taxes are directly attributable to a trade or business,
they are deductible business expenses. According to the IRS publication:
1. excise taxes are deductible if they are an ordinary and necessary
part of carrying on the taxpayer’s trade or business;
2. fuel taxes (taxes on gasoline, diesel fuel, and other motor fuels
used in a business) can be included in the cost of the fuel and
deducted as part of deductible fuel expenses; and
3. sales taxes are deductible when the services or goods to which they
apply are a deductible business expense, in which case the tax is
considered part of the cost of those goods or services.
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These deduction provisions apply whether the business is a
corporation subject to separate corporation taxes or a pass-through
entity whose members or partners are subject to federal and state
personal income taxes on the business’ income.
Federal and State Corporation Tax Deductions
The federal corporation tax is based on a business’ taxable income,
which is the difference between its total income and its total allowable
deductions. Connecticut’s corporation tax requires a business to
calculate its tax liability in two ways and then pay the higher of the two.
One method is based on the company’s net income and the other on the
company’s so-called “capital base,” which is the sum of its outstanding
stock, profits, and reserves. The net income method uses the federal
taxable income as its starting point and therefore incorporates most
federal income definitions, deductions, rules, and exclusions. The
capital base method incorporates profits, which also takes account of
federal deductions. Thus, a federally deductible expense is already
incorporated into Connecticut’s corporation tax calculation without
requiring a separate state deduction. (OLR Report 2003-R-0397 provides
a general description of the federal and state corporation tax calculations
if you need a fuller explanation.)
JL:ts
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