(Updated 4:10 p.m.) A decades-old tax law that had been ignored for years is now putting the heat on homeowners who use propane in their homes and generators.
While propane used exclusively to heat homes and businesses is exempt from the current 8.81 percent gross earnings tax, propane used in generators is not. That means propane delivered to a tank that happens to supply a generator is automatically taxed even when the vast majority of the propane is used for exempted purposes in or around the home.
Non-taxable uses include some obvious ones like home heating and hot water as well as others that are less apparent, such as cooking and heating in-ground pools.
David Daniels, co-owner of Essex-based Daniels Propane, said most of his customers use propane for heating their homes in the winter and for hot water throughout the year. Those exempt users account for about 800 to 1,500 gallons of propane per year for each user.
In the absence of large storms like Superstorm Sandy, he said they use approximately 12 gallons of propane per year to periodically test-run their generators.
A customer who receives a 100-gallon propane delivery at a cost of $3 per gallon will pay $26.43 in taxes per delivery at 8.81 percent.
“The use of propane for electricity generation on these homes constitutes an incredibly small portion of their annual usage but this new enforcement change makes their entire usage subject to the gross receipts tax,” Daniels said.
According to state Sen. Paul Formica, R-East Lyme, it used to be that propane companies would charge the tax only when they filled a tank attached solely to a generator.
Now, assessing the tax on an entire delivery of propane just because of the presence of a generator effectively eliminates the heating exemption, he said.
Formica said the tax is the result of a recent “reinterpretation” of the law by the Department of Revenue Services.
Commissioner Kevin B. Sullivan disputed that characterization, saying the law has always been clear on the matter. State statute specifically exempts propane used “exclusively for heating purposes.”
Generators, however, are used for electricity.
Sullivan cited a recent audit which found a propane company in violation of the statute, prompting the propane industry to seek clarification, in writing, of the department’s policy.
“It’s hard to read the law any other way,” Sullivan said. “If you’re going to ask our advice, we’re just going to tell you what the law says.”
Sullivan was not aware of any current penalty assessments against noncompliant propane companies. Violations would likely be uncovered through the audit process.
Sullivan said his agency has no problem with changing the law; in fact, he worked with lobbyists and lawmakers on legislation earlier this year that would have eliminated the the gross receipts tax on propane to power generators. The bill died in the Finance, Revenue and Bonding Committee.
Sen. John Fonfara, who co-chairs the Finance, Revenue, and Bonding Committee, said Tuesday that he opposes the measure because no one except the company who a consumer purchases a tank from can refill it.
Fonfara said a customer leases the tank from the company and become the only company, regardless of price, that can refill it.
“You can’t shop for price. That’s an unregulated monopoly and that’s wrong,” Fonfara said.
He said he’d be happy to change his mind about the issue, if the propane companies would allow any company to fill their tank. He doubts that’s going to happen.
“At this point the law is the law,” Sullivan said. “They’re going to have to live with it.”
Formica and Rep. Devin Carney, R-Old Saybrook, will be sponsoring legislation during the 2016 session of the General Assembly to settle the matter once and for all.
At a Monday morning press conference at the town hall in East Lyme, where Formica served as first selectman for seven years prior to his election to the state senate, he said his town has been battered by storms like Hurricane Irene and Superstorm Sandy that have led many residents to purchase generators.
“It is unfair to the people who are trying to be proactive. After the large storms we have experienced in recent years, many people bought generators in case of another catastrophic event. Now, they are finding out that they are getting taxed for thinking ahead,” Formica said.
Carney recounted complaints from his constituents lamenting the unfairness of the tax, especially since it does not apply to those who power their generators with diesel fuel.
“These people are doing something good. They’re being self-sufficient and they’re being taxed in this state for doing so and that is completely wrong,” Carney said.
The original law was the result of ever-increasing oil prices in the 1970s that spurred the state legislature to rein in petroleum companies through a 2 percent gross earnings tax, which they were prohibited from passing on to their customers. While the pass-through provision was struck down by federal court, the tax remained — and has been rising ever since.
Sullivan said current record keeping makes it difficult to determine the amount of revenue that has been brought in since propane companies came into compliance with the law following the clarification about a year ago.
“It’s not a large amount of revenue collected by the state one way or another,” he said.
Joe Sastre, president of the Connecticut Emergency Management Association, said the law flies in the face of efforts to educate people about the importance of being prepared for disasters.
“If I have an inground swimming pool, I can have a propane heater and I can warm my pool in the middle of winter so I can go swimming and I’m not taxed on it. But if I put a propane powered generator into my house and run it off that same tank of propane, I’m going to get whacked for another 8.8 percent tax. And it just does not make sense. It’s sending the wrong message; it’s punishing people for trying to do the right thing,” Sastre said.