On April 1, 2019, the State Legislature approved a $175.5 billion budget for 2019-2020, which, among other things, eliminates an important sales tax exemption that allowed certain commercial customers of Energy Service Companies (“ESCOs”) to receive electric and gas supply without paying sales tax on transmission and distribution charges.

Since 2000, shortly after New York restructured its energy markets, the NYS Tax Law has included an exemption for commercial ESCO customers that was designed to incentivize consumer choice and enhance the ability of ESCOs to offer competitive prices (“Exemption”). Under the Exemption, commercial customers that received service from an ESCO would pay sales tax on the commodity portion of their bills, but not the delivery service. In contrast, default utility customers paid sales tax on both the commodity and delivery provided by the utility.

The repeal of the Exemption goes into effect in only 60 days – on June 1, 2019 – and will apply to sales and services made or provided on and after that date, regardless of whether the service was based on a prior contract. Commercial ESCO customers will begin to see charges for sales tax on the delivery portion of their bills for services from June 2019 going forward. The Governor’s office expects that eliminating this exemption would generate an additional $48 million for local governments outside of New York City (New York City eliminated the exemption in 2009) and would increase taxes by about $128 million in total.

In recent years, much ink has been spilled in the regulatory and political environment around perceived deficiencies in the residential energy markets. Indeed, litigation around the New York State Public Service Commission’s (“PSC”) regulation of ESCO sales to residential customers is currently pending at the Court of Appeals, wherein PSC has argued that the industry was not “workably competitive” (notwithstanding some 200-plus sellers in the marketplace). Those and other proceedings have largely conceded that the market for commercial customers is functioning well. It is therefore somewhat anomalous with the larger narrative that elimination of the tax exemption will not directly benefit residential ESCO customers, but instead will increase the cost of doing business for commercial ESCO customers.