Taxes considered -

Corporate income tax ("CIT")
Gross receipts tax ("GRT")
Energy consumption tax ("ECT")

Apply the same state CIT to all power suppliers
Phase in state taxation of power supply coops using a temporary minimum GRT
Apply a graduated ECT to all consumers to make up the tax shortfall to the state

1. All power supply competitors should be taxed similarly and equitably at the state level. Applying different taxes to different companies that are competing against each other is problematic. If a utility has taxable operations, then its profits should be taxed. Old Dominion should be taxed just like all other taxpayers in Virginia.

2. Virginia has been a tax conformity state (i.e., state taxable income is based on federal taxable income), and should continue to follow that principle. State tax law should follow federal tax law. Other types of coops in Virginia are subject to these same rules—electric coops should not be treated differently.

3. The minimum GRT should eventually be eliminated so that only profits are taxed. Coops are now exempt from federal CIT only if they meet specific requirements and have no profits. But times are changing. Coops will have to compete for business on an open market, and will make sales to nonmembers. When a coop has taxable profits, it will be subject to federal CIT and should also pay state CIT. A coop's power transactions in a competitive environment may result in significant gross receipts, but may generate little or no margin ("profit"). Continuing to subject an electric coop to a minimum GRT would cause an unfair tax burden and inequitable tax treatment.

4. The electric coops are currently tax-exempt. During the transition to full competition, the coops should phase into a state CIT by paying a minimum GRT. The GRT rate should be set so that the power supply coops pay a proportional amount of tax to the IOUs in Virginia. (See attached.)

5. Since the coops' cost of power service is higher than the IOUs' cost of power, the coops are paying a higher proportionate amount of GRT now. When the IOUs go from GRT to CIT, they will significantly reduce their tax burden. Under the proposed model, the minimum GRT rate for a power supply coop would be set to initially assess a tax proportionate to the tax collected from the IOUs. That rate would decline over the transition period.

6. Unlike telephone service, which is provided directly to the end user by all competitors, electricity is sold at wholesale before it is resold to the end user at retail. If an IOU sells power at wholesale to a power supply coop, the seller should pay CIT on profits earned form the sale. If a power supply coop resells the power, it should not have to pay GRT on the same power—otherwise, the same power could be taxed several times. (In that case, the power supply coop would pay tax on the tax imbedded in the cost of power purchased from the IOU.) Such treatment is not equitable. During the phase-in period, sales subject to GRT should be reduced by power that has already been taxed. Under the proposed model, the cost of all power already subject to any tax would have to be deducted from the gross receipts of the coops before the GRT rate is applied. After the transition to a uniform state CIT, all taxable profits on any power sale would be taxed.

7. Out-of-state power providers may not have sufficient nexus in Virginia to be subject to CIT in Virginia. Since they may have no "gross receipts" in Virginia, they may not be subject to state GRT either. All power providers or power users in the state should be taxed the same way to be fair. Otherwise, Virginia's in-state utilities will not be able to effectively compete in Virginia against power providers from low-tax states. Under the proposed model, the state would have to find some way to impose a CIT on the income earned by any power provider selling power into the state. This increases the complexity of the tax.

8. The most fair taxation method is to treat all taxpayers the same. The taxable profits of all utilities should be taxed at a common CIT rate in Virginia, and the users of energy in the state—regardless of their power source—should be subject to a common ECT rate. That way, the state can control the tax revenue needed in state, everyone is taxed the same way, and all utilities can compete on equal footing. Eventually, the GRT should be abolished altogether to simplify the tax system.

Calculation by State Dept of Taxation:

    1995 data                  All IOUs         Old Dominion

Total GRT tax paid           $87.8 million      $2.3 million
Production %                         60.4%             60.4%
CIT % of GRT                         32.2%             32.2%
Net state CIT expected      $17.08 million          $450,000

The phase-in from a minimum GRT to a state CIT should be spread over a four-year transition period. The minimum GRT rates proposed are as follows:

              Rate applied to
              Total      Net

     2000     .16%      .38%
     2001     .12%      .285%
     2002     .08%      .19%
     2003     .04%      .095%