May 31, 2011

CHEC refunds more than $5 million in sales tax to members


During the last week in May, the Cape Hatteras Electric Cooperative mailed nearly 14,000 refund checks for sales tax paid by members on their electric accounts from the years 2000 – 2009, plus 8 percent interest.  Refunds were first applied to any balances due and any remaining amounts were refunded to members by check.

Since its incorporation in 1945, CHEC had been exempt from state taxes.  Beginning in April, 2000, the North Carolina Department of Revenue (NCDOR) mandated that CHEC begin collecting and remitting the 3 percent sales tax rate on sales of electricity.  In addition, in 2001, the NCDOR also ordered CHEC to begin paying franchise tax (a gross receipts tax) directly, at the rate of 3.22 percent.   CHEC sued the NCDOR and continued to pay both the sales and franchise taxes under protest. 

In November, 2009, CHEC was awarded a judgment against the NCDOR for all sales and franchise taxes paid plus accrued interest at 8 percent.  In March, 2011 the North Carolina Court of Appeals unanimously affirmed the trial court’s ruling in favor of the cooperative.

In May, 2011, CHEC received two refund checks in settlement of the litigation with the NCDOR.  The refund for sales tax payments totaled $5,287,875.37 and the franchise tax refund totaled $5,250,082.27.  The refunds included interest at the rate of 8 percent through May 15, 2011.

The sales tax is what is often referred to as a pass-through tax, meaning, it is collected from the customer and sent on to the NCDOR.  Sales tax never impacted the margins of CHEC.  That is why it was refunded immediately to members who paid those taxes from 2000- 2009. 

The franchise tax, on the other hand, was paid directly by the cooperative.  This tax directly affected the operating statement, reducing the Cooperative’s margins for the years in which they were paid.  The refund of these taxes therefore, will increase margins in 2011, the year in which they will be recognized for accounting purposes. 

The franchise tax refund, including interest, will be allocated to CHEC members who had electric accounts during the years 2001-2009, and will be refunded in future capital credit retirements.  Capital Credits are a part of the unique, non-profit, cooperative way of doing business.

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