City Municipal Utility Tax

Many cities impose a municipal utility tax for utility services provided to their citizens.  

In some cases, cities provide utility services directly to their citizens and collect the municipal utility tax from them. In other cases, cities contract with third parties to provide utility services to their citizens. Third-party utility providers collect municipal utility taxes and pass them on to the city. 

In both scenarios, the municipal utility tax collected from customers is included in the gross income subject to state tax. No deduction is allowed for municipal utility tax collected or passed on to the city. The tax is a cost of doing business and considered part of the utility provider’s gross income, whether included in the utility charge or stated separately on the customer’s utility bill.  

Examples 

The examples provided below are to be used only as a general guide. The tax results of other situations must be determined separately after a review of all the facts and circumstances.  

Example 1 

City Z imposes a municipal utility tax on water distribution services within city limits. The City Z Water Department provides water services to its residents and collects the municipal utility tax from its customers. The entire amount the Water Department bills its customers for water services, including the municipal utility tax liability (even if separately stated on the billing invoice), is subject to the state public utility tax (PUT) under the water distribution classification. 

Example 2 

City A imposes a municipal utility tax on power distribution services within city limits. To provide these services, City A contracts with a third-party Electric Company. The Electric Company bills the City A customers for power distribution services and the municipal utility tax. The Electric Company reports the total amount it collects from City A customers under the Power PUT classification.