June 13, 2017, the Arizona Corporation Commission voted to review a 2013 policy allowing utility company owners to pass along some of their personal income tax burden to customers.
Regular corporations — known in IRS code as C-corporations — have long been entitled to pass the cost of income taxes to customers. But smaller corporations and limited liability companies pay no income taxes, with earnings instead passed through to owners.
The policy change, advanced by Pierce, who was indicted last year on bribery charges, sought to provide some equity by allowing the owners of those small companies to have their income tax costs be borne by ratepayers.
An independent third-party consultant, Larkin & Associatees, PLLC, was selected by Staff to review the Commission policy. Based on the report, Staff recommended that the Commission reverse the policy adopted so that recovery of income tax expense of the shareholders/partners of pass-through entities is no longer allowed as part of the cost of providing utility service.
By reversing the policy, Arizona would be in line with those states that have found that only expenses which are actually paid, or payable, by the utility should be included for purposes of ratemaking. Since tax expenses are reflected in the owner's personal income tax, Staff believed that it should not be included in the income tax expense for purposes determining the pass-through entity's cost of service.
On March 29, 2018 the Commission determined it is in the public interest for the Commission to reconsider and reverse its income tax policy for pass-through entities adopted in Decision No. 73739, effective immediately.
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