Dominion Energy, owner of the former SC Electric & Gas franchise, is battling state officials over an estimated $ 442 million tax bill that is allegedly due for the failed VC Summer nuclear project, and there is no sign that the concessionaire is ready for a deal yet.
The multi-million dollar dispute arises from a sales tax exemption that the state granted SCE & G more than a decade ago, when the Cayce-based concessionaire began planning the construction of the two reactors at the Fairfield County plant.
The agreement allowed SCE & G and its contractors to purchase construction materials and nuclear components for the project without worrying about the 7% sales tax that would normally be due on these multimillion dollar purchases.
If the decade-long project had been completed, most of those taxes would have been forgiven. But that is not what happened.
Instead, the unfinished expansion of VC Summer was abandoned in July 2017, after years of cost overruns and programming delays.
This decision generated a long list of lawsuits. This prompted law enforcement officials to open a criminal investigation into the project. This also led to Dominion’s decision to acquire SCE & G almost two years ago. And that prompted the SC Revenue Department to launch an audit of purchases made for the reactors over nine years.
It was this review that put Dominion in contention with the state’s tax department. Dominion, which inherited all SCE & G’s energy customers and their responsibilities for the failed nuclear project, filed a lawsuit in the SC Administrative Court in 2019 contesting the tax release.
Dominion, which is based in Richmond, Virginia, is arguing that the state must honor the tax deal that was approved for the VC Summer project in 2008 and give up its attempt to raise nearly half a billion dollars for the state government.
But that’s not how the Revenue Department sees it. In a legal memo, agency officials argued that the concessionaire gave up the right to claim the exemption on the day that SCE & G executives announced that they were halting construction of the unfinished reactors in July 2017.
“Despite the South Carolina state’s investment in the project – through the availability of hundreds of millions of dollars in sales tax exemptions – the taxpayer claims that he has the right to abandon the project, not bring any significant benefits to the economy the state and practically not paying taxes on billions of dollars in taxable purchases, “wrote a lawyer for the revenue agency in the court document.” The department disagrees. “
“Tax exemptions are a matter of legislative grace, not a right,” the memo continued. “The Legislature generally grants substantial tax incentives to achieve milestones in advancing the state’s economy, not millstones that slow the economy.”
A spokeswoman for the Revenue Department did not respond to specific questions about the dispute with Dominion, saying the agency “does not comment on issues related to the current dispute”.
Dealer spokeswoman Rhonda O’Banion said the company hopes to “resolve” the dispute “in the best interests of both parties”.
But that is yet to happen.
Dominion questioned the fact that it was the only company being chased by unpaid taxes when Santee Cooper, the South Carolina state concessionaire, co-owned 45% of the nuclear project.
The company’s lawyers also argued that state officials cannot legally collect taxes because they cannot prove that the nuclear project will not be completed at some point.
This is a bold strategy, considering that SCE & G has already claimed a $ 1 billion federal tax reduction for officially abandoning the reactors. Santee Cooper is selling parts and materials left at the construction site near Jenkinsville.
A bad taste
The tax dispute has been going on behind the scenes for over a year. Meanwhile, public attention has been drawn to another legal battle being fought by the dealership.
Dominion filed an application with the SC Public Service Commission last summer seeking permission from regulators to increase the monthly energy bills of its 753,000 customers by 7.7 percent. But the proposal was delayed last week. At the request of Governor Henry McMaster and other officials who cited concerns about the impact of an increase in interest rates on an economy weakened by the COVID-19 pandemic, Dominion placed its order on ice for at least six months.
McMaster’s office did not respond to emails seeking comment on the ongoing sales tax dispute. But several state lawmakers said they were becoming increasingly frustrated with Dominion.
Representative Kirkman Finlay, R-Columbia, said the concessionaire has the right to challenge the tax law. But the company’s simultaneous effort to avoid charging state taxes and raising an extra $ 178 million a year from its energy customers is deaf, he said, especially during a major public health crisis, when residents lost jobs and businesses struggle to stay open.
“It certainly leaves a bad taste in people’s mouths,” said Finlay, who is also on the House committee responsible for balancing the state budget. “They dramatically damaged the public’s perception.”
The estimated $ 442 million that Dominion is supposed to owe could provide a substantial boost to the state budget, which lawmakers could use to finance a number of priorities they have observed in the past.
The money could be used to cover items such as bonuses for public officials, long-delayed security updates in South Carolina prisons, emergency funding for the state’s health department or subsidies for small businesses that are still suffering from the pandemic.
But for Dominion, tax assessment poses a major threat to the company’s bottom line. Its utility operations in South Carolina generated a profit of about $ 266 million during the first nine months of 2020, according to the company’s financial records. This means that South Carolina’s entire profit margin could be canceled this year if it is ordered to pay.
Still, this potential tax liability is something that Dominion’s leadership should know before finalizing the purchase of SCE & G and its parent, SCANA Corp. State records show that the Revenue Department opened its audit of the nuclear project in January 2018, more than a year before Dominion consolidated its acquisition of the concessionaire.
Who’s on the hook?
If Dominion loses its legal challenge, the company may need to pay the multimillion-dollar tax on its own.
Santee Cooper said Dominion has already agreed to exempt the state utility from taxes allegedly owed by the reactors as part of a legal agreement signed in 2020.
And Dominion is likely to encounter a lot of resistance if it tries to pass on tax collection to its utility customers.
In most cases, investor-owned electricity utilities, such as Dominion, can charge their customers the taxes they pay. This is part of the benefit of operating a regulated monopoly.
Officials at the Office of Regulatory Staff, the state utility’s surveillance agency, said there was nothing to stop Dominion from asking regulators to transfer the cost of taxes to energy consumers in the future.
But this move is not a guarantee.
ORS, which represents taxpayers in regulatory cases, said the agency would likely examine any proposal that attempts to pass on more costs related to the abandoned nuclear project.
SC Senate Majority Leader Shane Massey, R-Edgefield, said it would be “an insult” if energy consumers were forced to pay the tax bill in addition to the $ 2.3 billion they already need to cover for useless nuclear reactors.
“I think Dominion’s leaders are trying to get the best deal for themselves and their shareholders, and they don’t care who gets hurt by that,” said Massey. “Dominion tried to transfer all of the costs it faces to customers and taxpayers, while increasing dividends and benefits for shareholders.”
“Customers have already taken their chin several times on this one,” he added. “The company cannot have everything.”
For now, the tax dispute is still pending in the administrative court. Lawyers for Dominion and the state tax department are expected to face off at a hearing in the case in March. Depending on the outcome, the decision could be challenged in the SC Appeals Court if similar tax disputes serve as a guide.