Is it legal to charge sales tax on money that is being used to repay tax exempt bonds?

Sophia: Is it legal to charge sales tax on money that is being used to repay tax exempt bonds?
Our community issued tax exempt bonds to build improvements to the utility system. A portion of our utility bill goes to repay that tax exempt bond. However, we are charged sales tax on ALL of the utility bill. Is this legal under the IRS and SEC rules, or should they be exempting a pro-rated portion of the bill from sales taxes?
Our city does not receive revenue from property tax. The property tax goes to the school district. The city is operated from 2 sources of revenue: the profit on the city-operated electric, water, and gas utility and the proceeds from a 1.5% sales tax.

Answers and Views:

Answer by DrIG
You need a tax attorney to answer that question.

Answer by justin o
I’m a corporate tax accountant, I have never heard of that.? What utility bill> electric, gas or are you talking about your yearly home tax. Your yearly home tax goes toward town improvements. not your utility bill

Answer by CarVolunteer
I am not a tax accountant, but common sense (to me) says yes, this is legal and proper. If your sales tax applies to utility bills, then consider a private utility. Whether it paid for improvements by using a (taxable) bond issue, selling stock, or using its profits makes no difference to you. You are paying a tax on the service. If a community owned utility does the same, the only difference is there is no stock, there are no “profits”, and the bonds are tax exempt, therefore cheaper to pay off. You still pay the same tax on the service.

Answer by Hank Roitman, EA
Of course it is!! Why do you think it would not be? Is it possible that you are thinking that this is an example of “paying tax on tax”, which common sense says ain’t right?

The benefit of tax exempt bonds is to the bond-holder, who does not have to pay income tax on the bond interest. The “tax exempt” status has no direct impact on the issuer, your city, (other than allowing it to issue bonds at a lower interest rate, all other things being equal.) You actually benefit because the lower interest reduces the expense of providing the gas, electricity or water, etc and with it the price you pay.

If I pay sales tax on a bottle of Pepsi some of the cost of the Pepsi is interest that the Corp pays on its bonds. Why would your city not have to charge tax on the portion of its bonds? It is a cost of doing business no different than Pepsi’s or any other enterprise.

As far as “tax on tax”, it happens all the time and it is perfectly legal. Gasoline has a Federal tax on it and sales tax is added to the price per gallon including the Fed tax. Tires have a Federal Excise tax and you pay sales tax on the FET as well.

A very good question! Sorry if it’s not the answer you wanted!