Electricity is taxed almost entirely at the state and local level in the United States. There is no federal excise tax on electricity, so every tax line on your power bill comes from your state, county, or city, usually as some combination of sales tax, gross receipts tax, excise tax, and franchise fees, alongside regulatory surcharges that function the same way. The specific mix, and how much it adds to your bill, depends on where you live.
The Four Kinds of Taxes on Your Power Bill
Not every jurisdiction uses all four, and rates vary widely. Several can appear on the same bill.
Sales Tax
Many states apply their general sales tax to electricity, treating power like any other retail purchase. A significant number of states either fully exempt residential electricity or tax it at a reduced rate. Where sales tax does apply, the rate is usually the state’s standard retail rate, and some localities layer their own percentage on top.
Gross Receipts Tax
Some states tax utility companies on their total revenue from energy sales rather than taxing you directly. The tax base typically covers all revenue from delivering electricity to the end user. Utilities almost always pass this cost through to customers, so it lands on your bill even though the company is technically the taxpayer.
Excise Tax
A handful of states impose a dedicated excise tax on electricity consumption, usually charged as a flat amount per kilowatt-hour rather than as a percentage. Virginia, for example, levies an electric utility consumption tax at $0.001595 per kWh on the first 2,500 kWh consumed per month, split into state, special regulatory, and local components.
Franchise Fees
Local governments grant utilities permission to run power lines through public streets and rights-of-way. In exchange, the utility pays a franchise fee, essentially rent for using public land, negotiated between the city and the utility. Franchise fees for utilities commonly run in the range of 2% to 6% of your bill, though the exact amount depends on the local agreement.
Surcharges That Work Like Taxes
Your bill also carries mandatory surcharges imposed by state regulators or legislatures. Technically they are not taxes, but you cannot opt out, and the money funds public purposes rather than the electricity you actually used.
Public benefit charges (sometimes called system benefit charges) are collected per kilowatt-hour and fund energy efficiency programs, low-income customer assistance, renewable energy procurement, and grid reliability operations. The rate is adjusted periodically based on prior program costs and projections. In some states, these charges account for a substantial share of the total bill.
Renewable portfolio standard compliance costs are the second big category. Most states require utilities to source a set percentage of electricity from renewables, and utilities recover those compliance costs through surcharges or rate adjustments. Some states cap the annual pass-through; others allow full recovery. Where a state offers an alternative compliance payment, that payment effectively caps what consumers pay for the mandate.
Why You Pay Even When the Utility Owes the Tax
Even when the utility is legally the taxpayer, regulatory frameworks almost universally let the company pass the cost through to customers. This is by design. State public utility commissions set rates using a formula that accounts for reasonable operating costs, and taxes are explicitly included as an operating expense the utility is entitled to recover. A utility files a rate case, the commission reviews whether the costs are reasonable and prudent, and the resulting rates let the utility recover those costs plus earn a regulated return. When a legislature raises a utility tax, the cost flows to ratepayers through this mechanism.
Residential customers are the largest group of individual payers. Commercial and industrial customers usually sit on different rate schedules, and large industrial users often have their own classifications reflecting their consumption volumes, with tax treatment that can differ significantly from a household’s. The result across every customer class is the same: the consumer funds the tax, whether it appears as a named line item or is baked into the base rate.
How the Charges Are Calculated
Electricity taxes take one of two shapes: a percentage of the dollar amount, or a flat rate per unit consumed.
Percentage-based taxes, including sales tax and some gross receipts taxes, apply to the total charge. A 6% sales tax on a $100 energy charge produces $6 in tax. The amount tracks your bill, so higher consumption or higher electricity prices generate more revenue without any rate change.
Unit-based taxes, including excise taxes and many surcharges, apply per kilowatt-hour regardless of price. A rate of $0.002 per kWh costs a household using 1,000 kWh exactly $2.00, whether power costs 10 cents or 20 cents per kWh. That approach gives governments predictable revenue tied to actual consumption.
Things get more expensive when charges stack. In jurisdictions that impose both a gross receipts tax and a sales tax, the sales tax is sometimes calculated on a subtotal that already includes the gross receipts tax, creating a tax-on-tax effect. Gross receipts taxes are particularly prone to pyramiding because they hit total revenue at each stage of production, and those embedded costs accumulate as they flow down to the final consumer. The effective burden on your electricity can be noticeably higher than the advertised rates suggest.
Who Can Claim an Exemption
Some categories of consumers can reduce or eliminate the tax portion of their bill. None of these exemptions apply automatically. You have to claim them, and in most cases you have to document them.
Manufacturers. Manufacturing facilities often qualify when they can show the majority of their power goes directly to production rather than to office space, lighting, or climate control. This is typically called a predominant use standard and usually means demonstrating that more than 50% of consumption drives production equipment. States that offer the exemption generally require a professional energy audit to verify the split, and the business must maintain detailed usage records going forward. Losing the documentation trail can trigger retroactive tax liability plus penalties for the years the exemption was claimed.
Agricultural operations. Farmers and ranchers can often get relief for electricity powering irrigation systems, grain dryers, livestock facilities, and similar equipment. These exemptions typically require a formal exemption certificate filed with the utility and proof that the electricity is used primarily in farming. Where equipment serves both farm and non-farm purposes, you need records showing farming use predominates.
Nonprofits. Organizations with federal 501(c)(3) tax-exempt status can often avoid sales tax on utility bills. The process usually involves providing the tax-exempt determination letter and a state-specific exemption certificate to the utility. The utility will not remove the charge on its own. In many states you need to register with the state tax authority and obtain a specific exemption form before the utility will honor it.
Low-income and elderly households. Various state and local programs reduce or waive electricity taxes and charges for qualifying residents. Eligibility often ties to participation in federal assistance programs. The Low Income Home Energy Assistance Program (LIHEAP) is the largest federal program in this space and provides direct help with energy costs to eligible households. Eligibility varies by state but generally depends on household income and size, with some states granting automatic eligibility to people already receiving benefits through programs like Supplemental Security Income or Temporary Assistance for Needy Families.1USAGov. Get Help With Energy Bills Utilities do not know your income and will not apply relief without government verification, so you have to apply.
Keeping an Exemption Through an Audit
Claiming the exemption is the easy part. Keeping it is where businesses stumble. State tax authorities periodically review exemption claims, and when they find a problem, the consequences go beyond simply paying back what should have been owed.
A manufacturer claiming predominant use needs current energy consumption schedules showing exactly how much power goes to production versus non-production. An engineer certification letter supporting the calculations strengthens the position. Records need to be current: a five-year-old audit will not satisfy a reviewer looking at last year’s claim if equipment or operations have changed.
When an audit invalidates an exemption, expect the full back taxes plus interest, and depending on the state, penalties and administrative costs. The tax authority can record a lien if you do not pay, and you typically have a limited window, often 30 days, to request a hearing.
The most common trigger is neglect: a business qualifies, files the initial paperwork, and never updates its records as operations change. If production’s share of consumption drops below the threshold and no one notices, the exemption becomes invalid retroactively. An annual internal review of your usage breakdown is the cheapest insurance.
Solar and Self-Generated Power
Generating your own electricity does not fully remove you from the tax picture. Most solar homeowners still draw grid power at night or during cloudy periods, and the same taxes and surcharges apply to that grid electricity. For the electricity your panels produce and you consume on-site, no sales or excise tax applies because there is no purchase to tax.
Net metering complicates things. When your panels produce more than you use and the surplus flows back to the grid for bill credits, the IRS has indicated that payments or incentives from utilities for clean energy could be included in your gross income for federal income tax purposes, with the specific treatment depending on how the utility structures the credit.2Internal Revenue Service. Residential Clean Energy Credit Actual cash payments make the case for reporting income stronger than bill credits do.
The bigger 2026 change: the federal residential clean energy credit under Section 25D, which previously covered 30% of the cost of installing solar panels and battery storage, no longer applies to expenditures made after December 31, 2025. The One, Big, Beautiful Bill terminated the credit effective January 1, 2026.3Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under the One, Big, Beautiful Bill Installations completed before that date can still claim the credit for those expenditures. New installations in 2026 and beyond will not receive this federal benefit. Some states still offer their own solar incentives, including sales tax exemptions on solar equipment, so the state-level picture varies.
Disputing a Tax Charge on Your Bill
If a tax line looks wrong, an exemption was not applied, or a surcharge appeared that you cannot identify, start with the utility. Most billing errors are clerical and get resolved at this stage. Ask the representative to walk through each tax and surcharge line and confirm that any exemption you have filed is on your account.
If the utility does not resolve it, your next stop is your state’s public utility commission or public service commission. Every state has one, and all accept consumer complaints. The commission will typically send your complaint to the utility, require a formal response within a set timeframe, and issue a resolution. If the informal process fails, you can usually escalate to a formal proceeding.
For disputes about the tax rate itself or about whether state law gives you an exemption, contact your state’s department of revenue rather than the commission. The utility only collects the tax. The department of revenue sets the rules. Keep copies of exemption certificates, audit documentation, and correspondence, because the burden of proving you qualify for an exemption always sits with you.