We receive a franchise fee from various utility companies in place of their paying a business license fee. Are franchise fees excluded from the general revenue calculations?

On January 6, 2022, the U.S. Department of the Treasury (“Treasury”) issued the Coronavirus State and Local Fiscal Recovery Fund (“CSLFRF”) Final Rule pursuant to the American Rescue Plan Act of 2021 (“ARP”). The Final Rule does not specifically address franchise fees; however, this does not necessarily mean that franchise fees must be excluded from general revenue calculations in all cases.  Treasury’s definition of general revenue includes “revenue collected by a recipient and generated from its underlying economy, and it would capture a range of different types of tax revenues, as well as other types of revenue that are available to support government services.”[1] Franchise fees, as described above, are a payment from the utility company to the municipality for use of public space or right-of-way.[2]

Treasury has included language in the Final Rule regarding updates to the definition of general revenue in response to public comment:

Treasury has adjusted the definition to allow recipients that operate utilities that are part of their own government to choose whether to include revenue from these utilities in their revenue loss calculation. This change responds to comments from recipients indicating that revenue from utilities is used to fund other government services and that utility revenues have declined on aggregate.[3]

Furthermore, for utilities and other entities (e.g., certain service districts) that are not a part of a government recipient, a transfer from the utility to the recipient is considered an intergovernmental transfer and therefore is included in the definition of general revenue.[4] As such, recipients may choose to include government-operated utilities, but must include non-government operated utilities as general revenue.[5]

Neither Treasury’s appendices to the CSLFRF Frequently Asked Questions (“FAQ”) nor the Census Bureau Government Finance and Employment Classification Manual explicitly describe the classification of franchise fees or other fees paid by utilities for land use. However, the Census Bureau Manual describes public utility sales taxes as:

Taxes imposed distinctively on public utilities, both privately- and publicly-owned, such as public passenger and freight transportation companies, telephone, telegraph, and light and power, and others; and measured by gross receipts, gross earnings, or units of service sold, either as a direct tax on consumers or as a percentage of gross receipts of utility.[6] 

Additional information may be provided when the Treasury issues new FAQs regarding the Final Rule. In addition, recipients should consider the guidance issued in the Statement Regarding Compliance with the Final Rule.[7]

Last Updated: February 20, 2022