Can a semiconductor manufacturer use dedicated electrical submeters, instead of a full predominant-use study of every piece of equipment, to claim the Texas manufacturing electricity exemption?

Plain-English summary

A corporation acquired the operations of a semiconductor manufacturer at a Texas facility. The prior company had already performed a full predominant-use utility study and claimed the electricity exemption, which the Comptroller's audit office had verified as part of a refund claim. The new corporate owner made no material change to the manufacturing process or overall facility use, but did install 22 electrical submeters to monitor electricity usage across various manufacturing and non-manufacturing points in the facility.

The question: since the corporation now had submeters, could it qualify for the manufacturing exemption on electricity just by listing each submeter and its measured usage — without having to redo a full predominant-use study documenting the kilowatt rating, duty factor, and hours of use of every individual piece of equipment?

The Comptroller said yes, conditionally. Under Rule 3.295(e), electricity used for both exempt and taxable purposes under a single meter is entirely exempt or entirely taxable based on that meter's predominant use, measured over 12 consecutive months. The corporation's submeters can substitute for tracking every individual piece of equipment only if each submeter is truly dedicated — meaning every piece of equipment connected to a given submeter is exclusively manufacturing use, or exclusively non-manufacturing use, with no mixed-use equipment on any one submeter. An engineer must certify that usage, per Rule 3.295(f)(2) and (3).

Even with dedicated submeters in place, the exemption isn't automatic and permanent: because the submeters let the company measure predominant use on a rolling monthly basis, the Comptroller noted the corporation would be required to accrue and remit sales tax for any billing period in which a submeter's predominant use turns out to be non-manufacturing — the exemption tracks actual usage each month, not a one-time determination.

What this means for you

Manufacturers with mixed manufacturing/non-manufacturing facilities

Installing dedicated submeters — one exclusively for manufacturing equipment, another exclusively for non-manufacturing equipment — can simplify your predominant-use exemption documentation considerably, letting you skip itemizing every piece of equipment's kilowatt rating and duty cycle. But you still need an engineer to certify the dedication and usage, and you must monitor and remit tax for any month where a "manufacturing" submeter's actual usage tips non-manufacturing.

Companies acquiring a facility with an existing predominant-use exemption

An existing exemption claim doesn't automatically transfer without re-verification — this corporation had to confirm its own qualification even though the acquired business's usage pattern was materially unchanged, and even though the prior exemption had already been verified by a Comptroller audit.

Accountants and tax professionals

This letter is a useful precedent for using submetering as an alternative compliance path to the traditional detailed predominant-use study under Rule 3.295, but it's conditioned on true meter dedication (no mixed-use equipment per meter) and ongoing monthly monitoring, not a one-time study.

Common questions

Q: Can submeters replace a full predominant-use study?
A: Yes, if every submeter is truly dedicated — all equipment on a given submeter is exclusively manufacturing use or exclusively non-manufacturing use — and an engineer certifies the usage under Rule 3.295(f)(2)-(3).

Q: Does the exemption apply automatically once submeters are installed?
A: No. The company must still accrue and remit sales tax for any monthly billing period in which a submeter's actual measured usage turns out to be predominantly non-manufacturing.

Q: Does acquiring a business with an existing exemption transfer that exemption automatically?
A: This letter shows the new owner still needed a fresh determination, even though the manufacturing process and facility use were materially unchanged from the prior owner.

Q: Can any semiconductor or manufacturing company rely on this ruling?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10). Confirm your own submetering setup and engineer certification with a tax professional.

Citations and references

Statutes and rules:

• Comptroller Rule 3.295(e) (predominant use determination under a single meter)
• Comptroller Rule 3.295(f)(2)-(3) (natural gas and electricity — engineer certification requirement)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200103093L

Original ruling text

March 5, 2001

Subject: Predominant Use Utility Study

Dear **:

Thank you for your recent email concerning your client's qualification for
exemption from sales tax on electricity based on the predominant use theory.

Summary of Information Presented: Your client, ** ("CORPORATION")
acquired the operations of ** ("COMPANY) located at **,
Texas. CORPORATION's business is the development and manufacture of
semiconductors. COMPANY had a predominant use study performed at this location
and claimed an exemption that was verified by the comptroller's audit office as
part of a COMPANY's refund claim. CORPORATION installed twenty-two (22)
electrical submeters to monitor electricity usage at various points of the
manufacturing process as well as in non-manufacturing areas. The manufacturing
process an overall use of the facility by CORPORATION has not changed
materially from the use by COMPANY even though CORPORATION equipped the
facility with new equipment related to manufacturing.

Issue: Considering CORPORATION has only installed additional submeters within
the facility, can CORPORATION qualify for an exemption of sales tax based on
predominant use by listing each submeter without listing the kilowatt rating,
duty factor, and hours of use for each item of equipment?

Response: CORPORATION can qualify for exemption based on predominant use based
on the electricity measured by the submeters, assuming that there are dedicated
submeters for manufacturing use and non-manufacturing use and all equipment on
those dedicated meters are exclusively manufacturing use or non-manufacturing
use. An engineer must certify the usage. See Rule 3.295(f)(2) and (3)
concerning natural gas and electricity.

Rule 3.295(e) states: "Natural gas or electricity used during a regular monthly
billing period for both exempt and taxable purposes under a single meter is
totally exempt or taxable based upon the predominant use of the natural gas or
electricity measured by that meter. A person who performs a processing,
manufacturing, or other exempt function continually must establish predominant
use on 12 consecutive months of use."

The submeters appear to give CORPORATION the ability to determine the
predominant use of electricity for each monthly billing period. It would
appear that CORPORATION would be required to accrue and remit sales tax on the
electricity used during monthly billing periods in which the predominant use is
non-manufacturing use.

The referenced Comptroller rule is available at:
. Click on
State Tax Rules and scroll down to the referenced rule(s).

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825. My
email address is .

Sincerely,

Eddie C. Washington
Tax Policy Division