What are the requirements for a predominant use study that lets a print shop claim the manufacturing exemption on its natural gas and electricity?

Plain-English summary

Someone asked the Comptroller to explain the requirements for a "predominant use study" for print shops seeking to exempt their natural gas and electricity from Texas sales tax.

The Comptroller laid out the layered exemption structure that applies:

• § 151.317(a)(2) exempts electricity used to power equipment that itself qualifies for the manufacturing exemption under § 151.318.
• § 151.318(a)(2) exempts tangible personal property directly used during actual manufacturing/processing that is necessary or essential to that operation.
• § 151.318(a)(4) exempts equipment that powers or supports other equipment already qualifying under § 151.318(a)(2).
• § 151.317(a)(3) separately exempts natural gas and electricity used to light, heat, and cool the manufacturing/processing area during actual manufacturing or processing operations.

Because a print shop typically uses the same gas/electricity supply for both exempt (production equipment, production-area lighting/climate control) and taxable (office space, non-production areas) purposes, § 151.317(e) requires a predominant use study whenever a single meter measures both. Per Rule 3.295(e)-(f), the study determines whether over 50% of that meter's gas or electricity usage goes to exempt purposes. If it does, the exemption applies to the entire amount measured through that meter — even the taxable-purpose portion rides along as exempt. This works the same way whether the print shop has a single meter or multiple meters, except that with multiple meters, each meter must independently qualify — a study has to be performed separately for each one.

What this means for you

Print shops and other manufacturers/processors with mixed-use utility meters

You can't just estimate what percentage of your gas/electricity goes toward manufacturing — a formal predominant use study is required whenever one meter serves both exempt and taxable purposes. If you have multiple meters, don't assume qualifying on one covers the others; each meter needs its own study clearing the 50% threshold independently.

Businesses installing separate meters for production vs. office areas

Since exemption tracks each meter separately, physically separating production-area utilities onto a dedicated meter (if usage there clears 50% exempt) can simplify qualifying, versus one shared meter blending office and production use.

Accountants and tax professionals

Note the two-tier exemption stack here: § 151.318(a)(2)/(a)(4) qualify the underlying equipment, § 151.317(a)(2)/(a)(3) extend that to the utilities powering (or supporting the environment for) that equipment, and § 151.317(e)/Rule 3.295(e)-(f) supply the metering mechanics (the >50% predominant-use threshold, applied per-meter).

Common questions

Q: Is a predominant use study always required to claim the manufacturing utility exemption?
A: Only when a single meter measures both exempt and taxable gas/electricity use. If a meter serves only exempt equipment/areas, a study generally isn't needed for that meter.

Q: What percentage of use must be exempt for the whole meter to qualify?
A: Over 50% — the exemption then applies to the entire amount measured through that meter, not just the exempt portion.

Q: If a print shop has multiple meters, does qualifying on one cover the rest?
A: No — each meter must independently qualify; a separate predominant-use study must be performed for each meter.

Q: Can another print shop rely on this letter?
A: No. It's a general explanation of the statutory and rule requirements rather than a ruling on specific facts; each business's actual usage must still be documented through its own predominant-use study.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.317(a)(2), (a)(3), (e)
• Tex. Tax Code § 151.318(a)(2), (a)(4)
• 34 Tex. Admin. Code Rule 3.295(e), (f)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200107372L

Original ruling text

July 3, 2001

Subject: Predominant Use Study for Print Shops

Dear **:

Thank you for your recent email requesting information about the requirements
for a predominant use study for print shops.

Texas Tax Code Section 151.317(a)(2) exempts electricity used to power
equipment that qualifies for exemption under Texas Tax Code Section 151.318.
Texas Tax Code Section 151.318(a)(2) exempts tangible personal property
directly used during the actual manufacturing or processing of tangible
personal property for sale as tangible personal property that is necessary or
essential to the manufacturing or processing operation.

Texas Tax Code Section 151.318(a)(4) exempts specific machinery and equipment
that powers or support machinery and equipment that qualifies for exemption
under Section 151.318(a)(2).

Texas Tax Code Section 151.317(a)(3) exempts natural gas and electricity used
to light, heat and cool the manufacturing and processing area during actual
manufacturing or processing operations.

Texas Tax Code Section 151.317(e) requires a predominant use study if natural
gas or electricity measured through a single meter during a regular billing
period is used for both exempt and taxable purposes. See Rule 3.295(e) and (f)
concerning natural gas and electricity.

A printer's use of natural gas or electricity may qualify for exemption based
on predominant use (over fifty percent) of the gas or electricity is used for
exempt purposes whether measured through a single meter or multiple meters. If
there are multiple meters, each meter must qualify individually. This means a
study must be performed for each meter.

You may view or down load the sales tax law by clicking on the following URL
http://www.window.state.tx.us/ and then click on the following:

1. Texas Taxes
2. Tax Code under Texas Laws and Rules
3. Tax Code
4. Scroll down to referenced statutory cite

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 [email protected].

Sincerely,

Eddie C. Washington
Tax Policy Division