Does a Texas cotton gin need its own individual utility (predominant-use) study to claim the sales tax exemption on the electricity it uses to run the gin?

Plain-English summary

A cotton gin operator ("Company A") gave its electricity supplier ("Company B") a sales and use tax exemption certificate claiming an exemption for "electricity used in Ginning Cotton." Company A asked the Comptroller to confirm it could claim the exemption on 100% of its electricity purchases, relying on an existing industry-wide predominant-use study rather than commissioning its own individual study.

Texas exempts natural gas and electricity used to power exempt manufacturing/processing equipment (Tax Code § 151.317(a)(2); Rule 3.295(c)(4)(A)). Normally, a business claiming this exemption through a single meter must have an individual utility study performed to prove the predominant use of that metered electricity is for an exempt purpose (Rule 3.295(f)). But Rule 3.295(f)(5) waives that individual-study requirement when the Comptroller has already accepted an industry-wide study showing that electricity used in a particular industry always qualifies for the exemption.

The Comptroller confirmed that two older STAR rulings (from 1995 and 2000) already establish that electricity used to power cotton gins is for processing, and that the Comptroller has accepted an industry-wide predominant-use study covering cotton ginning. So a cotton gin doesn't need its own individual utility study — a properly completed exemption certificate is enough to buy the metered electricity tax-free.

One important limit: under Rule 3.295(e)(2), if a gin's electricity meter is also used for a non-processing purpose part of the year, the exemption only covers the months cotton is actually being processed — not the full calendar year. The Comptroller also gave general (non-binding) guidance in the same letter about the separate agricultural-use exemption (which requires registering for an Agricultural and Timber Exemption Registration Number under Section 151.1551), the residential-use exemption, and the four-year statute of limitations for tax refund claims.

What this means for you

Cotton gin operators

You can rely on the accepted industry-wide predominant-use study for cotton ginning instead of paying for your own utility study — but only claim the exemption for the months your gin is actually processing cotton if the same meter also serves a non-ginning function during the rest of the year.

Electric and gas utility companies serving agricultural customers

A properly completed exemption certificate referencing the cotton-ginning industry-wide study should be sufficient documentation to sell electricity tax-free to a cotton gin, without requiring the customer to also submit an individual utility study.

Farmers and agricultural businesses more broadly

Don't confuse the manufacturing/processing exemption (which cotton ginning qualifies for) with the separate agricultural-use exemption under Section 151.317(a)(5) — the latter requires the purchaser to register with the Comptroller and obtain an Agricultural and Timber Exemption Registration Number, which isn't needed for the processing exemption discussed in this ruling.

Accountants and tax professionals

Note that the general guidance portion of this letter (agricultural exemption registration, residential exemption, refund statute of limitations) is explicitly described by the Comptroller as advisory and not tied to a specific set of facts — it's useful background but carries less weight than the actual private letter ruling on the cotton-gin utility-study question.

Common questions

Q: Do cotton gins need to commission their own utility study?
A: No, as long as they're relying on the Comptroller-accepted industry-wide predominant-use study for cotton ginning (referenced in STAR Accession Nos. 9505L1346F14 and 200010761L) and provide a properly completed exemption certificate.

Q: What if the gin also uses electricity from the same meter for something other than ginning?
A: Per Rule 3.295(e)(2), the exemption only applies to the months during which the gin is actually processing cotton — not year-round.

Q: How does the agricultural exemption differ from this processing exemption?
A: The agricultural-use exemption (Section 151.317(a)(5)) is separate and requires the purchaser to register for an Agricultural and Timber Exemption Registration Number under Section 151.1551 and provide it on a Texas Agricultural Sales and Use Tax Exemption Certificate. The processing/manufacturing exemption discussed in this ruling does not require that registration.

Q: Can another cotton gin rely on this ruling?
A: No. The core ruling is binding only on the Comptroller as to this taxpayer and these facts. However, it references and applies previously accepted Comptroller guidance (the industry-wide study) that is generally available to cotton gins meeting the same fact pattern — check with a tax professional about your specific situation.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.317(a)(1), (2), (5) (natural gas/electricity exemptions: residential, manufacturing/processing, agricultural)
• 34 Tex. Admin. Code Rule 3.295(c)(1), (c)(2), (c)(4)(A) (residential, agricultural, manufacturing/processing exemptions)
• 34 Tex. Admin. Code Rule 3.295(e)(2) (partial-year predominant use)
• 34 Tex. Admin. Code Rule 3.295(f), (f)(5) (utility study requirement and industry-wide-study exception)
• Tex. Tax Code § 151.1551 (Agricultural and Timber Exemption Registration Number)
• 34 Tex. Admin. Code Rule 3.325 (refunds; four-year statute of limitations)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Prior STAR guidance discussed:

• STAR Accession No. 9505L1346F14 (May 5, 1995) (cotton-gin electricity industry-wide study)
• STAR Accession No. 200010761L (Oct. 4, 2000) (cotton-gin electricity industry-wide study)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201607900L

Original ruling text

July 20, 2016

Re: Private Letter Ruling #150560138

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter
Rulings and General Information Letters, [ENDNOTE 1] in response to your
request dated February 18, 2015 regarding the taxability of electricity used by
cotton gins in Texas. Detrimental reliance relief is provided in accordance
with Rule 3.10, the Taxpayer Bill of Rights.

In addition, you raise questions about whether a cotton gin may claim a refund
of tax paid in error on the purchase of exempt electricity, and about
agricultural and residential uses of electricity. The general guidance
following the private letter ruling is advisory in nature and is not related to
a specific set of facts.

Ruling Requested

** (“COMPANY A”), a cotton gin operator, may claim a sales and use
tax exemption on 100 percent of the purchase price of electricity based on an
industry-wide predominant use study accepted by the Comptroller.

Facts Presented

** (“COMPANY B”) sells electricity to its client, COMPANY A, in
CITY, Texas. COMPANY A provided COMPANY B with a sales and use tax exemption
certificate for the electricity it purchased in order to run its cotton gin.
COMPANY A’s tax exemption certificate claimed an exemption from sales and use
tax for “electricity used in Ginning Cotton.”

Analysis and Private Letter Ruling

Section 151.317(a)(2) and Rule 3.295(c)(4)(A) provide a sales tax exemption for
natural gas and electricity used to power exempt manufacturing or processing equipment.

Under Rule 3.295(f), persons claiming a sales tax exemption because the
predominant use of natural gas and electricity purchased through a single meter
is for processing, manufacturing, fabricating, or another nontaxable use must
have a utility study performed to establish this predominant exempt use.
However, Rule 3.295(f)(5) states, in part, that subsection (f) does not apply
to persons whose use of natural gas or electricity is for an exempt function if
an industry-wide study for that particular industry reflects that the natural
gas or electricity used would always qualify for the exemption.

STAR Accession Nos. 9505L1346F14 (May 5, 1995) and 200010761L (Oct. 4, 2000)
specifically address natural gas and electricity used to power cotton gins.
These letters establish that the use of electricity by a cotton gin is for
processing and that the Comptroller has accepted an industry wide predominant
use study for electricity used to power cotton gins. A customer may provide a
properly completed exemption certificate in lieu of tax on charges for meters
that measure electricity used by a cotton gin.

Additionally, Rule 3.295(e)(2) states, "If, in the regular course of business,
a person performs a processing, manufacturing, or other exempt function only
part of the year and a nonprocessing, nonmanufacturing, or other taxable
function for the remainder of the year, the predominant use may be established
for that period of time the processing, manufacturing, or other exempt function
occurs based on the predominant use during that period." This means that cotton
gins may only claim the exemption for months of the year cotton is actually
being processed, and not for other months.

General Guidance

In our phone conversation, you also had questions about the taxability of
agricultural and residential use of natural gas and electricity. As we discussed,
the exemption for agricultural use is separate from the exemption for processing.

Section 151.317(a)(5) and Rule 3.295(c)(2) provide a sales tax exemption for
natural gas and electricity used in agriculture. Section 151.1551 requires a
person claiming the exemption for agricultural use of natural gas and
electricity to register with this office and obtain an Agricultural and Timber
Exemption Registration Number.

A purchaser must provide a completed Texas Agricultural Sales and Use Tax
Exemption Certificate when claiming an agricultural exemption for electricity
and must provide their registration number on the certificate.

Additional information regarding the agricultural and timber sales tax
exemptions is available online at comptroller.texas.gov/taxinfo/agriculture/.
You may check the status of a customer’s Agricultural Registration Number using
our online database. The database is available online at
https://mycpa.cpa.state.tx.us/regagexsearch/.

In addition, residential use of natural gas and electricity in Texas is exempt
from state sales and use tax under Section 151.317(a)(1) and Rule 3.295(c)(1).
Certain cities and special purpose districts may impose local sales and use tax
on the residential use of electricity. Information regarding residential use of
natural gas and electricity, including a list of cities imposing a tax, is
online at comptroller.texas.gov/taxinfo/utility/reflist.html.

Finally, Rule 3.325 provides guidance regarding refunds. The statute of
limitations for refund claims is four years from the date on which the tax was
due and payable. Additional information related to sales tax refunds is
available online at comptroller.texas.gov/taxinfo/refunds/sales/.

Additional sales tax information, including links to statutes, rules, forms,
and publications, is available at comptroller.texas.gov/taxinfo/sales/.

The State Tax Automated Research (STAR) System is a searchable database of
Comptroller letters, decisions, hearings, and other documents. STAR documents
may be accessed online at cpastar2.cpa.state.tx.us/. The “Help” tab located in
the yellow banner near the top of the page provides instructions on using the
.

Please email us at https://www.comptroller.texas.gov/taxhelp/ and reference
Private Letter Ruling #150560138 if you have any questions about this response.

Regards,

Tax Policy Division – Indirect Taxes

ENDNOTE

1. Unless otherwise noted, all references herein to “Section” are to Tex. Tax
   Code Ann. (Vernon 2015 and Supp. 2016) and all references to “Rule” are to
   34 Tex. Admin. Code (2016).