Does Texas's sales tax exemption for gas and electricity sold to a qualifying data center cover hydrogen used to power on-site fuel cells?

Plain-English summary

A company planning a hydrogen-powered modular data center asked the Texas Comptroller whether hydrogen counts as exempt "gas" under the sales tax exemption for gas and electricity sold to qualifying data centers (Tex. Tax Code § 151.317(a)(9)). The company argued the statute doesn't define "gas," so its everyday meaning should include hydrogen.

The Comptroller disagreed. Even though § 151.317 itself doesn't define "gas," the Comptroller has interpreted the word to mean natural gas since a 1961 ruling, and its current administrative rule (34 Tex. Admin. Code § 3.295, "Natural Gas and Electricity") is expressly limited to natural gas. The statute's own metering provision, added in 1999, also only discusses splitting exempt and taxable use of gas through a "natural gas" meter. Because hydrogen isn't natural gas, purchasing it (or hydrogen fuel cells) to power the data center is a taxable purchase of tangible personal property, regardless of whether the facility itself otherwise qualifies as an exempt data center under §§ 151.359/151.3595.

What this means for you

Data center operators evaluating alternative fuels

Qualifying as a "data center" under §§ 151.359 or 151.3595 does not automatically make every energy source you buy exempt. The gas/electricity exemption in § 151.317(a)(9) is keyed to natural gas and electricity specifically — hydrogen, and by the same logic other non-natural-gas fuel sources, fall outside it and are taxable.

Businesses evaluating hydrogen fuel cells generally

This ruling is Texas-specific administrative interpretation, not a broad statement about hydrogen's tax status everywhere. But wherever a Texas exemption statute says "gas" without defining it, expect the Comptroller to read that as natural gas by default, based on decades of consistent rule-making (Rule .015 in 1978, now Rule 3.295).

Accountants and tax professionals

The ruling leans on Comptroller's rule-making authority under Tex. Tax Code § 111.002 to interpret undefined statutory terms, plus an unbroken chain of guidance dating to a 1961 ruling. That is a strong administrative-interpretation argument, but it is still just the Comptroller's reading — a taxpayer who wanted to challenge it would be arguing against 60+ years of consistent agency practice.

Common questions

Q: Would hydrogen ever qualify for a Texas sales tax exemption at a data center?
A: Not under the § 151.317(a)(9) gas/electricity exemption discussed in this ruling. A different, specific exemption could theoretically apply to hydrogen, but this ruling didn't find or discuss one.

Q: Does this mean the data center itself doesn't qualify as exempt?
A: No — the ruling doesn't say the facility fails the data-center exemption tests in §§ 151.359/151.3595. It says the specific gas/electricity exemption in § 151.317(a)(9) doesn't reach hydrogen purchases.

Q: Can another company rely on this ruling?
A: No. It is binding on the Comptroller only for the taxpayer and facts described in the request. Another company using hydrogen fuel cells would need its own ruling or should independently verify current guidance under Rule 3.295.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.010 (Taxable Item); § 151.009 (Tangible Personal Property)
• Tex. Tax Code § 151.317(a)(9) (gas/electricity sold to a data center); § 151.317(e) (predominant-use metering)
• Tex. Tax Code §§ 151.359, 151.3595 (data center property exemptions)
• Tex. Tax Code § 111.002 (Comptroller's rule-making authority)
• 34 Tex. Admin. Code § 3.295 (Natural Gas and Electricity)

Cited prior guidance:

• STAR Accession No. 6108R0071D04 (Aug. 30, 1961) — Sales Tax Ruling No. 12, Utilities
• STAR Accession No. 7810R0142D05 (Oct. 25, 1978) — original "natural gas" rule

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202511012L

Original ruling text

November 21, 2025

RE: Private Letter Ruling No. 20250530143651

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated May 21, 2025. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether hydrogen is considered a gas for purposes of the sales tax exemption under Section 151.317(a)(9) (Gas and Electricity).

Facts Presented

** (Taxpayer) is a Delaware corporation headquartered in California. Taxpayer develops and constructs modular data centers powered by hydrogen. Taxpayer is in the process of determining its future site for building, developing, and operating a modular-data center powered exclusively by hydrogen.

Taxpayer intends to utilize hydrogen produced from natural gas to power its data center. Taxpayer will house hydrogen fuel cells within each data center module to power the data center operations. Hydrogen fuel cells are a system that converts hydrogen gas into electricity.

Taxpayer states the proposed facility will qualify as a data center as defined under Section 151.359 (Property Used in Certain Data Centers; Temporary Exemption) or 151.3595 (Property Used in Certain Large Data Center Projects; Temporary Exemption). In addition, Taxpayer asserts hydrogen is included in the definition of “gas” under Section 151.317 (Gas and Electricity). Taxpayer emphasizes the common, ordinary meaning of “gas” in Section 151.317 includes “hydrogen,” and the sales tax exemption under Section 151.317 would apply.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Is hydrogen a “gas” that is exempt from sales and use tax under Section 151.317?

Ruling: No. Hydrogen is not a gas exempt under Section 151.317.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). Section 151.010 (Taxable Item) defines a taxable item to include tangible personal property and taxable services. Section 151.009 (Tangible Personal Property) defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any manner. Gas meets this definition. The sale of gas is taxable as the sale of tangible personal property unless an exemption applies.

Gas and electricity have been taxed as a utility since the legislature enacted the tax in 1961. Since that time, the legislature provided exemptions for certain uses of gas and electricity as a utility, including gas or electricity sold for use directly by a data center as defined under Sections 151.359 or 151.3595. Section 151.317(a)(9). Neither gas nor electricity are defined in 151.317.

The Comptroller’s office has consistently interpreted “gas” under Section 151.317 to mean natural gas. Guidance regarding taxable and exempt gas has been available since 1961 under Sales Tax Ruling No. 12 Utilities. See STAR Accession No. 6108R0071D04 (Aug. 30, 1961). Since 1978, the administrative rule implementing the exemptions for “gas” and electricity has specifically referred to “natural gas.” See, for example, Rule .015 (Natural Gas and Electricity) effective Oct. 25, 1978. STAR Accession No. 7810R0142D05 (Oct. 25, 1978). The Comptroller’s current interpretation is found in Rule 3.295 (Natural Gas and Electricity) and is limited to natural gas.

The Comptroller has the authority to adopt, repeal, or amend rules for the purpose of enforcement of the tax code and the collection of taxes. Section 111.002 (Comptroller’s Rules; Compliance; Forfeiture). The Comptroller’s longstanding administrative interpretation adopted under Rule 3.295 of “gas” to mean only “natural gas” is within the Comptroller’s authority under Section 111.002.

Additionally, Section 151.317 specifically refers to natural gas when it explains how to calculate the predominant use of gas through a meter that that is used for exempt and taxable purposes. See Section 151.317(e). Section 151.317(e) was adopted in House Bill 3211 during the 76th legislative session in 1999 as a clarification of existing law after the Comptroller adopted its administrative rule and policy guidance.

Based on the prior and current guidance, hydrogen is not included in “gas” that is exempt under Section 151.317. If Taxpayer purchases hydrogen or hydrogen fuel cells to power its data center, it must pay tax on those purchases as it is purchasing taxable tangible personal property and not exempt gas.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

The Texas Tax Code and Texas Administrative Code are accessible at: www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20250530143651.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.