Could a building manager exempt electricity reimbursed by a portrait-studio tenant?

Plain-English summary

The building manager was not reselling electricity when it paid the utility bill and recovered each tenant's share through the lease. It could not claim an exemption from the utility unless more than 50% of the electricity measured by the building's master meter was used for exempt purposes.

If the portrait studio bought electricity directly from a regulated utility, it could claim an exemption if more than 50% was used directly to operate portrait-production equipment such as cameras, studio lights, and film-processing equipment. The cost's inclusion in the portrait price did not make the electricity a component of the portrait, so the stated manufacturing theory under Section 151.317 did not apply.

Common questions

Was the building manager selling electricity to its tenants? No; the letter treated the allocation as reimbursement of a building-operating expense. Did the tenant's own usage alone control the master-meter exemption? No; more than 50% of all electricity measured by the master meter had to be exempt use. Was electricity exempt because its cost was included in the portrait price? No.

Citations and references

• Tex. Tax Code § 151.317 — the manufacturing exemption the letter said did not apply on the component-part theory.
• 34 Tex. Admin. Code Rule 3.295 — referenced for the electricity exemption; the rule text is not reproduced.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8506L0644B13

Original ruling text

June 10, 1985

Dear ***:

This is to follow up our telephone conversation regarding our October
1984 correspondence concerning a sales tax exemption claimed by CORP
X, on electricity.

As I understand, you are a building management company and pay the
electric bills, including sales tax, each month. In turn, the cost
of the electricity and tax are proportionately billed to each tenant
as part of the lease agreement.

You are not a seller of electricity by billing each tenant for their
proportionate share of electricity, and tax but are merely seeking
reimbursement for your expense in operating the building.

If CORP X was purchasing electricity from a seller (i.e., a utility
company subject to Public Utility and other governmental regulations),
they could claim sales tax exemption provided over 50% of the electricity
was used directly in the operation of equipment used to produce
portraits, (i.e., cameras, studio lights and film processing). The
fact that the cost of electricity is incorporated into the selling
price of the portrait is not a basis for exemption. The electricity
is not incorporated into nor becomes a component part of the portrait,
therefore, the manufacturers exemption under SEC. 151.317 does not
apply. Please refer to Rule 3.295 regarding the sales tax exemption
on electricity.

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

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the
Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

October 31, 1984

Dear ***:

Thank you for your letter of October 15, 1984, regarding sales tax on
electricity.

You stated that you are a building management company and pay the electric
bills, including sales tax, each month. In turn, the cost of electricity and
taxes are proportionately billed to each tenant. One of the tenants, CORP X,
has claimed an exemption from the tax since they are a custom manufacturing firm.

If over 50% of the CORP X, is exempt use, they could claim sales tax
exemption on the purchase of electricity. However, you are not selling
electricity to them, but are getting reimbursement for their share of
electricity as part of the lease agreement.

You cannot claim exemption for sales tax paid to the utility company
unless over 50% of the electricity measured by the master meter is
exempt use.

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

Please feel free to contact us if you have additional questions. You
may write us, call toll free 1-800-252-5555 from anywhere in Texas.

Sincerely,

Tax Policy Section
Tax Administration Division