When did electricity qualify for exemption under the predominant-use test, and what rules applied to exemption certificates and refunds of previously collected tax?

Plain-English summary

The letter addressed tax exemptions and refunds for electricity, despite the STAR caption calling it a “Disconnection Fee.” Commercial electricity use was taxable, while residential use and electricity used directly in manufacturing or processing goods for sale, extracting material from the earth, and agricultural operations were exempt uses.

When one meter covered both taxable and exempt uses, more than 50% had to be exempt for the meter to qualify. A continuously operating manufacturer or processor established predominant use from 12 consecutive months. A seasonal operation could establish it for the period when processing or manufacturing occurred. The purchaser claiming exemption bore responsibility for qualification, supported by an electricity-usage study.

A seller was not legally required to sell a taxable item tax-free or refund tax from prior transactions. A properly completed exemption certificate accepted in good faith relieved the supplier of liability and had to be retained. The supplier still had to understand which kinds of use could qualify.

The limitations period restricted refunds to four years as described in the letter. A refund depended on the past utility use matching the use measured by the study. No refund was available for inactive meters because an on-site study could not be performed. A utility's refund check had to be payable to the purchaser who paid the tax, not the consultant or engineer who prepared the study.

Common questions

What percentage of a mixed-use meter had to be exempt? More than 50%.

Who was responsible for establishing exempt use? The purchaser claiming the exemption.

Did accepting a certificate for future sales force the seller to refund old tax? No.

Could tax be refunded for an inactive meter? No, because the required on-site study could not be made.

Who had to receive the refund check? The purchaser who paid the utility tax.

Citations and references

• 34 Tex. Admin. Code Rule 3.295 was enclosed with the letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8608L0753A03

Original ruling text

August 7, 1986

Dear ***:

This is to follow up our telephone conversation regarding sales tax
exemption on electricity and your responsibility for the tax.

The Texas sales tax law taxes the commercial use of electricity.
"Commercial use" means use by a person engaged in selling, warehousing or
distributing a commodity or a professional or personal service. The law
exempts the residential use of electricity and that used directly in (1)
manufacturing or processing tangible personal property for sale, (2)
extracting a material from the earth, and (3) agricultural operations.

Where one meter measures both exempt and taxable uses, the predominant
use theory applies. This means that over 50% of the utility must be exempt
use in order to qualify for exemption. It is the responsibility of the
person (purchaser) claiming the exemption to be sure that the utility qualifies
for exemption. This may be determined by an electricity usage study.

A person processing or manufacturing continually must establish
predominant use on 12 consecutive months of use. If processing or manufacturing
is performed part of the year and a non-processing or non-manufacturing
function is performed the remainder of the year, the predominant use may
be established for the period of time the processing or manufacturing
function occurs based on the predominant use during that period, i.e., a cotton
gin processing only a part of the year could qualify for exemption only for
that period of time.

You asked if you are required to refund sales tax paid in the past when
an exemption certificate is accepted from the customer and future sales are
exempted. There are no provisions in the sales tax law that requires a
seller to sell taxable items tax free or to refund the tax on prior
transactions.

The sales tax law provides that the gross receipts of a seller are
presumed taxable until the contrary is established. A seller is relieved
of the tax liability if an exemption certificate is accepted in good faith
from the purchaser. The exemption certificate must be retained in the seller's
files to show why the tax was not collected.

The utility supplier has the same responsibilities about allowing exemptions
as any other retailer. The utility supplier is responsible for knowing the
types of uses that can qualify for exemption (i.e., manufacturer of widgets,
apartment complex) and the type of uses that do not qualify (i.e., service
station, department store). The utility supplier is relieved of liability for
the tax if a properly completed exemption certificate is accepted in good
faith from the purchaser.

The Statute of Limitations limits refunds to four years from the beginning of
the reporting period in which the written refund request is dated. A refund
can be claimed provided the past utility use was the same as at the time
the study was performed determining predominant exempt use.

Sales tax cannot be refunded on inactive meters since an on-site study of
the utility uses cannot be made.

Checks issued by the utility company to refund the tax must be made payable
to the purchaser of the utility who paid the tax. The checks cannot be
issued to a consultant or engineer who prepared the study.

I am enclosing Rule 3.295 for your information.

Please feel free to contact us if you have additional questions. You may
write us, call toll free l-800-2S2-5555 from anywhere in Texas or phone
512/463-4600.

Sincerely,

Tax Policy Section
Tax Administration Division