Could manufacturing tenants claim a utility exemption when gas and electricity accounts remained in the commercial landlord's name?

Plain-English summary

When a landlord bought gas and electricity and billed a manufacturing tenant through rent, the tenant could not claim the manufacturing exemption. Texas treated the landlord as making taxable commercial use of the utilities in leasing the property.

The same result applied when utilities were separately metered and the tenant paid the utility company directly but the account remained in the landlord's name. The payment was still treated as part of the lease.

If the tenant contracted directly with the utility company as purchaser, the tenant could claim exemption when predominant utility use was exempt.

Common questions

Did direct tenant payment fix a landlord-held account? No.

Why was the exemption denied? The purchaser on the account was the landlord, whose use was commercial leasing rather than manufacturing.

When could the tenant claim exemption? When the tenant contracted directly to buy the utilities and predominant use was exempt.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8812L0918D06

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller December 21, 1988

Dear ***:

Thank you for your letter regarding sales tax exemption on natural
gas and electricity used for manufacturing. The specific situa-
tions involve a landlord and a tenant engaged in manufacturing.

The first situation involves a landlord "A" and a tenant "B". "A"
leases office/manufacturing space to "B" and bills "B" for elec-
tricity and natural gas (as part of its rent) for which "A" pays
the utility companies. You are correct that "B" cannot claim
sales tax exemption since the payment by "B" to "A" for electrici-
ty and natural gas is considered to be a part of the rent. "A" is
making a commercial use of the natural gas and electricity pur-
chased in conjunction with leasing property to "B".

The second situation involves a landlord "C", a tenant "D" and
utility company "U". "U" bills "C" for natural gas and electrici-
ty separately metered for space leased by "C" to "D". "D" pays
the utility company directly for the bills even though the "ac-
count" is in the lessor's name for convenience.

The landlord would have to claim exemption since the account is in
the landlord's name. However, the utilities would not qualify for
exemption since the landlord's use is commercial use and not manu-
facturing. Since the utility accounts have remained in the landlord's
name, the fact that the tenant pays the utility company rather than
the landlord, does not make the payment any less a part of the rental
or lease.

If the tenant "D" contracted to purchase the utilities from utility
company "U", the purchaser ("D") could claim exemption from tax if
the predominant use of the utility(s) is exempt use.

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

If you have any questions or need more information, please call
our toll-free number 1-800-252-5555 or the regular number 512/463-
4600. My extension is 3-4666. You may write to Tax Correspon-
dence, Comptroller of Public Accounts.

Sincerely,
Jo Ann Dieck
Tax Correspondence