Was a separately stated municipal franchise fee part of the taxable sales price of electricity?

Plain-English summary

An electric utility separately billed its service charge, a municipal franchise fee, and sales tax when applicable. The franchise agreement allowed the utility to use city streets and public ways and required it to pay the city a percentage of gross receipts from local sales.

The Comptroller treated the franchise fee as part of the electricity's sales price because it was a cost of doing business. Separately stating the fee did not remove it from the tax base, so the utility had to collect tax on the fee whenever the electric-service charge itself was taxable.

Common questions

Did separately stating the franchise fee make it nontaxable? No.

When was tax due on the fee? When the underlying electric service was taxable.

Why was the fee included? It was part of the utility's business cost and therefore part of the total sales price.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8903L0925E11

Original ruling text

March 8, 1989

Dear *:

Thank you for your inquiry regarding the taxability of a charge for a
"municipal franchise fee" in connection with electric service.

You state that you bill service cost, municipal franchise fee, and sales tax
(when applicable) separately to your customers. The municipal franchise
agreement allows your company to use city streets, alleys, and other public
ways in the course of your business. Furthermore, the agreement requires that
your company pay the city a fixed percentage of your gross receipts from sales
within the city boundaries. I understand that you bill this fee to your
customers.

The charge for the municipal franchise fee is considered part of the sales
price of your electricity. In brief, the sales price includes the total amount
for which a taxable item is sold without a deduction for the cost of items such
as your expenses. In this case, the municipal franchise fee is part of your
cost of doing business. Therefore, you must charge tax on the separately
stated charge for the fee when the electric service charge is taxable.

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

If you have any question, please contact Tax Correspondence. You may call toll
free 1-800-252-5555, or our regular number is 512/463-4600. My extension is
3-4662.

Sincerely,

Bob Jeffcoat
Tax Correspondence