Were submeter installation, repair, reading, and tenant-billing services taxable for Texas apartments and condominiums?

Plain-English summary

This STAR body contains an August 18 follow-up and the earlier July 19 response about the same submeter business.

The company read submeters, compared current and prior readings, used a computer to determine each unit's usage, and produced resident bills for apartment or condominium owners. The Comptroller treated that activity as taxable data processing under Rule 3.330. A utility that performed its own meter reading to bill for utility sales was not selling third-party data processing, but a utility or property owner buying this computerized service was purchasing taxable data processing.

If the company installed meters for its own use, it paid tax when buying them. When meters were sold and installed for the property owner, treatment depended on whether the transaction remained a sale and installation of tangible personal property or qualified as residential real-property remodeling. Materials were taxable to the end consumer either way.

Repair of a meter that retained its identity as tangible personal property was taxable. Labor to repair a metering system that had become a residential real-property improvement was not taxable under the letter's treatment. An exempt organization could provide an exemption certificate, but government-backed property financing alone did not create an exemption.

Common questions

Was computerized submeter reading and billing taxable? Yes, as data processing.

Why was a utility's own meter reading different? The utility was selling the utility and using the readings to prepare its own bills, not selling data processing to customers.

Were meters bought for the service provider's own use taxable? Yes.

Were all meter-repair charges treated alike? No. Treatment depended on whether the installed system remained tangible personal property or became a residential real-property improvement.

Did government-backed financing exempt the property? No.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8908L0952C04

Original ruling text

August 18, 1989

Dear *****:

I am responding to your second letter regarding the meter reading services you
provide to multi-family residential communities. I am enclosing several rules
for your information.

You have explained that your business provides metering system installations,
meter repair services, and meter reading. The application of tax to the
metering system installation is determined by several factors. If you install
the meters for your own use in providing the sub-meter reading and billing
service, you must pay tax on the meters at the time of purchase. If you sell
the meters to the multi-family complex and install these meters, the total
charge for this sale and installation is taxable either as the sale and
installation of tangible personal property or non-taxable as the remodeling of
residential real property. In either case, the materials are taxable to the
end consumer.

The meter repair services are taxable as the repair of tangible personal
property when the meter system retains its identity as tangible personal
property once installed. The labor to repair metering systems that become
residential improvements to real property is not taxable as the repair of
residential realty.

In each of the above situations the materials used are taxable to the end
consumer. If the end consumer is an exempt organization such as a governmental
entity, an exemption certificate may be accepted in lieu of tax. Exempt
organizations may also issue exemption certificates on taxable services
performed on their properties.

In response to your primary concern, meter reading services, your company is
providing taxable data processing services. The charge to the apartment or
condominium owner is taxable. Rule 3.330 defines data processing as "the
processing of information for the purpose of compiling and producing records of
transactions, ..." Your company reads submeters for the specific purpose of
determining the amount of utility used by a particular unit during the monthly
billing period. The current meter reading is compared to the prior month's
meter reading to determine an exact amount of usage for the unit in order to
produce a bill for this unit. This activity is performed by using a computer
and is the processing of information for the purpose of compiling and producing
records of transactions. Therefore, the activity is clearly a data processing
activity.

You stated that utility companies do not add tax to the utility billing and yet
they read meters. The utility company is not providing third party data
processing services. The utility company uses meter reading and probably the
computer to prepare and send monthly bills to the utility consumer. The
utility company is selling the utility not data processing. The application of
tax on utility bills is determined by the guidelines set out in Rule 3.295,
enclosed.

When a utility company hires a third party to read the meters and prepare
billings for its consumers and the compiling and producing of the records of
these transactions is maintained and processed by use of a computer, then the
utility company is purchasing taxable data processing for its own use. The
utility company must pay tax or it may issue an exemption certificate if the
company is an exempt entity or a purchase voucher if it is a governmental
entity.

Based upon the content of your letters, your company is not reading meters for
the utility company. Your company is reading submeters for the apartment or
condominiums owner in order to provide billings based on individual unit usage.
Again, your company is providing taxable data processing services.

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

You may also write to Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Correspondence

July 19, 1989

Dear *****:

Thank you for your letter explaining the service that you provide.

Rule 3.330 defines data processing as the processing of information for the
purpose of compiling and producing records of transactions, maintaining
information, and entering and retrieving information. It specifically includes
computerized payroll and business accounting.

In your letter you stated that you "read their submeters, then we process these
readings to produce a bill showing the amount a resident will owe to the
apartment or condo." Clearly your service, accounts receivable billing, falls
within the definition of taxable data processing services.

Utility companies do not charge tax on residential use of natural gas and
electricity because the sales tax law specifically exempts it. Utility
companies do charge tax on commercial use of these utilities because the law
taxes it. Utility companies and property management companies are not in the
business of providing data processing services for their customers. They may
use or consume data processing services to provide their service or sell their
product. They owe tax on taxable services, such as you provide, that they use
in the regular course of their business just as they owe tax on pencils, paper,
and office equipment. The fact that some properties are financed by
government-backed loans does not make the purchase of taxable items exempt from
sales tax.

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

Sincerely,

Julie Pesl
Tax Correspondence