When were gas and electricity used by a Texas laundry or dry cleaner exempt rather than taxable commercial utilities?

Plain-English summary

The Comptroller treated a laundry's cleaning of its own uniforms or mops before renting them as processing tangible personal property for sale or rental. Gas and electricity used for that activity were noncommercial use and exempt.

Cleaning items owned by customers was a service, so the related gas and electricity were taxable commercial use. For a business doing both through one meter, exemption was available only when more than 50% of the measured utility was used directly to clean the business's own rental items, supported by an engineer-certified predominant-use study.

The letter also explained that an older court decision using an "industrial operation" test did not control after the sales-tax law changed effective July 1, 1963, to use residential and commercial categories.

What this means for you

Ownership and end use of the cleaned goods controlled the utility classification. A mixed operation needed more than a rough estimate: the letter required a certified study showing predominant qualifying use.

Common questions

Were utilities used to clean company-owned rental uniforms exempt? Yes, as described processing use.

Were utilities used to clean customer-owned goods exempt? No. The letter treated that activity as providing a service.

What if one meter served both activities? More than 50% had to be used directly for the qualifying rental-item activity, based on an engineer-certified study.

Could audit tax be recovered from the utility customer? Yes. The letter said invalidly exempted tax became part of the gas sales price and a debt recoverable from the purchaser.

Citations and references

• Calvert v. Austin Laundry and Dry Cleaning Company, 365 S.W.2d 232, discussed as preceding the July 1, 1963 statutory change.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9008L1034D08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller

August 6, 1990

Dear **:

Thank you for your letter regarding the taxability of natural gas
purchased by dry cleaning establishments.

The Texas Tax Code provides that the sale of gas and electricity
is exempt from sales tax except when sold for commercial use. Com-
mercial use does not include use in processing tangible personal
property for sale as tangible personal property, but does include
use in providing a service.

When a dry cleaner or laundry cleans items it owns such as uni-
forms or mops in preparation for rental to others, that activity
is considered to be the processing of tangible personal property
for sale or rental, a noncommercial use of gas and electricity.

When a dry cleaner or laundry cleans items belonging to its cus-
tomers, the business is providing a service, a commercial use of
gas and electricity. The fact that the service became taxable
October 2, 1984, does not exempt the utilities from sales tax.

A business engaged in both rental and service, as explained above,
can claim sales tax exemption only if more than 50% of the utility
measured through a single meter is used directly in cleaning its
own items for the purpose of rental. A study must be performed to
determine predominant use and the study must be certified by an
engineer.

As you mentioned, there was a court case (Calvert v. Austin Laun-
dry and Dry Cleaning Company, 365 S.W.2d 232) in which the Court
ruled that electricity used by the company was exempt since they
were an industrial operation. However, the sales tax law was
changed effective July 1, 1963, to delete "industrial" and to define
residential and commercial uses. Commercial use included use in
providing a service.

The sales tax assessed in an audit on claimed exemptions that were
determined to be invalid can be recovered from the customer. The
tax becomes a part of the sales price of the gas; it is a debt of
the purchaser to the seller until paid; and, if unpaid, it is re-
coverable at law in the same manner as the original sales price.

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 additional information, you may
call toll free 1-800-252-5555 or the regular number 512/ 463-4600.
My extension is 3-4666. You may write to Tax Correspondence, Comp-
troller of Public Accounts.

Sincerely,
Jo Ann Dieck
Tax Correspondence