What documentation did a natural-gas seller need for predominant-use exemptions or gas delivered through a Texas pipeline interconnect for out-of-state use?

Plain-English summary

A natural-gas seller transferred title at well sites or Texas pipeline interconnects and often did not know where purchasers would ultimately use the gas. The Comptroller said the seller had to obtain a valid, completed exemption certificate or collect sales tax.

For predominant-use claims, the purchaser had to qualify under Rule 3.295 and provide both the exemption certificate and an engineer's certification when required. A manufacturer buying through several meters had to determine predominant use separately for each meter. Natural gas sold to an electric utility received the rule's subsection (a)(2) treatment.

When title passed at a Texas interconnect, tax was due unless an exemption applied or the seller documented transport outside Texas. Because pipeline carriers did not issue bills of lading, the letter accepted contracts or invoices between the purchaser and carrier that stated the out-of-state delivery point. If documentation was missing at sale, the seller collected tax but could refund it after receiving proper proof.

What this means for you

Belief about a customer's intended exempt or out-of-state use was not enough. The seller needed contemporaneous exemption or transportation records tied to the actual delivery arrangement.

Common questions

Could the seller rely only on its understanding of intended manufacturing use? No.

What did a predominant-use claim require? A completed exemption certificate and, when applicable, an engineer's certification.

What could prove pipeline transport outside Texas? A purchaser-carrier contract or invoice naming the out-of-state delivery point.

What if proof arrived after the sale? The seller collected tax first and could later refund it.

Citations and references

• 34 Tex. Admin. Code Rule 3.295(a)(2) — natural gas sold to an electric utility
• 34 Tex. Admin. Code Rule 3.295(d), (e), and (f) — predominant-use requirements

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9103L1093E13

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller March 13, 1991

Dear ** :

Thank you for your letter regarding COMPANY A's responsibilities for
securing exemption certificates in the following situations:

COMPANY A may sell gas to end users for use in manufacturing or
processing (i.e., to manufacturers and electric utilities).
The gas is apparently being purchased to be "predominantly"
used in manufacturing operations by manufacturers or for
generating electricity by electric utility companies. The
gas may be delivered by COMPANY A to the purchaser at the manufac-
turing or processing plant, or at a location other than a
plant.

Title to the gas may be transferred at a well site or at an
interconnect in a pipeline. An interconnect is defined as a
common point between two natural gas pipelines at which
control of natural gas is transferred from one pipeline to
another. If COMPANY A transfers title to the gas at one of these
locations, that location is our delivery point to the pur-
chaser, and the purchaser is responsible for transporting the
gas to the location where they will use the gas. COMPANY A's
knowledge of the destination of the gas also ends when title
is transferred. The purchaser may then take the gas to one
location or more than one location for use.

If title is transferred at the well site or at an intercon-
nect in a pipeline, COMPANY A cannot determine the location of
use, and, therefore, cannot secure exemption certificates
based on the requirements for predominant use in Rule 3.295
(d), (e), and (f). However, based on COMPANY A's understanding of
the purchaser's intended use, the gas will be predominantly
used for exempt purposes (i.e., manufacturing or pro-
cessing).

Your specific questions are restated below with response:

1. If COMPANY A delivers gas to an end use customer at a wellsite or at
   an interconnect in a pipeline, what are COMPANY A's responsibilities
   to secure exemption certificates?

Response: COMPANY A must obtain a properly completed and valid
exemption certificate or collect the sales tax from the purchaser.

2. If we believe the purchaser of gas delivered at a well site or
   at an interconnect is purchasing the gas for "predominant"
   exempt use as described above, what can COMPANY A accept as
   documentation to support the exemption since the "predominant
   use" requirements in Rule 3.295 cannot be documented?

Response: To claim tax exemption, the purchaser must qualify for
exemption as outlined in Rule 3.295 and issue COMPANY A a completed
exemption certificate and engineer's certification if the exemption
is based on predominant use. Natural gas sold to an electric utili-
ty is exempt from tax as outlined in Section (a)(2). As I understand,
the manufacturer may purchase gas from several entities such as COMPANY
A either as a spot purchase or on a regular basis and from the local
gas company. The gas enters the plant through the local distributor's
lines or possibly through a direct line with a "check meter" that
measures the incoming gas volume. The manufacturer would be required
to determine predominant use for each meter (each local distributor
meter and/or the "check meter") to claim tax exemption on gas purchases.

3. If the purchaser transports the gas to a location that is out-
   side of Texas after title has passed to the purchaser at an
   interconnect or at the well site, what are COMPANY A's
   responsibilities regarding Texas sales tax? COMPANY A does not
   receive any documentation regarding the location to which the
   purchaser takes the gas, either in Texas or outside of Texas.

Response: Because title to the gas passes to the purchaser at the
interconnect in Texas, the sales tax is due and must be
collected unless an exemption applies. Texas tax would
not be due if the gas qualifies for exemption as
explained above and COMPANY A is issued a properly completed
and valid exemption certificate and engineer's
certification if applicable. Since the gas is delivered
from COMPANY A's pipeline to a third-party pipeline carrier
at the interconnect, Texas tax would not be due on the
gas transported to a location outside Texas if COMPANY A
obtains documentation that the gas was transported
outside Texas.

Since the pipeline carriers do not issue documents such
as a bill of lading, we will allow other documentation
to be accepted as proof of an out-of-state shipment for
these transactions only. The documentation can be
copies of contracts or invoices between the purchaser
and pipeline carrier stating the out-of-state delivery
point.

Sales tax must be collected if the documentation is not
obtained at the time of sale, but can be refunded if
proper documentation is subsequently obtained.

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

If you have any questions or need more information, please feel
free to call me toll free at 1-800-252-5555, extension 3-4666 or
the regular number 512/463-4666. You way write to me at Tax
Administration Division.

Sincerely,
Jo Ann Dieck
Tax Administration Division

Information from ** :

COMPANY A gets no documentation from the pipeline carrier after
delivery to the interconnect. The carrier may issue something to
the purchaser.

The "spot market" sales are usually one-time sales. COMPANY A
negotiates with the purchaser for the best price. If COMPANY A can
make a profit on the sale, they will sell. The contract with the
purchaser usually does not state where the gas will be used, but
may state that it will be used at the purchasers facility. The
sale may be negotiated with an out-of-state purchaser, but COMPANY A
does not know if the gas is for out-of-state use or use at a Texas
facility. As the "spot" sale contracts become more standardized,
they will contain less information as to use, etc.

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller July 27, 1989

Dear ** :

Your letter of July 7, 1989, regarding exemption certificates and
documentation on "spot" sales is being forwarded to Taxability
Section, Legal Services Division. The issue of documentation to
substantiate out-of-state delivery may have to be reviewed by the
Policy Committee.

If you have any questions, please call me toll free at 1-800-252-
5555, extension 3-4666.

Sincerely,
Jo Ann Dieck
Tax Correspondence