Were electricity and natural gas exempt when used to manufacture equipment the company retained and used to provide services to hotels and motels?

Plain-English summary

A company manufactured equipment that, once installed at a customer's property, formed a system used to provide services to hotels and motels. The company retained ownership of the installed equipment.

The Comptroller said natural gas and electricity used to provide services—or to manufacture property the company itself used to provide services—were taxable as commercial use. The utilities used to make this retained service equipment were therefore not exempt.

Utilities directly used to manufacture equipment sold, leased, or rented as tangible personal property, rather than supplied as part of a service, could qualify for exemption. The letter directed the company to Rule 3.295 for the predominant-use standard and required study.

What this means for you

The manufacturing exemption followed the equipment's disposition. Making property for the company's own service operation did not qualify, while making property for sale, lease, or rental could qualify if the utility-use test was met.

Common questions

Did customer installation transfer ownership? No.

Were utilities used to make the retained equipment exempt? No.

When could manufacturing utilities qualify? When directly used to make tangible personal property for sale, lease, or rental.

What rule governed the utility-use study? Rule 3.295.

Citations and references

• 34 Tex. Admin. Code Rule 3.295 — natural gas and electricity exemption, predominant use, and supporting study

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1119E13

Original ruling text

July 8, 1991

Dear **:

Thank you for your letter regarding sales tax exemption on utility
bills (electricity).

You stated that your company manufactures a group of products
which, when installed at the final point of service, comprise a
system which provides a service to the hotel/motel industry.
Ownership of the equipment installed on the customer's real
property does not transfer to the customer.

Natural gas and electricity (utilities) used in providing services
or for manufacturing tangible personal property for use in
providing services are taxable as commercial use. Utilities are
exempt when directly used in manufacturing tangible personal
property for sale as tangible personal property.

The utilities used by your company to manufacture equipment that
is uses to provide the service are not exempt from sales tax.

If you manufacture any equipment that you sell, lease, or rent as
tangible personal property, not as part of a service, the
utilities directly used in manufacturing this equipment are
exempt. Please refer to Rule 3.295, Natural Gas and Electricity,
regarding predominant use and the study required to determine
predominant use.

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

If you have questions or need additional information, you may
call toll-free 1-800-252-5555 or the regular number is 512/463-4600.
My extension is 3-4666. You may write to Tax Administration
Division

Sincerely,

Jo Ann Dieck
Tax Administration Division.