Which Texas utility uses qualified for exemption, and how did a taxpayer support a predominant-use claim?

Plain-English summary

Texas explained that water was specifically exempt and that residential use of natural gas and electricity was exempt. The letter also classified qualifying agricultural, manufacturing, processing, mining, and drilling uses as exempt, while utility use by hotels, restaurants, convenience stores, taverns, data processors, and providers of other taxable services was taxable.

A taxpayer claiming a predominant-use exemption had to account for all utility use on each meter. The format of a usage study could vary. For an open manufacturing facility containing both manufacturing and nonmanufacturing areas, square footage could be used to allocate lighting, heating, and cooling between exempt and nonexempt use.

The Comptroller sent taxpayers Rule 3.295, an exemption certificate, and Rule 3.287 rather than a standard approval letter. Exemption claims were commonly accepted or denied by utility suppliers and could be reviewed during a sales-tax audit; suppliers sometimes asked the Comptroller to review a request before acting.

What this means for you

A business seeking a utility exemption should build its support meter by meter and document every use, not just the exempt activity. A service business should not assume its electricity or gas becomes exempt merely because the service it performs depends on those utilities.

Common questions

Were utilities used in manufacturing exempt? The letter said utilities used for manufacturing and processing, including lighting, heating, and cooling the manufacturing area, were exempt. Could mixed space be allocated? Yes; the letter allowed square-footage allocation in an open area containing manufacturing and nonmanufacturing uses. Were utilities used for data processing exempt? No, the letter classified them as taxable.

Citations and references

• 34 Tex. Admin. Code Rule 3.295
• 34 Tex. Admin. Code Rule 3.287

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1149F01

Original ruling text

January 13, 1992

Dear **:

I received your letter of January 3, 1992, requesting information about the
State of Texas' procedures for administering exemptions claimed by certain
utility customers based on predominant use.

Water is specifically exempt under the Texas Tax Code. Noncommercial use of
natural gas and electricity (utilities) is exempt, but commercial use is
taxable. Commercial use is defined in paragraph (a)(1) of Rule 3.295 on natural
gas and electricity. Noncommercial use is defined to include the activities
defined in paragraphs (a)(3), (4), (5), and (7) of Rule 3.295.

Residential use of utilities as defined in paragraph (a)(8) of the rule is
exempt.

Taxpayers seeking an exemption or a refund of taxes paid on utilities are sent
a copy of Rule 3.295 along with an exemption certificate and Rule 3.287 which
outlines the responsibilities of persons issuing and accepting an exemption
certificate. We do not have form letters or documents that are sent to
taxpayers nor do we use form documents in reviewing utility exemption claims.
Paragraphs (d) and (e) of Rule 3.295 provide the information that taxpayers
must follow in order to claim exemptions based on predominant use.

Utility usage studies may vary in style and format, but all usage of utilities
on each meter must be accounted for by taxpayers seeking to claim exemption
based on predominant use.

Utilities used for lighting, heating, and cooling the manufacturing and
processing area are exempt. If a manufacturing facility has an open are that
encompasses both manufacturing and nonmanufacturing areas (e.g., storage), a
taxpayer may use square footage to allocate between exempt and nonexempt usage.

Nursing homes are classified as residences for utility purposes. Utilities used
in hotels, restaurants, convenience stores, taverns, and taverns with
restaurants are taxable. Utilities used in agriculture, manufacturing,
processing, mining, and drilling are exempt. Compounding, refining, and drying
grain (by co-op grain elevators) are considered processing operations.

The Texas Tax Code imposes a sales and use tax on taxable services, which
include data processing. Utilities used by taxpayers who perform data
processing services or other taxable services are taxable.

We do not review all claims for exemption. Claims for utility exemptions are
reviewed when we audit taxpayers for compliance with the sales and use tax law.
Periodically, utility suppliers request that we review request for exemption
before they grant or deny the exemption.

We do not maintain records of the number of exemptions granted or denied. Keep
in mind that the majority of the exemptions are either granted or denied by the
utility suppliers.

You may call toll free 1-800-252-5555 if you have any questions or need more
information. Eddie Washington or Jo Ann Dieck in our Tax Administration
Division will be able to provide additional assistance or information. Eddie's
extension is 3-4683 and Jo Ann's is 3-4666.

Sincerely,

Michael D. Doyle
Director, Tax Administration Division