When a landlord buys electricity and gas for an office building and bills tenants (including a nonprofit tenant) for their pro-rata share as part of the lease, is that utility purchase taxable to the landlord?

Plain-English summary

A company that owns an office building leases space to a nonprofit tenant, pays the utility bills for the whole building, and then bills each tenant for its pro-rata share of the natural gas and electricity. The company asked whether it could pass through the sales tax on that pro-rata share, since it couldn't bill the nonprofit organization directly for taxes on its share of the utilities.

The Comptroller's answer: the landlord's purchase of gas and electricity is itself a taxable commercial use under Rule 3.295 (Natural Gas and Electricity), because the utilities are simply an expense the landlord incurs in the business of leasing office space. When the landlord passes a pro-rata share of that utility cost through to a tenant, it is not reselling the utilities to the tenant — it's just part of the overall rental or lease price for the office space. So the sales tax the landlord paid on its own utility purchase, which gets folded into what tenants are charged, is not a separate, direct tax levy against the nonprofit tenant.

The letter also flags that not every nonprofit organization automatically qualifies for a Texas sales tax exemption — see Rule 3.322(b) (Exempt Organizations) — so even if the tenant is a nonprofit, that status alone doesn't change the taxability of the landlord's underlying utility purchase.

What this means for you

Commercial landlords

If you pay the utility bills for a building and then bill tenants for their pro-rata share as part of the lease arrangement, your purchase of the gas and electricity is a taxable commercial use — you are the taxable purchaser, not a reseller of utilities to your tenants. You cannot treat the utility pass-through as a tax-exempt resale simply because a tenant happens to be a nonprofit.

Nonprofit tenants

Being a tax-exempt or nonprofit organization does not automatically exempt utilities that are bundled into your rent. The tax your landlord paid on the utilities becomes part of the sales price the landlord incurred, and that cost being passed through to you in your lease bill is not treated as a direct sales tax charge against your organization — but it also isn't something you can get refunded or exempted just by asserting nonprofit status, since (per Rule 3.322(b)) not all nonprofits qualify for an exemption in the first place.

Accountants and tax professionals

This letter distinguishes a landlord's utility purchase (taxable commercial use, expense of the leasing business) from a resale of utilities to tenants (which would follow different rules). Advise clients that pro-rata utility billing under a commercial lease is generally treated as part of the lease price rather than a separate taxable/exempt resale transaction.

Common questions

Q: Can a landlord avoid sales tax on utilities by billing a nonprofit tenant separately for its share?
A: No. The landlord's purchase of the gas and electricity is a taxable commercial use regardless of how the cost is later allocated to tenants; billing a tenant for its pro-rata share doesn't convert the purchase into a tax-exempt resale.

Q: Is passing through a share of the utility cost (including tax) to a nonprofit tenant the same as directly taxing that nonprofit?
A: No. The letter states this pass-through is not a direct levy against the nonprofit organization — it's simply part of the rental or lease price of the office space.

Q: Does a tenant's nonprofit status automatically exempt utilities billed under its lease?
A: No. The letter notes that not all nonprofit organizations qualify for exemption from sales tax, citing Rule 3.322(b) (Exempt Organizations).

Citations and references

Statutes/Rules:

• 34 Tex. Admin. Code § 3.295 (Natural Gas and Electricity)
• 34 Tex. Admin. Code § 3.322(b) (Exempt Organizations)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1171A08

Original ruling text

May 11, 1992

Dear ***:

Thank you for your letter of April 1, 1992, concerning the taxability of
utilities at one of your company's office buildings in which your company
leases space to a nonprofit tenant.

You state that your company pays for the utilities for the building and then
bills those tenants for their pro-rata share of the utilities. You go on to
state that your company cannot bill the nonprofit organizations for the taxes
on their pro-rata share of the utilities.

In our April 20, 1992 telephone conversation, I explained to you that your
company's purchase and use of utilities (natural gas and electricity) are for
commercial use. Commercial use of natural gas and electricity is defined under
the sales tax law and in Rule 3.295 - Natural Gas and Electricity.

Under the arrangement that you describe, your company is leasing office space
with utilities provided. The purchase of the utilities is an expense incurred
by your business in leasing office space. The sales tax becomes a part of the
sales price of the utilities when added to the sales price.

The pro-rata portion of the utility expense that is passed through to the
nonprofit organizations does not constitute a resale of the utilities, but
merely part of the rental or lease price of the office space. The sales tax
paid by your firm that is passed through to the nonprofit organization is not a
direct levy against that organization. Not all nonprofit organizations qualify
for exemption from sales tax. See section (b) of Rule 3.322 - Exempt
Organizations.

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

You may call 512-463-4600 if you have any questions or need more information.
You may write to Tax Administration Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division