Can condominium associations claim a 'prior contract' exemption from a city's reimposed 1% local sales tax on their natural gas and electricity purchases?

Subject

Local Tax — Gas And Electricity — Residential Use — Prior Contract Exemption Not Available

Plain-English summary

A firm that manages condominium associations asked the Comptroller whether the associations' natural gas and electricity purchases could be exempt from a city's 1% local sales tax based on a "prior contract" theory -- i.e., that utility purchase arrangements made before the city's tax was reimposed should not be subject to the new tax.

The Comptroller explained the underlying history. State, county, and MTA sales tax generally does not apply to residential use of natural gas and electricity, but city sales tax on residential utilities is a separate matter that varies by city. This particular city had imposed its 1% city sales tax on residential utilities since April 1, 1968. When the legislature repealed the state and local tax on residential utilities effective October 1, 1978, cities that already taxed residential utilities got a choice: keep the city tax, repeal it early (October 1, 1978), or let it lapse automatically a year later (October 1, 1979). This city chose to repeal early, effective October 1, 1978.

Critically, cities that repealed the tax retained the right to reimpose it later by action of the city council, and this city did just that -- reimposing city tax on residential utilities effective January 1, 1992, applicable to all residential billing cycles beginning on or after that date. The condominium associations argued their utility purchase arrangements predated the reimposition and should be grandfathered in as "prior contracts." The Comptroller rejected this: the legislature never created a prior-contract exemption for the reimposition of city tax on residential utilities, so the reimposed tax applies regardless of when the utility purchase arrangement was made. Nonprofit condominium and homeowner's associations also do not separately qualify as tax-exempt entities under the sales and use tax law.

What this means for you

Condominium and homeowner's association managers

If your association's city later reimposes a local tax on residential utilities that it had previously repealed, you cannot rely on the timing of your utility purchase arrangement to escape the tax. The reimposed tax applies to all billing cycles beginning on or after the reimposition's effective date, with no prior-contract carve-out.

Accountants and tax professionals advising residential property managers

When a client asks about "prior contract" or grandfathering arguments for a newly reimposed city utility tax, this ruling confirms there is no such statutory exemption -- only the item's own tax-exempt or taxable status (and the applicable effective date) controls. Check the city's own history under 34 Tex. Admin. Code § 3.378(b) to see whether and when it repealed, and whether/when it later reimposed, tax on residential utilities.

Utility billing administrators

Local tax on residential gas and electricity turns on the billing cycle start date relative to the city's reimposition date, not on the origination date of any underlying purchase agreement or account relationship.

Common questions

Q: Can a condominium association claim exemption from city sales tax on utilities because it's a nonprofit entity?
A: No. Nonprofit condominium and homeowner's associations do not qualify for exemption as exempt entities under the sales and use tax law.

Q: Does state sales tax apply to residential natural gas and electricity?
A: Generally no -- the sales and use tax law exempts residential use of natural gas and electricity from state, county, and MTA tax. City sales tax is separate and depends on each city's own history of imposing, repealing, or reimposing the tax.

Q: If a city previously repealed its tax on residential utilities and later reimposes it, does a "prior contract" for utility service protect existing customers from the new tax?
A: No. The legislature did not provide a prior-contract exemption for reimposition of city tax on residential utilities. The reimposed tax applies to all residential billing cycles beginning on or after the reimposition's effective date.

Q: When did this apply to the taxpayer here?
A: The city reimposed its 1% tax on residential utilities effective January 1, 1992, and the tax applied to all residential billing cycles beginning on or after that date.

Citations and references

Statutes:

• 34 Tex. Admin. Code § 3.378(b)(1)-(3) (city repeal of tax on residential utilities)
• 34 Tex. Admin. Code § 3.378(b)(4) (city reimposition of tax on residential utilities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1174D12

Original ruling text

May 15, 1992

Dear **:

Thank you for your letter of March 27, 1992, concerning the 1% City of
** sales tax on purchases of natural gas and electric-city
(utilities) purchased by the condominium associations that your firm manages.

Nonprofit condominium and homeowner's associations do not qualify for exemption
as exempt entities under the sales and use tax law. However, the sales and use
tax law does exempt residential use of natural gas and electricity from state,
county, and MTA tax. Residential use of natural gas and electricity is exempt
from city sales and use tax in some cities. City tax on residential use is
discussed later.

You are requesting exemption from the ** city sales tax on utility
purchases based on the premise that the purchases qualify for exemption as
prior contracts.

The purchases of utilities by condominium associations and other residential
users do not qualify for exemption based on, prior contracts. The City of
** adopted the 1% city sales tax April 1, 1968. The 1% city sales
tax applied to residential use of utilities as well as did the state sales tax.

The legislature repealed the state sales and local taxes on residential use of
utilities effective October 1, 1978. Cities that imposed city sales tax on
residential utilities were given the option of retaining the city tax on
residential utilities, repealing the city tax early (October 1, 1978), or
allowing the city tax to be repealed automatically effective October 1, 1979.
The City of ** repealed the tax on residential utilities, early
(October 1, 1978). See paragraphs (I), (2), and (3) of section (b) of Rule
3.378 concerning city taxation of natural gas and electricity.

Cities that imposed city sales tax on residential utilities retained the right
to reimpose the tax at any time by action of the governing body (city council).
proper manner, the city tax applies to residential utilities as outlined in
paragraph (4) of section (b) of Rule 3.378. The legislature did not provide a
prior contract exemption regarding reimposition of city tax on residential
utilities. The City of ** reimposed city tax on residential
utilities effective January 1, 1992. Dallas city sales tax applies to all
residential billing cycles that began on or after January 1, 1992.

Incidentally, our records show that the corporate charters for **
and for ** were forfeited February 21, 1983. We could find no
record for the **.

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

You may call toll free 1-800-252-5555 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