Can a business use measured kilowatt (KW) demand — the peak-usage figure a utility uses for billing — as the determining factor for the predominant-use sales tax exemption on electricity, instead of the method set out in the Comptroller's rules?

Plain-English summary

A taxpayer wrote in asking whether measured kilowatt (KW) demand — the peak-usage figure a utility company reads off a demand meter and uses for billing — can be used as the determining factor for the predominant-use sales tax exemption on electricity purchases under Rule 3.395 (Natural Gas and Electricity). The taxpayer's letter included a detailed worked example: a manufacturing facility with four pieces of equipment (some taxable use, some non-taxable use), showing how KW demand readings and KWH (kilowatt-hour) readings could be allocated proportionally across the equipment to calculate a percentage of taxable versus non-taxable electricity use, ultimately arguing that KW demand alone (or combined with KWH) showed 68.8% of the facility's metered electricity was used for non-taxable (exempt) purposes.

The Comptroller's Tax Administration Division rejected the premise that KW demand can be used as the determining factor. KW demand only measures the amount of electricity a customer draws during peak demand periods — not the customer's total electricity usage — and it exists as a cost factor utilities use for billing purposes. Because of that, KW demand is not a determining factor for predominant use. Instead, predominant use must be established according to the requirements set out in Rule 3.295(e).

What this means for you

Manufacturers claiming the utility predominant-use exemption

If you're trying to show that your facility predominantly uses purchased electricity, natural gas, or other utilities for an exempt purpose (such as manufacturing), you cannot substantiate that claim simply by pointing to the KW demand figure on your utility bill. KW demand reflects a peak-period snapshot used for utility billing, not your actual overall pattern of usage. The Comptroller directs taxpayers to the predominant-use study requirements in Rule 3.295(e) instead.

Businesses building a predominant-use study

A study built only around allocating billed KW demand and KWH readings across pieces of equipment — like the manufacturing case study submitted with this request — is not, by itself, an acceptable basis for the exemption determination. Predominant use has to be established under the Comptroller's own rule-based method, not backed into using utility billing metrics.

Utility companies and billing consultants

This letter is a useful reminder that "demand" as utilities define and meter it for billing purposes is a technical/cost concept distinct from the tax concept of "predominant use," and the two should not be conflated when advising customers on exemption certificates.

Common questions

Q: Can a business use its utility's measured KW (kilowatt) demand reading to prove predominant use for the electricity sales tax exemption?
A: No. KW demand is not a determining factor for predominant use under Rule 3.395.

Q: Why isn't KW demand a valid measure of predominant use?
A: Because it only measures the amount of electricity used during peak demand periods, not the total amount of electricity used — it's a cost factor utilities use for billing, not a usage-pattern measure.

Q: What rule actually governs how predominant use is determined?
A: Rule 3.295(e) sets out the Comptroller's requirements for determining predominant use.

Q: The taxpayer's letter included a detailed worked example showing KW demand and KWH calculations allocated across specific equipment. Did the Comptroller accept that calculation as valid?
A: No. The response rejected KW demand as a determining factor without endorsing the submitted case study's methodology, and pointed instead to Rule 3.295(e).

Q: Does this mean KWH (kilowatt-hour) usage is also irrelevant to predominant use?
A: The letter only addresses KW demand specifically; it does not separately analyze KWH as a determining factor, but it directs taxpayers to Rule 3.295(e) for the actual method.

Q: Can I rely on this letter for my own facility's predominant-use determination?
A: No. This opinion is based on the facts presented, and if there are additional or different facts, the opinion may change; it can be relied on only by the taxpayer to whom it was issued.

Q: Who should I contact with questions about a predominant-use exemption claim?
A: The letter directs the taxpayer to the Comptroller's Tax Administration Division; equivalent current contact information should be confirmed directly with the Texas Comptroller's office, since this is a 1992 letter.

Citations and references

• 34 Tex. Admin. Code Rule 3.395 (Natural Gas and Electricity) — governs the method for determining predominant use.
• 34 Tex. Admin. Code Rule 3.295(e) — sets out the Comptroller's requirements for determining predominant use.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206128L

Original ruling text

June 12, 1992

Dear **:

Thank you for your letter of May 13, 1992, concerning the method for
determining predominant use under Rule 3.395 Natural Gas and Electricity.

Kilowatt demand merely measures the amount of electricity used by a customer
during peak demand periods, not the total amount of electricity used. It is a
cost factor used by electric utilities for billing purposes. Thus, the kilowatt
demand is not a determining factor for predominant use.

Rule 3.295(e) sets out the Comptroller's requirements for determining
predominant use.

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, extension 3-4683, if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie Washington
Tax Administration Division

May 13, 1992

Controller of Public Accounts
Tax Policy Division
Austin, Tx. 78774

Dear Sirs,

This is a request for a ruling regarding the determination of a sales tax
exemption on an electric utility based on predominant use and the associated
study and calculations used to determine such exemption.

Issue on which a ruling is requested:

1. Measured KW (kilowatt) demand, when measured by the utility company for
   billing purposes, can or cannot be used as a determining factor of predominant
   use?

Argument substantiating KW demand as a determining factor of predominant use.

1. Each item of equipment using electricity, whether used for taxable purposes
   or non-taxable purposes, contributes to the reading indicated by the demand
   meter.

2. It can be shown, through mathematical computation, which portion of the
   measured KW demand is directly attributed to any given piece of equipment.
   Therefore, if a piece of equipment is used for a non-taxable purpose, the
   portion of KW demand directly attributable to that piece of equipment will be
   non-taxable.

Case study:

A manufacturing facility, has in regular use, equipment that is used for
taxable and non-taxable uses. Manufacturer's specifications for each piece of
equipment are as follows:

item #1 KW rating 25
item #2 KW rating 6
item #3 KW rating 2.5
item #4 KW rating 1.6

Measured readings of KW demand by utility company 35.1 Measured readings of KWH
(kilowatt hours) by utility company 2052

Hours of use: item #l 2 hrs./day 2 days/week
Monthly kwh: 400
Hours of use: item #2 8 hrs./day 5 days/week
Monthly kwh: 960
Hours of use: item #3 10 hrs./day 5 days/week
Monthly kwh: 500
Hours of use: item #4 6 hrs./day 5 days/week
Monthly kwh: 192

Total Monthly kwh: 2052

item #l is used for non-taxable purposes
item #2-#4 are used for taxable purposes

total KW attributable to non-taxable use - 25
total KW attributable to taxable use - 10.1

total KWH attributable to non-taxable use 400
total KWH attributable to taxable use 1652

KW charge 13.63
KWH charge .01135

KW charges:
non-taxable 13.6325=340.75
taxable 13.6310.1=137.66
total KW charges 478.41
% taxable 28.8%
% non-taxable 71.2%

KWH charges:
non-taxable .01135400=4.54
taxable .011351652=18.75
total KWH charges 23.29
% taxable 80.5%
% non-taxable 19.5%

total charges 501.70
total taxable charges 156.41
total non-taxable charges 345.29
% total taxable 31.2%
% total non-taxable 68.8%

This example, while greatly simplified, gives an accurate comparison of the
common factors that can be used in determining predominant use.

In this example, kW demand calculations alone or combined with KWH
calculations, reveal that the purchaser is entitled to a sales tax exemption on
the purchase of electricity.

If predominant use is based on electricity measured through a single meter,
this example shows that 68.8% of the measured electricity is used for
non-taxable purposes.

KW is a factor which must be incorporated into predominant use calculations to
accurately reflect the percent of the billing which is directly attributable to
taxable and non-taxable use.

Your response is greatly appreciated.

Please forward your ruling to:

Sincerely,