A landlord leases office space in a multi-story building to a computer software manufacturer, and the electricity (partially sub-metered to cool the tenant's mainframe computers) is purchased by the landlord and passed through as part of the lease. Is that electricity exempt from sales tax as manufacturing-related use, and can the landlord get a refund?

Plain-English summary

A taxpayer's client leased office space in a multi-story building. The building's electricity was "partially" sub-metered to measure the power used to air-condition the tenant's mainframe computers, which the tenant used to design and produce computer software. The landlord (the party who actually bought the utilities from the utility company) sought a sales tax exemption and refund on that electricity, backed by an engineering study of the tenant's equipment usage.

The Comptroller denied the exemption and refund. The purchaser of the utilities — the landlord — was making a commercial use of the electricity and gas, and commercial use is taxable under the sales tax law and Rule 3.295 (Natural Gas and Electricity). Buying utilities to supply leased office space is simply an expense the landlord incurs in leasing the space, so it doesn't matter what the tenant does with the space or the electricity. The letter cites Hearing 22,870 as "exactly on point" and Texas Tax Code § 151.318, concluding the client's use of electricity was exclusively commercial use; it distinguished those facts from a hotel with mixed residential/commercial usage. An engineering study of the tenant's usage does not override the tax code's classification. Any pro-rata share of the utility expense passed through to the tenant is not a resale of electricity — it's just part of the rent.

What this means for you

Commercial landlords who buy utilities and provide space to tenants

If you purchase electricity or gas (even sub-metered) to supply space you lease out — including to a tenant who claims a manufacturing or other qualifying use — your purchase is generally a taxable commercial use. The tenant's activity inside the space does not transform your purchase into an exempt one. Passing utility costs through to the tenant as part of rent does not make it a "resale" of electricity that could support an exemption.

Tenants who use leased space for equipment with potentially exempt uses (e.g., manufacturing equipment)

Even if your own use of electricity might otherwise support an exemption claim (for example, cooling manufacturing/production equipment), that doesn't flow through automatically when your landlord is the one who purchases the utilities under a lease arrangement. Engineering studies showing your equipment's usage may not be sufficient by themselves to obtain the exemption for the landlord's purchase.

Accountants and tax professionals advising on commercial leases

This letter reinforces that the exemption analysis under Tex. Tax Code § 151.318 and Rule 3.295 depends on who is buying the utility and in what capacity, not merely how the electricity is ultimately used within the space. Compare and contrast with situations involving mixed residential/commercial use (e.g., hotels), which the letter treats as distinguishable.

Common questions

Q: Can a landlord get a sales tax exemption on electricity purchased to cool a tenant's manufacturing equipment?
A: Not based on this letter. The Comptroller ruled that the landlord's purchase of utilities to supply leased office space is a commercial use, taxable regardless of the tenant's equipment or activities.

Q: Does sub-metering electricity to a tenant's equipment change the tax result?
A: No. Here the electricity was "partially" sub-metered for the tenant's mainframe computer air-conditioning, but the letter still found the landlord's purchase to be commercial use.

Q: If the tenant reimburses the landlord for a share of the utility bill, is that a resale of electricity?
A: No. The letter states that any pro-rata portion of the utility expense passed through to the tenant "does not constitute a resale of the electricity, but merely part of the rental or lease price of the office space."

Q: Does an engineering study of the tenant's equipment usage help win the exemption?
A: Not in this case. The letter states "an engineering study does not overcome the fact that the tax code defines and taxes your client's electricity usage as commercial use."

Q: Is this comparable to a hotel that has both residential and commercial utility usage?
A: No — the letter specifically distinguishes hotel facts involving mixed residential and commercial usage from this office-lease scenario, which it treats as exclusively commercial use.

Q: Can this taxpayer's client or anyone else rely on this letter for their own facts?
A: No. The letter states its opinion is based on the facts presented and may change if there are additional or different facts; under STAR's reliance rules, only the taxpayer who received the letter may rely on it.

Citations and references

• Tex. Tax Code § 151.318
• 34 Tex. Admin. Code § 3.295 (Natural Gas and Electricity)
• Hearing No. 22,870 (referenced as "exactly on point," citing its Findings of Fact 2 and paragraph 3 of the Discussion and Conclusions of Law)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1182D09

Original ruling text

July 8, 1992

Dear **:

Thank you for your letter of June 10, 1992, concerning the taxability of
utilities used by your client, a computer software manufacturer.

You state that your client leases space in a multi-story building managed by
COMPANY A. The electricity is "partially" sub metered for the purpose of
air-conditioning your client's mainframe computers. The mainframe computers are
used to design and produce computer software.

The study submitted was performed for the utility purchaser, COMPANY A.

Your request for sales tax exemption and refund is denied. The purchaser's use
of utilities is a 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.

The facts as presented indicates that COMPANY A. leases office space to your
client with utilities provided. The purchase of the utilities by COMPANY A. is
an expense incurred by COMPANY A. in leasing the space.

The facts in Hearing 22,870 are exactly on point. See Findings of Fact 2 and
paragraph 3 under the Discussion and Conclusions of Law. Under Texas Tax Code
151.318, your client's use of electricity is exclusively commercial use. The
facts regarding the hotel with mixed usage (residential and commercial) are not
analogous with your client's facts. An engineering study does not overcome the
fact that the tax code defines and taxes your client's electricity usage as
commercial use.

Any pro-rata portion of the utility expense that is passed through to your
client does not constitute a resale of the electricity, but merely part of the
rental or lease price of the office space.

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