Texas Letter Ruling 9211590L: Utility Study — New Study Required If Change Of Ownership

Plain-English summary

A Louisiana company bought 100% of the assets of a hardwood sawmill in Texas, kept operating it the same way as the previous owner, and simply renamed it. The previous owner had a predominant use study done in September 1989 by a registered engineer, finding that 91.34% of the mill's electricity use was exempt (manufacturing) use, and had been treated as tax-exempt on its electricity purchases ever since.

The new owner asked the Comptroller whether it needed to get its own predominant use study done, given that nothing about the mill's operations had changed — only the ownership.

The Comptroller's answer: yes, a new study is required. The exemption is tied to the person claiming it, not to the facility. Each taxpayer claiming the exemption based on predominant use must have its own study performed and kept on file, even if the new owner runs the plant exactly the same way the old owner did. The old study, performed for the prior owner, does not carry over to the new owner.

What this means for you

Buyers of manufacturing facilities (asset purchases)

If you buy a manufacturing facility's assets and want to keep claiming the sales tax exemption on electricity (or other utilities) used predominantly in manufacturing, you cannot rely on the seller's old predominant use study. You need your own study performed and kept on file under your own name/taxpayer number, even if you change nothing about how the plant runs.

Sellers of manufacturing businesses

A predominant use study you had performed stays associated with your business as the entity that claimed the exemption. It doesn't transfer automatically to a buyer who takes over the operation, even in an asset sale where operations continue unchanged.

Accountants and tax professionals

Advise clients handling a change of ownership (asset purchase, name change, or similar) in a facility claiming a utility predominant use exemption to commission a new study promptly after closing, rather than assuming continuity of operations preserves the exemption for the new legal owner.

Common questions

Q: We bought a manufacturing plant and didn't change anything about how it operates. Do we still need a new utility study?
A: Yes. The Comptroller's ruling is explicit that a change in ownership requires a new predominant use study, "even though the facility is operated in the same manner by the new owner."

Q: Can we just keep using the previous owner's study since the exempt-use ratio hasn't changed?
A: No. The study was performed for the previous owner, and each person claiming the exemption must have its own study performed and kept on file.

Q: Does this ruling apply exactly to our situation?
A: This opinion is based on the specific facts presented to the Comptroller. As the ruling itself notes, "[i]f there are additional or different facts, the opinion may change."

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9211590L

Original ruling text

November 10, 1992

Dear **:

Thank you for your letter of October 23, 1992, concerning the availability of
electricity purchased by COMPANY A.

The sawmill was operated by the previous owner as COMPANY B. INDIVIDUAL, a
registered engineer, performed a predominant use study for COMPANY B. COMPANY B
was claiming exemption on its electricity purchases when COMPANY C purchased
the business and began operating the facility as COMPANY A.

A change in ownership necessitates another study. The study that was performed
was performed for the previous owner. Each person claiming exemption based on
predominant use must have a study performed and kept on file. This is so even
though the facility is operated in the same manner by the new owner.

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 C. Washington
Tax Administration Division

October 23, 1992

John Sharp
Comptroller of Public Accounts
Austin, TX 78774-0100

RE: Predominant Use Study Requirements

Dear Mr. Sharp:

On October 16, 1992, COMPANY C of CITY, Louisiana purchased 100% of the assets
of a hardwood sawmill in CITY, Texas. The name of that mill was COMPANY B and
the taxpayer number was **.

The name has been changed to COMPANY A (**) but no changes have
been made in the operation of the mill. In September of 1989, COMPANY B had a
predominant use study completed by INDIVIDUAL, a registered engineer, number
**. The ratio of exempt to non-exempt use of electricity was
91.34%. The study was filed with UTILITY COMPANY in CITY and COMPANY B was
considered an exempt user of electricity from then on.

My question is. Since there has been no change in the operation of the mill,
just a change of ownership, are the new owners required to have another
predominant use study done to maintain the tax exempt status?

We would appreciate your timely response to this inquiry. Please feel free to
give me a call if I may be of assistance.

Cordially,

Tax Supervisor
COMPANY A