Does a property management company owe sales tax on an 'overtime air conditioning' fee it charges tenants?

Subject

Property Management Company's Overtime Air Conditioning Fee Charged to Tenants Is Not Taxable

Plain-English summary

A property management company asked the Texas Comptroller whether it owes sales tax on an "overtime air conditioning" charge it bills to tenants (an extra fee, presumably for cooling/heating/ventilation service outside normal building hours). The Comptroller said no, the charge is not taxable.

The reasoning: the property management company already pays sales tax on the electricity or natural gas it buys from the utility company. Because the company is the one using that electricity or gas -- to cool, heat, and ventilate the office space it manages -- it is making its own "commercial use" of the utility service, not reselling electricity or gas to the tenant. Since sales tax was already paid once, at the point the property manager bought the utility service, that tax liability is "extinguished," and there's no second sale of electricity or gas happening when the overtime AC fee is passed on to the tenant.

The ruling also addresses the underlying lease structure: under Rule 3.294(k)(1), when a real property lease bundles in tangible personal property (the example given in the rule is furniture), no additional sales tax is due on the amount the tenant is charged for that tangible personal property -- the property owner can't issue a resale certificate for it, and sales or use tax must instead be paid up front when the property owner buys the tangible personal property. The letter treats the overtime AC charge the same way.

Finally, the letter notes that tenants who already paid sales tax on overtime air conditioning charges may be able to get that money back, citing Rule 3.325 on credits and refunds.

What this means for you

Property management companies

If you charge tenants an overtime air conditioning fee (or similarly bill tenants for utility-based building services like heating or ventilation), you generally should not be charging sales tax on top of that fee, according to this letter. Your sales tax obligation on the electricity or natural gas is satisfied when you pay tax to your utility company, since electricity and natural gas are taxed as tangible personal property under Tax Code Section 151.009.

Tenants who were charged sales tax on overtime AC

The letter states that tenants may claim a refund of sales tax paid on overtime air conditioning charges, under Rule 3.325 concerning credits and refunds.

Commercial landlords generally

The letter's underlying logic traces to Rule 3.294(k)(1): where a lease of real property bundles in tangible personal property, the tenant isn't charged sales tax separately for that tangible personal property -- the property owner instead pays sales or use tax when it originally buys the tangible personal property, and cannot pass that liability through with a resale certificate.

Common questions

Q: Does the property management company have to collect sales tax on the overtime AC fee?
A: No. The letter says the charge for overtime air conditioning is not taxable, because the company already paid sales tax to the utility and is using the electricity/gas itself rather than reselling it.

Q: Why isn't the property management company "selling" electricity or gas to the tenant?
A: Because it is making a commercial use of the utility service in providing cooled, heated, and/or ventilated office space -- the letter is explicit that "the property management company is not selling electricity or natural gas."

Q: What if a tenant was charged sales tax on an overtime AC fee in the past?
A: The letter says tenants may claim a refund of the sales taxes paid on overtime air conditioning charges, per Rule 3.325 on credits and refunds.

Q: Can I rely on this letter for my own situation?
A: This is a 1993 letter ruling issued to one specific taxpayer based on the facts that taxpayer presented. As the letter itself says, "this opinion is based on the facts presented. If there are additional or different facts, the opinion may change." Letters on STAR bind the Comptroller only for the taxpayer they were issued to, and documents this old may no longer reflect current policy.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.009 (electricity and natural gas defined and taxed as tangible personal property)
• 34 Tex. Admin. Code Rule 3.294(k)(1) (rentals and leases of tangible personal property bundled with a real property lease)
• 34 Tex. Admin. Code Rule 3.325 (credits and refunds)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9304L1238G13

Original ruling text

April 14, 1993

Dear **:

Thank you for your letter of March 23, 1993, concerning the taxability of
"overtime air conditioning" charged by a property management company to
tenants.

The charge for overtime air conditioning is not taxable. The property
management company extinguishes any tax liability when it pays sales tax
to the electric or natural gas utility company. The property management
company makes a commercial use of the utility in providing cooled,
heated, and/or ventilated office space. The property management company
is not selling electricity or natural gas.

Natural gas and electricity are defined and taxed as tangible personal
property under the Texas Tax Code Section 151.009. Rule 3.294(k)(1)
concerning rentals and leases of tangible personal property states:

If a contract for the lease or rental of real property includes the
lease or rental of tangible personal property (such as furniture) as
part of the agreement, no sales tax is due on the amount charged the
tenant for the lease or rental of the tangible personal property. A
resale certificate may not be issued and sales or use tax must be
paid at the time the tangible personal property is purchased.

Rule 3.325 concerning credits and refunds is enclosed for reference.
Tenants may claim a refund of the sales taxes paid on the overtime air
conditioning charges.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call toll free
1-800-531-5441, 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

NOTE: Previous Accession Number 93070022.2 and/or 9307022L