Is a city's 20% construction-cost charge for installing new electric power lines taxable, when the line will serve both residential and commercial use?

Subject

Contributions In Aid Of Construction (Ciac) Fees — Charges Related To Establishing Electricity Service — Charged To Residential Customers Vs. Developer

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9402L1286C05

Plain-English Summary

A city asked the Comptroller whether a new charge to customers and developers for installing power transmission lines is taxable. In the past, the city ran new overhead power lines to a residential subdivision or connected a new building at no charge. Under the new arrangement, the city collects 20% of the anticipated construction cost from the customer or developer. No property changes hands — the city keeps ownership of the power lines and pays all future maintenance — and the city treats the 20% payment as contributed capital that offsets its construction costs.

The Comptroller ruled that this fee is still taxable in some circumstances, because Texas sales tax law treats electricity as a sale of tangible personal property, and the construction fee is considered part of the sales price of the electricity. Whether the fee is taxable depends on whether the ultimate use of the electricity is commercial (taxable) or residential (potentially exempt). For a line that will serve both residential and commercial use, the total fee is taxable. That's because the sales tax exemption for electricity used in a home or residence does not apply to electricity sold to a developer — the developer isn't the end residential user, so the exemption doesn't attach to the developer's purchase.

The ruling also distinguishes this fee from the city's separate paving assessments charged to property owners for street construction. Because new construction labor is not a taxable service, paving assessments are not taxable — but the Comptroller found the electric line assessment is not analogous to a paving assessment, since it is tied to the sale of taxable tangible personal property (electricity), not to labor.

What This Means For You

If you are a city or utility charging developers or customers for new electric line construction: The charge is generally treated as part of the sales price of the electricity that will flow over that line, not as a separate nontaxable construction or labor charge — even if you retain ownership of the lines and the payment is booked as contributed capital rather than a sale of property.

If the line will serve a mix of residential and commercial customers: Expect the entire fee to be taxable. The residential-use exemption for electricity does not carry over to a developer's purchase, even if some or all of the homes eventually built will use the electricity residentially.

If you are a developer paying such a fee: You cannot claim the residential exemption on your own purchase of the line-installation charge, because you personally are not using the electricity in a home or residence — that exemption belongs to the eventual residential occupant, not to you as the developer.

Q&A

Q: Does it matter that the city keeps ownership of the power lines and never transfers property to the customer?
A: No. Even though there's no transfer of property and the city treats the 20% charge as contributed capital, the Comptroller still treated the fee as part of the taxable sales price of the electricity to be delivered over that line.

Q: If a new subdivision's power line will serve homes, is the developer's construction charge exempt as residential electricity?
A: No. The sales tax law exempts electricity bought for use in a home or residence, but that exemption does not apply to electricity sold to a developer. If the line serves both residential and commercial use, the total fee is taxable.

Q: Is this construction charge like a paving assessment, which isn't taxable?
A: No. The ruling states that new construction labor (like paving) is not a taxable service, but the assessment for installing electric transmission lines is not analogous to a paving assessment — it's tied to the sale of electricity rather than to labor.

Original ruling text

February 7, 1994

Dear **:

Thank you for your letter of January 19, 1994, concerning the taxability of
a charge to customers for the installation of power transmission lines for
both residential and commercial purposes.

In the past, the city connected a new building or installed the
overhead power lines for a new residential subdivision at no charge. The city
is now collecting 20% of the anticipated cost from the customer or developer.
There is no transfer of property as the city retains ownership of the power
lines and all future maintenance expenses are paid by the city. The 20% paid
by the developer offsets the construction costs incurred by the city and is
viewed by the city as contributed capital.

The sales tax law defines and taxes electricity as the sale of
tangible personal property. The fee is considered part of the sales price of
the electricity. Thus, the fee is either taxable or nontaxable depending on
whether the use of the electricity is either a commercial (taxable) use or if
the sale of electricity is taxable (commercial) or nontaxable (non commercial)
use. The total fee for an electric line that will be for "residential" and
commercial use is taxable. The sales tax law exempts electricity and natural
gas bought for use in a building or structure occupied as a home or residence.
The exemption for residential use does not apply to electricity sold to a
developer.

The city makes paving assessments for the construction of streets.
These assessments are made by the city to property owners. New construction
labor is not a taxable service. Thus, the assessment for installing the
electric transmission lines is not analogous to the paving assessments.

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
Tax Administration Division

NOTE: Previous Accession Number 9402056L