If a utility company accepts a predominant-use energy study in good faith and issues an exemption, can the Comptroller still challenge that study on audit?

Subject

Utility Study — Subject To Review In The Event Of Audit — Even If Study Was Accepted In Good Faith By Utility Company

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1306C09

Plain-English Summary

A taxpayer (apparently a motel operator) had submitted a "Motel Occupancy Information" form as part of a utility exemption study supporting a refund request for sales tax paid on electricity. The Comptroller had already told the taxpayer, in earlier correspondence, that the form could not be verified for accuracy because it was not broken down by meter — all of the exempt or taxable electricity use could theoretically be running through a single meter, so occupancy records and documentation needed to be separated by meter (and ideally include room numbers) so an auditor could later verify the claimed exemption.

The Comptroller acknowledged that the study's computations came reasonably close to actual electricity usage, but explained that "coming close" on the numbers does not automatically validate all of the assumptions built into the study, since usage is affected by multiple factors (cycling, hours of use, days of use, etc.).

The taxpayer had correctly pointed out that the electricity tax exemption is based on predominant usage, not predominant occupancy, and cited Administrative Hearing No. 21,763 for the proposition that residential/apartment-style users of hotel rooms use proportionately more energy than overnight guests. The Comptroller agreed that Finding of Fact No. 16 in that hearing found apartment-dweller usage normally exceeds motel-occupant usage on a daily basis, but clarified that the administrative law judge in that case never had to rule on, or set, an acceptable usage difference — the petitioner in that earlier case had simply treated all rooms as having the same usage, so the judge ended up allowing the exemption based on predominant occupancy (citing Finding of Fact No. 9, where residential night usage was found to be a fairly constant 80%, versus the 37% this taxpayer's own work papers established). In other words, that earlier case doesn't stand for the general rule the taxpayer wanted to draw from it — its outcome turned on how that particular petitioner presented its numbers.

Finally, and most importantly, the Comptroller stated that even if the utility company accepts the taxpayer's energy study in good faith and issues a refund, that does not settle the matter. Under Rule 3.295(e)(3), neither the Comptroller (by reviewing the study) nor the utility company (by accepting an exemption certificate) is confirming the study's accuracy. The study remains subject to review if the business is audited, and if the study turns out to be incomplete or inaccurate, tax, penalty, and interest will be assessed against the business owner — not the utility company.

What This Means For You

If you are a hotel/motel or other business relying on a utility exemption/predominant-use study: Good-faith acceptance of your study by the utility company (or even preliminary review by the Comptroller) is not a safe harbor. The study can still be challenged in a later audit, and if it's found incomplete or inaccurate, you — the business owner — will owe the resulting tax, penalty, and interest.

When building or submitting a utility study: Break down occupancy and usage records by meter, and consider including room numbers, so that an auditor can later verify the exemption you claimed. A study that mixes exempt and taxable use behind a single, undifferentiated meter cannot be checked for accuracy and is a red flag on audit.

On "predominant usage" vs. "predominant occupancy": The exemption turns on which use is predominant in terms of actual energy usage, not simply which type of occupant (short-term guest vs. longer-term/residential-style occupant) is more common. Numbers that merely approximate actual total usage don't by themselves prove the usage-based assumptions in your study are correct.

Q&A

Q: If a utility company accepts our exemption study and gives us a refund, are we protected if the Comptroller later audits us?
A: No. Per Rule 3.295(e)(3), the utility company's good-faith acceptance of the study does not confirm its accuracy. The study is still subject to review on audit, and tax, penalty, and interest can be assessed on the business owner if the study is found incomplete or inaccurate.

Q: Does a utility study need to be broken down by meter?
A: Yes, based on this ruling. If a study or occupancy form isn't broken down by meter, it can't be verified for accuracy, because all of the exempt or taxable use could be running through a single meter. Separating occupancy records (and including room numbers) by meter helps an auditor later verify the exemption claimed.

Q: Is the electricity exemption based on how many rooms are occupied by long-term residents, or on actual energy usage?
A: It's based on predominant usage, not predominant occupancy. The Comptroller noted that in the cited administrative hearing, the exemption was actually allowed based on occupancy only because the petitioner in that case had treated all rooms as having identical usage — that outcome doesn't establish a general rule that occupancy alone can substitute for a usage analysis.

Citations

• 34 Tex. Admin. Code § 3.295(e)(3) (utility company's good-faith acceptance of an exemption certificate does not confirm the study's accuracy; the study remains subject to review on audit)

Original ruling text

March 10, 1994

Dear **:

Thank you for your letter of February 17, 1993, concerning a
refund request and utility study submitted for * (*).

In my previous correspondence of July 22, 1993, and August
27, 1993, I stated that your form entitled "Motel Occupancy
Information" is not broken down by meter. Therefore, the
studies cannot be examined for accuracy. All of the exempt
or taxable use could take place within a single meter. The
occupancy records and documentation should be separated by
meter. Including the room numbers in your utility study
would be helpful if an auditor is called upon to verify an
exemption claimed. Your recent correspondence did not
address this situation.

I am aware that the computations in your study did come
reasonably close to actual electricity usage. Since several
factors are involved (cycling, hours of use, days of use,
etc.), arriving at numbers that approximate actual use does
not automatically validate all of the assumptions made in a
study.

You are absolutely correct in stating that the tax exemption
is based on predominant usage and not predominant occupancy.
Your letter refers to Administrative Hearing No. 21,763 as
support that residential users of hotel rooms use far more
energy proportionately than overnight guests. Finding of
fact No. 16 in this hearing states that the usage of an
apartment dweller on a daily basis normally would be in
excess of the usage by a motel occupant. The Administrative
Law Judge did not have to rule on this fact or set out an
acceptable difference as the petitioner in the case treated
all rooms as if they had the same usage. In short, the judge
allowed the exemption in this case based upon predominant
occupancy. See Finding of Fact No. 9 where the residential
night usage was established at a fairly constant 80% as
opposed to the 37% established by your work papers. The
differences in apartment dweller usage verses motel occupant
usage gave the judge additional latitude in the matter.

Having said all this, I must state that the utility company
is not precluded from accepting the energy study in good
faith and issuing a refund. As provided in Rule 3.295
(e)(3), neither the Comptroller, by reviewing the study, or
the utility company, in accepting an exemption certificate,
is confirming the study's accuracy. The study will still be
subject to review in the event of an audit. Tax, penalty,
and interest will be assessed on the business owner if it is
found that the study is incomplete or inaccurate.

This opinion is based on the facts presented. If there are
additional or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613.
The direct line is 512/475-0613. You may also write to Tax
Administration Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division

NOTE: Previous Accession Number 9403429L