Do cotton gins in Texas need to have a utility study performed before they can buy gas and electricity tax-exempt for processing?

Plain-English summary

This 1995 letter from the Texas Comptroller of Public Accounts (signed by Comptroller John Sharp) addresses whether cotton gins needed to have a utility study performed to establish that their gas and electricity purchases were exempt from sales tax as being used predominantly for processing.

The letter explains that, in the past, whenever utility studies had been performed, they consistently showed that the overwhelming use of gas and electricity by cotton gins was for processing (an exempt use). To make tax collection more efficient for both taxpayers and the Comptroller's office, the agency reviewed additional utility studies of large and small cotton gins performed by an associate professor and extension agricultural engineer specializing in cotton ginning and mechanization at the Texas Agricultural Extension Service. Those studies mirrored the Comptroller's prior experience: exempt (processing) use of gas was 98 percent, and exempt use of electricity was over 91 percent, even when offices and rarely-used non-production equipment were included in the calculation.

Based on these examinations and studies, the Comptroller concluded that a utility study is no longer required for a cotton gin to establish that its gas and electricity purchases qualify for the processing exemption. The letter also addresses gins that had been paying sales tax on their utilities because they failed to provide a utility study to their utility company: such a gin may seek a refund from the utility company for four years from the date of its claim. After refunding or crediting the tax to the gin, the utility company may then take a credit for that refund or credit on its own next tax return.

The STAR website has posted an ALERT noting that this document may be affected by later changes to the Tax Code made by H.B. 268 (82nd Regular Legislative Session, 2011), which required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a Comptroller-issued registration number, effective January 1, 2012. That 2011 amendment postdates this 1995 letter by 16 years and does not change what the letter itself held at the time it was issued; readers relying on this letter today should check whether the agricultural/timber exemption registration requirement (or other later changes) affects current practice.

What this means for you

Cotton gin owners and operators

As of this 1995 letter, you do not need to commission a utility study to support an exemption claim on gas and electricity used predominantly for ginning/processing — the Comptroller had already concluded, based on repeated studies, that gin utility usage is overwhelmingly (98% gas, 91%+ electricity) exempt processing use. If you had been paying sales tax on your utilities because you lacked a utility study, this letter confirms you can seek a refund from your utility company going back four years from your claim date.

Utility companies serving cotton gins

If a gin customer seeks a refund of previously-collected sales tax under this policy, the utility company can refund or credit the tax to the gin and then take a corresponding credit on its own next sales tax return.

Accountants and tax professionals

Because this letter is 30 years old and STAR itself flags that H.B. 268 (2011) added a registration-number requirement for certain agricultural/timber exemptions, confirm with current Comptroller guidance (and check whether a registration number is now required) before relying on this letter's "no utility study needed" conclusion for a current transaction.

Common questions

Q: Do cotton gins need a utility study to claim the sales tax exemption on gas and electricity?
A: According to this letter, no — the Comptroller concluded a utility study is no longer required, based on prior studies consistently showing 98% exempt use of gas and over 91% exempt use of electricity by cotton gins.

Q: What if a cotton gin already paid sales tax on its utilities because it didn't have a utility study?
A: The gin may seek a refund from its utility company for four years from the date of its claim.

Q: Can the utility company get its money back after issuing a refund to the gin?
A: Yes. After refunding or crediting the tax to the gin, the utility company may take a credit for that refund or credit on its next tax return.

Q: Does the 2011 ALERT banner change the holding of this 1995 letter?
A: The ALERT is a STAR editorial note flagging that H.B. 268 (2011) later required a Comptroller-issued registration number for certain agricultural/timber exemption claims. It doesn't restate or negate the 1995 letter's conclusion, but it signals the letter may not reflect current requirements — readers should verify current policy separately.

Citations and references

No specific statutes or case law are cited in the original letter text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505L1346F14

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

May 5, 1995

Dear **:

Over the last year the question has arisen regarding whether utility studies
were necessary in order to establish that cotton gins are exempt on their gas
and electricity purchases. In the past, when studies had been performed, they
invariably showed that the overwhelming use of gas and electricity by cotton
gins was for processing. In order to make the collection of tax more efficient
and cost effective for both taxpayers and our office, we agreed to review
utility studies performed by ** of large and small cotton gins.
* is an associate professor and extension agricultural engineer
specializing in cotton ginning and mechanization at the Texas Agricultural
Extension Service, ****.

The results of *****'s studies mirror our experience. Essentially,
the exempt use of gas in both large and small gins was 98 percent. Electricity
usage was over 91 percent even when offices and non-production equipment that
was rarely used were included.

Based on our examinations and these studies, I have concluded that a utility
study is no longer required for a cotton gin. Furthermore, if a cotton gin has
been paying sales tax on its utilities because it failed to provide a utility
study to the utility company, it may seek a refund from the utility company for
four years from the date of its claim. The utility company, after refunding or
crediting the tax to the company, may take a credit for the refund or credit on
its next return.

We appreciate your working with our office in our efforts to make tax
administration in Texas as efficient and reasonable as possible.

Sincerely,

JOHN SHARP
Comptroller of Public Accounts

NOTE: Previous Accession Number 9505078L