Is all electricity used in an apartment or housing complex exempt from Texas sales tax as 'residential use,' or does it depend on how each part of the complex is actually used?

Plain-English summary

This letter is the Comptroller's Tax Policy Division reaffirming an earlier ruling (from a July 31, 1995 letter) after the taxpayer asked the office to reconsider it. The taxpayer had argued that because the statute defines "residential use" to mean a multi-family apartment or housing complex, all electricity used anywhere in such a complex should be exempt from sales tax, without applying the predominant use test.

The Comptroller disagreed and stood by the original position: electricity used for genuinely residential purposes in an apartment or housing complex is exempt, but electricity used for non-residential (commercial) purposes is not. The letter traces this back to a 1978 letter that treated recreation rooms, laundry rooms, swimming pools, common-area lighting, and an apartment manager's office as exempt residential use — because a residence could reasonably be expected to have those things. But the letter clarifies that a manager's office is only exempt if it is also the manager's actual living quarters. It also points to Comptroller Rule 3.295 (adopted in 1984), which specifically recognizes that multifamily apartment and housing complexes are not exempt per se, and subsection (d)(5) of that rule allows a utility company to require an exemption certificate to distinguish exempt residential use from taxable commercial use.

The letter gives a pointed example: if an apartment in the complex were rented out to a beauty salon, the taxpayer's own argument would make that electricity exempt too, simply because the salon sits inside an apartment complex — a result the Comptroller says the Legislature never intended. Instead, the office draws the line at actual use: a rental office used to run the complex's business (and not lived in) is commercial and its electricity is taxable, unless it is on a common meter where residential use predominates, in which case the predominant use test governs the whole meter.

What this means for you

Apartment and housing complex owners/operators

Don't assume that being located inside an apartment or housing complex automatically makes a space's electricity exempt. The Comptroller looks at how each space is actually used. Common residential amenities (recreation rooms, laundry facilities, swimming pools, common-area lighting) are treated as exempt residential use. A leasing or management office is only exempt if someone actually lives there as their residence — an office used purely to run the property's rental business is commercial and taxable.

Businesses operating out of units within a residential complex

If a commercial tenant (like a beauty salon in the letter's example) operates out of a unit in an apartment complex, that electricity is not automatically exempt just because the surrounding complex is residential. The nature of the actual use inside that space controls.

Utility companies and accountants handling exemption certificates

Under Rule 3.295(d)(5), a utility company may require an exemption certificate from a multifamily complex to help distinguish exempt residential use from taxable commercial use, especially where a common meter serves mixed uses. Where a single meter serves both residential and commercial space, the predominant use test decides how the whole meter is treated.

Common questions

Q: Is all electricity used in an apartment or housing complex exempt from Texas sales tax?
A: No. Only electricity used for residential purposes is exempt. Electricity used for commercial purposes within the same complex is taxable, unless it runs through a common meter where residential use predominates.

Q: Is an apartment manager's office always exempt as residential use?
A: No. This letter clarifies that a manager's office is exempt only if it is also the manager's residence. An office used solely to conduct rental business is commercial and taxable.

Q: What if a unit in the complex is rented to a business, like a salon?
A: The Comptroller specifically rejected the argument that such electricity would be exempt just because it's located within an apartment complex; it is taxable as commercial use.

Q: What amenities have been treated as exempt residential use?
A: The letter references a 1978 letter treating recreation rooms, laundry facilities, swimming pools, and common-area lighting as exempt, on the reasoning that residences could be expected to have these.

Q: Does Comptroller Rule 3.295 exempt multifamily complexes automatically?
A: No. The letter states that in 1984, Rule 3.295 specifically recognized that multifamily apartment and housing complexes are not exempt per se, and subsection (d)(5) allows utility companies to require exemption certificates to separate exempt residential use from taxable commercial use.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.295 (Natural Gas and Electricity), including subsection (d)(5) on exemption certificates for multifamily apartment and housing complexes

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9508L1365F12

Original ruling text

August 29, 1995

Dear *****:

I apologize for not responding to your letter sooner. I was
out of the office on business or vacation for most of the month
of August. You asked that I reconsider our office's position as
expressed in my letter of July 31, 1995 in which I advised
***** that the predominant use test is appropriate where
electricity is used for a commercial use within an apartment or
housing complex. After reviewing your letter with members of our
staff, I have concluded my letter was correct.

In your letter, you take the position that because the statute
defines residential use to mean a multi-family apartment or housing
complex, that any utilities used in the apartment or housing complex
are exempt and not subject to the predominant use rule. You also point
out that we have exempted recreation rooms, laundry facilities,
swimming pools, and apartment manager's office, and lighting.

The items included as residential in our 1978 letter were treated
as exempt use because residences could be expected to have recreation
and laundry rooms, swimming pools, and lighting. When ***
wrote the Texas Apartment Association, he probably assumed that
apartment managers' offices were in apartments which they occupied. My
experience would indicate that this is generally the case, but
undoubtedly it is not always so. My letter of July 31, 1995 clarified
that an apartment manager's office would be exempt so long as it was
also the manager's residence.

In 1984, Comptroller Rule 3.295 specifically recognized that multifamily
apartment and housing complexes are not exempt per se. Subsection (d)(5)
of the rule provided:

A person whose use is in multifamily apartment complexes, housing
complexes, or other residential buildings may be required to issue an
exemption certificate if one is necessary for the utility company to
distinguish exempt residential use from taxable commercial use.

Thereafter we did issue letters advising that the manager's office had
to be in the manager's living quarters to be considered an exempt.

Following the argument in your letter, if one of the apartments was
rented to a beauty salon, the electricity would still be exempt because the
salon was in an apartment complex. We take the position that electricity used
for residential purposes in an apartment or housing complex is exempt, but
electricity used for non-residential purposes is not. We also take the
position that a office from which the rental operations are conducted and which
is not used as a residence within the complex is used for commercial purposes,
and the electricity to operate the office is taxable unless it is run through a
common meter where the predominant use of the electricity is for residential
purposes.

As stated in your letter, you believe the Legislature intended to exempt all
use of electricity in apartment or housing complexes and that our rule cannot
change the definition of residential use. I respectfully disagree with your
interpretation of the exemption in that I believe the Legislature intended
to exempt residential use and not commercial use and our predominant use rule
accomplishes this result.

Should you have any further questions, please write me at 111 E. 17th Street,
Austin, Texas 78774, or call me at 1-800-531-5411, extension 3-4001.

Sincerely,

Wade Anderson
Director Tax Policy

NOTE: Previous Accession Number 9508405L