Do utilities used in apartment complex manager's offices, recreation rooms, laundry rooms, outside lighting, and swimming pools qualify for a Texas sales tax exemption, and are utility studies always required when a meter serves both taxable and exempt uses?

Plain-English summary

This 1995 letter from the Texas Comptroller's Tax Policy Division followed a meeting with representatives of the apartment industry about the sales tax exemption for utilities used in apartment complexes. It addresses how utility exemptions work for different areas of a complex and describes an ongoing effort to simplify how mixed exempt/taxable utility use is documented.

Since 1979, the Comptroller has treated recreation rooms, laundry rooms, outside lighting, and swimming pools as part of the residential units, so utilities used in those areas are exempt. A manager's office that is not also the manager's residence, however, is treated as a commercial use. If that office is on its own separate meter, sales tax is owed on the utilities for that meter. If the office shares a single meter with other residential uses, the Comptroller applies the "predominant use" test to the whole meter instead.

Historically, the Comptroller required a utility study whenever a single meter served a mix of exempt and taxable uses, in order to establish the predominant use. The letter notes one exception already made: cotton gins no longer need to submit utility studies, because representative industry studies showed cotton gin electricity use is overwhelmingly exempt. The letter says that if similar studies commissioned by the apartment industry show that mixed-use apartment meters are also overwhelmingly exempt, the Comptroller will likewise stop requiring utility studies for apartment complexes and will apply that determination retroactively. Those studies were expected to be completed and reviewed within about two months of the letter.

In the meantime, the letter notes that a utility company had been billing sales tax to a number of apartment complexes for the past four years, and the Comptroller asked that further action on those taxes be held in abeyance until the apartment-industry studies were done, "to avoid placing your customers in the position of either paying them or having their utilities cut off." The letter adds that it may ultimately be determined that no tax is owed for that four-year period.

What this means for you

Apartment complex owners and managers

Utilities for recreation rooms, laundry rooms, outside lighting, and swimming pools have been treated as exempt residential use since 1979. A manager's office, unless it doubles as the manager's residence, is a commercial use — so if that office has its own separate meter, tax is owed on that utility. If the office shares a meter with residential areas, the predominant use of that shared meter determines taxability.

Businesses on a shared, mixed-use utility meter

When a single meter serves both exempt and taxable uses, the Comptroller generally required a utility study to establish which use predominates. This letter shows the Comptroller had already waived that study requirement for one industry (cotton gins) based on representative industry data, and was actively evaluating whether to do the same for apartment complexes based on studies the apartment industry was preparing at the time.

Utility companies billing mixed-use customers

The letter is also addressed to concerns raised by a utility company that had been billing apartment complexes for taxes over a four-year period. The Comptroller asked that further collection action be held in abeyance while the apartment-industry studies were completed, noting it might ultimately be determined that no tax was owed for that period.

Common questions

Q: Are utilities for a swimming pool or laundry room in an apartment complex exempt from Texas sales tax?
A: According to this letter, yes — since 1979 the Comptroller has considered recreation rooms, laundry rooms, outside lighting, and swimming pools part of the residential units, with utilities to those areas treated as exempt.

Q: Is the utility for an apartment manager's office taxable?
A: If the office is not the manager's residence, it's treated as a commercial use. If it's on a separate meter from the residential portions, sales tax is owed on that utility. If it's on a shared meter with residential uses, the predominant use of that meter controls.

Q: Do you always need a utility study when a meter serves both exempt and taxable uses?
A: At the time of this letter, the Comptroller generally still required such studies, but had already dropped the requirement for cotton gins based on industry-wide data showing overwhelmingly exempt use, and was considering doing the same for apartment complexes pending similar industry studies.

Q: Would any change for apartment complexes apply retroactively?
A: The letter says that if the apartment industry's studies show the mixed use is overwhelmingly exempt, the Comptroller would no longer require utility studies for apartment complexes and would apply that determination retroactively.

Q: What did the Comptroller ask the utility company to do about past billing?
A: The letter asks that further action on taxes already billed to apartment complexes over the prior four years be held in abeyance until the apartment-industry studies were completed, noting it may be determined that no tax is owed for that period.

Citations and references

No statutes or administrative rules are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9509195L

Original ruling text

September 7, 1995

Dear **:

Recently, we met with representatives of the apartment industry concerning the
exemption for utilities used in apartment complexes. After a discussion of the
taxability of utilities used in a manager's office in an apartment complex, it
was agreed that the industry would do two studies of utilities used in
managers' offices when the offices were not used as residences by the managers
and were on the meter for residential portions of the complex.

As you know, since 1979, we have considered recreation rooms, laundry rooms,
outside lighting, and swimming pools part of the residential units and
utilities used in those areas as exempt. On the other hand, utilities used in a
manager's office that is not the residence of the manager have been considered
a commercial use.

If the manager's office is on a separate meter from the other residential uses,
sales tax is owed on the utilities. On the other hand, if the utility is on a
single meter for both the office and other residential purposes, the
predominant use test is applied.

Until recently, we have required utility studies where there is a mixture of
exempt and non-exempt use on a single meter. While we generally still require
such studies, we have made an exception for cotton gins based on industry
studies which have shown that electricity usage by cotton gins is
overwhelmingly exempt. Based on this representative study we have determined
that utility studies are no longer required from cotton ginners.

If the studies by the apartment industry show that the mixed use of the utility
is overwhelmingly exempt, we will no longer require utility studies on
apartment complexes and will apply the study retroactively. We expect the
studies to be completed and reviewed within the next two months.

It is my understanding that THE UTILITY COMPANY has billed a number of
apartment complexes for taxes for the last four years. I would appreciate it if
any further action concerning these taxes be held in abeyance until the studies
are completed to avoid placing your customers in the position of either paying
them or having their utilities cut off. It may well be determined that no tax
is owed for the past four years.

Should you have further questions, please write me at 111 E. 17th Street,
Austin, Texas 78774, or call me at 1-800-531-5441, extension 3-4004.

Sincerely,

Wade Anderson
Director Tax Policy