If a state agency leases office space in a privately owned building and puts the utilities in its own name, is it exempt from tax on the utilities even if the building owner later reimburses the agency for the utility cost?

Plain-English summary

A state agency leases office space through the General Services Commission, as lessee, in a privately owned building. The question was whether there are any tax consequences if the utilities are put in the occupying agency's own name (instead of the building owner's), and the building owner (lessor) subsequently reimburses the agency for the cost of those utilities. The stated purpose of putting the utilities in the agency's name was to eliminate the taxes, since the agency was the sole beneficiary of the utility use.

The Comptroller's Tax Policy Division answered by pointing to Sec. 151.309, Tax Code, which exempts taxable items sold, leased, or rented to, or stored, used, or consumed by certain governmental entities — including "this state" — from the taxes imposed under that chapter. Utilities used commercially are themselves taxable items, but a state agency occupying space in a privately owned building can buy them tax exempt so long as (1) the utilities are in the state agency's own name, and (2) the agency is directly responsible for paying them. Critically, the letter confirms that the building owner later reimbursing the agency for the utility cost does not affect the exemption.

What this means for you

State agencies leasing private office space

If your agency occupies privately owned leased space, putting the utility accounts in the agency's own name — and being the party directly responsible for paying the utility bills — is what unlocks the sales tax exemption on those utilities under Sec. 151.309, Tax Code. It does not matter if your landlord later reimburses you for that utility cost; the exemption still applies.

Property owners/landlords leasing to government tenants

If you own a building leased to a state agency and you reimburse the agency for utilities that are billed in the agency's name, this letter confirms that arrangement does not strip away the agency's sales tax exemption on those utility purchases.

Accountants and tax professionals

This is a narrow, fact-specific confirmation that the exemption under Sec. 151.309, Tax Code turns on whose name the utility account is in and who is directly liable for payment — not on who ultimately bears the economic cost through a reimbursement arrangement.

Common questions

Q: Are utilities taxable items in Texas?
A: Yes — utilities used commercially are taxable items under Texas law.

Q: Can a state agency buy utilities tax exempt when it occupies a privately owned building?
A: Yes, so long as the utilities are in the name of the state agency and the agency is directly responsible for paying them.

Q: Does it matter if the building owner later reimburses the agency for the utility cost?
A: No. The letter states the fact that the owner may subsequently reimburse the state agency for the cost of the utilities does not affect the exemption.

Q: What statute provides this exemption?
A: Sec. 151.309, Tax Code, which exempts taxable items sold, leased, or rented to, or stored, used, or consumed by specified governmental entities, including the state itself, from the taxes imposed by that chapter.

Q: Does this apply to any type of leased space, or just space leased through the General Services Commission?
A: The letter addresses the specific fact pattern of a state agency occupying space leased through the General Services Commission as lessee in a privately owned building; it does not address other leasing arrangements.

Citations and references

• Sec. 151.309, Tax Code (exemption for items sold, leased, rented to, or used by governmental entities, including this state)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606L1413F13

Original ruling text

June 7, 1996

Dear *****:

On June 3, you requested my opinion on the following question:

If a state agency occupies space leased through the
General Services Commission as lessee, in a privately owned building, and if
the utilities are subsequently placed in the occupying agency's name, are there
any tax consequences if the agency is reimbursed for the cost of the utilities
by the lessor (building owner)? The purpose of putting the utilities in the
occupying agency's name would be to eliminate the taxes since the occupying
agency would be the sole beneficiary of use of the utilities.

Answer: Sec. 151.309, Tax Code, provides as follows:

A taxable item sold, leased, or rented to, or stored, used, or consumed by,
any of the following governmental entities is exempted from the taxes imposed
by this chapter:

(1) ...
(2) ...
(3) ...
(4) this state; or
(5) ...
(6) ...

Utilities used commercially are taxable items which may
be purchased tax exempt by a state agency occupying a privately owned building
so long as the utilities are in the name of the state agency and the agency is
directly responsible for paying them. The fact the owner of the building may
subsequently reimburse the state agency for the cost of the utilities used by
the state agency does not affect the exemption.

I hope this satisfactorily answers your question. Should you have any further
questions, please write me at 111 East 17th Street, Austin, Texas 78774, or
call me at 463-4004.

Sincerely,

Wade Anderson
Director, Tax Policy

NOTE: Previous Accession Number 9606278L