How should an apartment complex handle sales tax refunds for electricity used in vacant apartment units that were taxed as commercial accounts, and can it still use exemption certificates for residential accounts billed at commercial rates?

Subject

Apartment Complex/Multifamily Dwelling — Vacant Units — Residential Use Of Electricity Guidelines

Plain-English summary

This letter answers three follow-up questions from a utility company about how to handle sales tax on electricity billed to apartment complexes for vacant units, after Texas Tax Code Section 151.317 was amended to require tax on utilities used in vacant residential apartments.

• Who gets the refund when several tenants' accounts are billed under the apartment complex's name? The complex itself, not each individual tenant, is treated as the "buyer" of the electricity. The utility company may refund the tax to the apartment complex directly rather than collecting a separate refund request from every tenant.
• How far back does the refund period go? Refunds run from billing cycles beginning on or after October 1, 1995 -- the effective date of the Section 151.317 amendment -- not from an earlier date such as January 1, 1994, which the requester believed was the deadline the Comptroller had used to start taxing vacant units. The letter states the Comptroller cannot confirm January 1, 1994 as an official date the agency advised utility companies to start taxing these accounts.
• Are exemption certificates still required? Yes -- the utility company may continue to require an exemption certificate for any residential account billed at a commercial rate whenever the actual use of the electricity can't otherwise be determined (the letter gives the example of an investment company billed through a master meter).

The letter also separately confirms that a billing system capable of prorating tax rates across a billing cycle that spans a rate change may do so, rather than being required to wait until the entire billing cycle falls after the rate change's effective date -- that "wait until the whole cycle is after the change" rule exists only to avoid the confusion of reporting two different tax rates on one return, not to forbid proration outright.

What this means for you

Apartment complex owners and operators

If your electricity accounts for vacant units are billed in the complex's name rather than in individual tenants' names, you (the complex) are the party entitled to any sales tax refund, and you don't need a separate refund request from each tenant. Refunds are only available for billing cycles from October 1, 1995 forward.

Utility companies serving multifamily housing

You may continue requiring exemption certificates for residential accounts billed at a commercial rate when you can't otherwise verify the electricity is being used residentially (e.g., a master-metered account billed to an investment company or complex owner). You are also permitted -- not required -- to use a billing system that prorates the tax rate within a single billing cycle that spans a rate change, instead of applying the pre-change rate to the whole cycle.

Accountants and tax professionals

Note the sharp refund cutoff: this letter refuses to extend refunds back to January 1, 1994, and explicitly says the Comptroller cannot confirm that date was ever an official instruction to tax vacant-unit utilities. Refund claims for this fact pattern should be anchored to the October 1, 1995 effective date of the Section 151.317 amendment.

Common questions

Q: If several tenants' electricity accounts are billed under the apartment complex's name, who is entitled to the sales tax refund?
A: The apartment complex, since it is the buyer of the electricity under those accounts -- not each individual tenant.

Q: How far back can an apartment complex claim a refund for tax collected on vacant-unit electricity?
A: Only for billing cycles beginning on or after October 1, 1995, the effective date of the Section 151.317 amendment -- not back to January 1, 1994.

Q: Does the apartment complex still need to provide exemption certificates for residential accounts billed at commercial rates?
A: Yes, when the actual use of the electricity can't otherwise be determined, such as when billing goes through a master meter to an investment company or complex owner.

Q: Can a utility prorate the tax rate within one billing cycle that spans a rate change?
A: Yes, if its billing system is capable of it. The normal rule -- taxing the whole cycle at the rate in effect at the start of the cycle -- exists to avoid reporting confusion, not to prohibit proration.

Citations and references

Statutes:

• Texas Tax Code Section 151.317 (as amended, effective October 1, 1995)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1435A04

Original ruling text

September 5, 1996

Dear ***:

Thank you for your letter of August 15, 1996,
concerning the amendment to Texas Tax Code Section 151.317 and Wade Anderson's
letter on utilities used by apartment owners in vacant apartment units.

COMPANY X (X) is starting to receive numerous requests
for state sales tax refunds on vacant apartments that have been taxed since Mr.
Sharp required vacant residential apartments be taxed. You believe the
deadline for implementing the taxing of vacant apartments was January 1, 1994.
The requests are for one particular tenant at a premise.

Question 1. If a premise has several tenants in the
apartment complex's name, may you refund all the tenants with the request for
the specific tenant or do you have to receive a request for each individual
tenant? (See attached list of tenants as an example.)

Answer: When the accounts for several tenants are in
the apartment complex's name, the complex is the buyer of the electricity. You
may refund the tax to the apartment complex rather than to the tenants.

Question 2. Do you refund from October 1995 when the
legislation was passed or do you go back to the time you started taxing these
accounts (January 1994 for most utilities, earlier for some)?

Answer: The refund period begins for billing cycles
beginning on or after October 1, 1995, the effective date of the change. I
cannot confirm January 1, 1994, as the date the comptroller advised utility
companies to tax utilities in vacant apartments.

Question 3. When you were required to start taxing
residential accounts with commercial names (basically vacant apartments), you
were required to ask for exemption certificates if these accounts actually had
residents living in them and the apartment complex paid the bill. Do you still
need to require exemption certificates on these customers or can you just
exempt them for residential use regardless of being vacant or occupied like you
did before January 1994?

Answer: You may continue requiring an exemption
certificate for any residential account that is billed as a commercial rate
when the use of the electricity cannot be determined. This is the case when an
investment company is billed for electricity measured through a master meter.

You would like to know if you have a new billing system
designed to prorate tax rates, can you prorate rate changes over a billing
period that covers both rates? You know that traditionally all electric usage
has had to be used after the effective date of the rate change. That means
that you normally would change the rate roughly one month after it becomes
effective. With some of the new software packages, the packages are designed
to handle prorating tax changes. For example, July 1 tax rate change with a
reading period June 12 (previous) and July 12 (present) would bill old rate for
18 days and new rate for 12 days. May you prorate or must you continue to wait
until entire usage is on or after the effective date?

Answer: You may use a billing system that is capable of
prorating the tax rates during a billing period. The requirement of having
sellers using billing cycles to tax the entire billing period at the rate that
was in effect at the beginning of the billing cycle was implemented to
alleviate confusion caused by reporting state tax at two different rates on the
same return.

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 1-800-531-5441, extension 3-4683. The direct line
is 512/463-4683. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9609658L