Does a city have to collect sales tax on a separately stated drainage utility district fee billed alongside its electricity and solid waste charges?

Subject

Drainage Utility District Fees — Charged Monthly By City Along With Electricity, Solid Waste Utilities

Plain-English summary

A Texas city passed ordinances creating a drainage utility district and began charging a monthly drainage fee -- billed alongside the city's existing utility charges for electricity, water, wastewater, and solid waste. The fee was set at a flat monthly rate per single-family residence, a flat monthly rate per multifamily residence, and a rate per 1,000 square feet of building for commercial accounts. The money raised would fund capital improvements to the city's storm drainage infrastructure on a pay-as-you-go basis.

The city asked the Comptroller whether it needed to collect sales tax on this new drainage fee.

The Comptroller said no. Charges for the city's taxable sales of electricity and solid waste collection services are part of the taxable sales price for those items, and separately, sales of water and wastewater service are not taxable at all. But the drainage utility district fee is not related to the sale of electricity or solid waste collection services -- it funds separate storm drainage infrastructure. Because the fee is unrelated to those taxable utility sales and is separately stated, the city does not have to collect sales tax on it. The letter cites subsection (i) of Rule 3.356, Real Property Service, regarding unrelated services.

What this means for you

Cities and municipal utility districts

If your city or utility district charges a drainage, stormwater, or similar infrastructure fee alongside taxable utility services like electricity or solid waste collection, this ruling indicates that fee is not automatically swept into the taxable sales price of those services. The key facts here were that the drainage fee (1) funded a separate purpose (storm drainage capital improvements) unrelated to the electric or solid waste service, and (2) was separately stated on the bill.

Accountants and tax professionals advising municipalities or utility customers

When a municipal bill bundles multiple charges -- some taxable (electricity, solid waste), some not (water, wastewater), and some new or unusual (a drainage fee) -- look at whether each charge is separately stated and whether it is actually related to a taxable service. This letter treats "unrelated services" under Rule 3.356(i) as the operative test for whether the drainage fee rides along with the taxable electricity/solid waste charges or stands apart from them.

Business owners billed for a drainage utility fee

If you're a commercial customer being billed a drainage utility district fee based on your building's square footage, this ruling supports that the fee itself should not carry sales tax, separate from any tax you already pay on your electricity or solid waste service.

Common questions

Q: Does the city have to collect sales tax on the drainage utility district fee?
A: No. The Comptroller ruled the city is not required to collect sales tax on the separately stated drainage utility district fee.

Q: Why isn't the drainage fee taxable when electricity and solid waste charges are?
A: Because the drainage fee is not related to the sale of electricity or solid waste collection services -- those are the taxable items, and the drainage fee funds separate storm drainage infrastructure improvements.

Q: Are water and wastewater charges on the same bill taxable?
A: No. The letter states sales of water and wastewater services are not taxable.

Q: What rule did the Comptroller rely on?
A: Subsection (i) regarding unrelated services in Rule 3.356, Real Property Service.

Q: Does this ruling apply to any city's drainage fee?
A: The letter says the opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1441G08

Original ruling text

September 25, 1996

Dear Mr. **:

Thank you for your letter concerning the monthly fees charged for a drainage
utility district.

The City of ** has recently passed appropriate ordinances creating
a drainage utility district. Fees for this district will be charged on a
monthly basis along with the previous established utilities of electricity,
water, wastewater, and solid waste.

The fee charged will be $** per month per single family residence,
$** per month per multifamily residence and $** per
month per 1,000 square feet of building for commercial accounts. The revenues
derived will be used primarily to make capital improvements to the City's storm
drainage infrastructure on a pay-as-you-go basis.

Charges related to the taxable sales of electricity and solid waste collection
services would be considered part of the sales price for those taxable items.
Sales of water and wastewater services are not taxable. The fees for the
drainage utility district are not related to the sale of electricity or solid
waste collection services. Therefore, the City of ** is not
required to collect sales tax on the separately stated drainage utility
district fees. See subsection (i) regarding unrelated services in Rule 3.356,
Real Property Service.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You
may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9609787L