My predominant use utility study was rejected by the Comptroller -- what did it need to include, and why was mine found deficient?

Subject

Utility Study — Requirements — Met/Not Met (Each Meter Studied Separately, Engineer'S Review, Owner'S Certification)

Plain-English summary

A taxpayer asked the Comptroller to rule on the validity of a predominant use study performed on a client's utility meter, submitted to support a claim that the electricity or gas used there was predominantly for an exempt purpose. The Comptroller found the study deficient and rejected it.

Rule 3.295(e)(1) spells out what a predominant use study must contain: all uses of the utility (both exempt and nonexempt), the times of usage, the energy used, twelve consecutive months of utility usage as part of the study, the kilowatt or BTU rating (including duty factor for cycling equipment), and certification by a registered engineer or a person with an engineering degree from an accredited college -- with both the engineer's and the owner's certification appearing on the face of the study.

This particular study fell short in three specific ways: (1) it did not list the times of usage separately for exempt and nonexempt equipment, (2) it did not contain twelve consecutive months of utility usage data, and (3) it was not certified by both an engineer and the owner.

The Comptroller also raised a separate, factual concern: the taxpayer had described the client's equipment as processing meat "not for immediate consumption" (which would support an exemption), but a Yellow Pages ad for the same client indicated it offered catering services. The letter warned that if the client operates its own catering vehicles or serves food at customer-designated locations, that food is being prepared for immediate consumption, and the utilities used in that food preparation are taxable. Where the same equipment is used for both exempt and nonexempt purposes, the study must allocate usage between the two.

What this means for you

Businesses claiming a predominant-use utility exemption

Before submitting a predominant use study, confirm it meets every element of Rule 3.295(e)(1): usage times broken out for exempt versus nonexempt equipment, a full twelve consecutive months of utility usage, the kilowatt/BTU rating with duty factor where cycling equipment is involved, and certification by both a qualified engineer and the business owner appearing on the face of the study itself. Missing any one of these can invalidate the whole study.

Food processors and caterers sharing the same facility or equipment

If equipment is used both to process food not for immediate consumption (potentially exempt) and to prepare food that is served at customer locations or from a catering vehicle (taxable, as immediate consumption), the study must allocate the utility usage between the exempt and nonexempt uses -- you cannot claim a blanket exemption for equipment with mixed uses.

Practitioners preparing or reviewing studies for clients

Get a clear, accurate description of exactly what the client's equipment does and how the business operates (including any related activities like catering) before relying on an exemption characterization, since outside evidence (like advertising) can contradict the facts as originally presented.

Common questions

Q: What does a predominant use study need to include under Rule 3.295(e)(1)?
A: All uses of the utility (exempt and nonexempt), the times of usage, the energy used, twelve consecutive months of usage data, the kilowatt or BTU rating (with duty factor for cycling equipment), and certification by both a registered/qualified engineer and the owner on the face of the study.

Q: Why was this particular study rejected?
A: It didn't break out usage times for exempt versus nonexempt equipment, didn't cover twelve consecutive months of usage, and wasn't certified by both an engineer and the owner.

Q: Is processing meat always exempt from utility tax?
A: Not necessarily. If the meat is processed for immediate consumption -- for example, through catering or food service at a customer's location -- the utilities used in that preparation are taxable. Processing meat not for immediate consumption can support an exemption, but the actual business activity has to match that description.

Q: What if the same equipment is used for both exempt and taxable purposes?
A: The study must allocate usage between the exempt and nonexempt uses; a single meter or piece of equipment serving mixed purposes can't simply be claimed as fully exempt.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.295(e)(1) (required contents and certification of a predominant use utility study)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9612056L

Original ruling text

December 6, 1996

FAX: ***

Dear ***:

This is in response to your request for a ruling on the validity of a
predominant use study that you performed on ***.

The study is deficient for the following reasons:

Subsection (e)(1) of Rule 3.295 requires that the study must show the
following:

all uses of the utility, both exempt and nonexempt
the times of usage
the energy used
twelve consecutive months of utility usage must be a part of the study
the kilowatt rating or BTU rating, duty factor, where needed for cycling
equipment
certified by a registered engineer or a person with an engineering degree from
an accredited engineering college
certification of both the engineer and the owner must appear on the face of the
study

Your study does not list the times of usage for exempt and nonexempt equipment,
does not contain twelve consecutive months of utility usage and is not
certified by both an engineer and the owner.

You should also provide a clearer description of the owner's business. You
indicated that the processing equipment is used to process meat not for
immediate consumption. Yellow Pages advertisement in the 1995-96 CITY A area
telephone directory for this client indicates that catering services are
provided. If your client operates any of its own catering vehicles or serves
meals and food prodcust at locations designated by the customer, the food
products are prepared for immediate consumption and the utilities used in the
food preparation are taxable. If the same equipment is used for both exempt and
nonexempt uses, allocations must be made for each use.

A copy of Rule 3.295, is enclosed for your benefit.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,
Gilbert Zamora
Tax Policy Division