If a Texas defense contractor's gas and electricity use is exempt because it makes defense/national-security electronics for the U.S. Government, does the exemption also cover indirect uses like offices, cafeterias, and restrooms?

Plain-English summary

A contractor manufacturing precision-guided weapons, anti-radiation and strike missiles, airborne radar, night vision systems, and electronic warfare systems for the U.S. Government pointed to Tax Code Section 151.317(c)(2)(A)(vi), which exempts gas and electricity used by persons under contract with the federal government to provide defense or national-security-related electronics, classified electronics data processing/handling systems, or defense-related platform modifications/upgrades. The contractor argued this exemption should cover all uses of electricity at its facility, including indirect uses like cafeterias, restrooms, and administrative offices -- and said Comptroller staff had told them no predominant-use study was needed even for indirect uses.

The Comptroller disagreed. The exemption applies only to electricity actually used in performing the specifically listed defense-related activities -- it does not reach indirect uses such as offices, cafeterias, or restrooms. An entity under one of these federal defense contracts that has both exempt (direct, activity-related) and non-exempt (indirect, overhead) uses of electricity running through a single meter must determine the predominant use of that meter, per Rule 3.295(d) and (e) -- the same predominant-use framework applied to manufacturing exemptions generally. Simply being under a qualifying federal defense contract does not exempt every kilowatt the facility uses.

What this means for you

Federal defense contractors claiming the Section 151.317(c)(2)(A)(vi) utility exemption

Don't assume the exemption covers your whole facility's utility bill just because your work qualifies. If offices, cafeterias, restrooms, or other overhead areas share a meter with your production/technical areas, you need a predominant-use study under Rule 3.295(d)-(e) to determine whether that meter's usage is majority-exempt or majority-taxable -- the exemption doesn't automatically extend to indirect, non-production uses.

Manufacturers with mixed exempt/non-exempt utility use generally

This letter is a specific application of a broader, recurring Texas principle across several exemptions in this corpus (manufacturing, pollution control, and now federal-defense-contract electronics): direct production/qualifying use can be exempt while indirect/administrative use on the same meter is not, and predominant-use studies are the tool for sorting them out.

Accountants and tax professionals

Worth flagging to any client relying on an oral representation from Comptroller staff (as happened here) — this letter shows the Comptroller will correct a misstatement in writing when a taxpayer's understanding conflicts with the actual statutory scope, so get exemption-scope questions like this answered in writing rather than relying on a phone conversation.

Common questions

Q: Does the federal-defense-contract utility exemption cover my whole facility?
A: No. It covers only electricity/gas actually used in performing the specific listed defense-related activities, not indirect uses like offices, cafeterias, or restrooms.

Q: Do I need a predominant-use study if my exempt and non-exempt uses share one meter?
A: Yes, per Rule 3.295(d) and (e), if all uses are measured through a single meter.

Q: I was told by Comptroller staff that no study was needed for indirect uses -- can I rely on that?
A: This letter shows the Comptroller disagreeing with that understanding in writing; get exemption scope questions confirmed in writing rather than relying on informal staff statements.

Q: Can I rely on this letter for my own contract?
A: No. It is based on the specific facts presented and can only be relied on by the taxpayer to whom it was issued.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.317(c)(2)(A)(vi) (exemption for gas/electricity used by federal defense contractors)
• 34 Tex. Admin. Code Rule 3.295(d), (e) (natural gas and electricity)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9907518L

Original ruling text

July 1, 1999

Subject: Utility Tax Exemption

Dear Mr. *:

Thank you for your recent e-mail concerning taxation of utilities used by an
entity engaged in manufacturing advanced defense systems for the U.S.
Government.

Your client manufactures precision-guided weapons, anti-radiation and strike
missiles, airborne radar, night vision systems and electronic warfare systems
for the U.S. government.

You point to the exemption for natural gas and electricity [Texas Tax Code
Section 151.317(c)(2)(A)(vi)] used by persons under contract with the U.S.
Government to provide defense or national security related electronics,
classified electronics data processing and handling systems, or defense-related
platform modifications or upgrades. You interpret this statutory provision to
mean that all uses of electricity by persons performing such activities to be
exempt, including indirect uses of electricity (cafeteria, rest rooms,
administrative offices, etc.) also. In addition, you said you were told by Ed
Frye of our Tax Assistance Section that persons using electricity directly in
performing the activities listed and indirectly are not required to have a
predominant use study.

We disagree.

The statute exempts an entity's use of electricity only when the electricity is
used in performing the activities described in Section 151.317(c)(2)(A)(vi).
The exemption does not apply to indirect uses of electricity, e.g.,
administrative offices, cafeteria, rest rooms, etc. Entities under contract
with the United States Government to provide the products or services described
in Tax Code Section 151.317(c)(2)(A)(vi) and that make indirect uses of
electricity must determine predominant use if all uses are measured through a
single meter. See Rule 3.295(d) and (e) concerning natural gas and
electricity.

You may download the referenced rules at the following website:
http://www.sos.state.tx.us/tac/34/I/3/O/index.html.

You may view or down load the sales tax law at and
then click on the following:

1. State Government
2. Texas Statutes
3. Tax Code
4. Chapter 151
5. Scroll down to the referenced statutory section

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 if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts. My e-mail address is
.

Sincerely,

Eddie C. Washington
Tax Policy Division