TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER A. GENERAL RULES

34 TAC §3.11

The Comptroller of Public Accounts proposes new §3.11, concerning petition for adoption of rules. This section implements Government Code, §2001.021 (Petition for Adoption of Rules), as amended by House Bill 763, 84th Legislature, 2015, effective June 9, 2015, which requires the comptroller to adopt a rule setting forth the substantive and procedural requirements an interested person must follow in order to petition the comptroller for the adoption of a rule. The section establishes the substantive and procedural requirements to petition the comptroller for the adoption, repeal, or amendment of a rule.

Subsection (a) identifies who may petition the comptroller for the adoption, repeal, or amendment of a rule. This subsection defines the term "interested person" based on Government Code, §2001.021(d), which identifies the individuals, entities, and organizations who can petition for the adoption of a rule.

Subsection (b) explains how to petition the comptroller for the adoption, repeal, or amendment of a rule.

Subsection (c) gives the comptroller discretion to deny a petition if it fails to meet the requirements of this section.

Subsection (d) requires the comptroller to consider a petition filed under subsection (b) within 60 days after submission and either deny the petition with written reasons for the denial or initiate rulemaking procedures under the Administrative Procedure Act. This subsection implements Government Code, §2001.021(c).

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no fiscal impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by implementing statutory provisions. The proposed new rule would have no fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

The new section is proposed under Government Code, §2001.021, which requires the comptroller to create a rule setting forth the substantive and procedural requirements that an interested person must follow in order to petition the comptroller for the adoption of a rule.

This section implements Government Code, §2001.021 (Petition for Adoption of Rules).

§3.11.Petition for Adoption of Rules.

(a) Any interested person may petition the comptroller for the adoption, repeal, or amendment of a rule by filing a petition as provided in this section. The term "interested person" as used in this section means a resident of this state; a business entity located in this state; a governmental subdivision located in this state; or a public or private organization located in this state that is not a state agency.

(b) A petition for the adoption, repeal, or amendment of a rule must be submitted in writing to: Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. A separate petition is required for each rule request. Each petition must include:

(1) the name and address of the petitioner;

(2) a brief explanation of the rule request;

(3) the text of the rule prepared in a manner to indicate the words to be added or deleted from the text of the current rule, if any;

(4) a statement of the statutory or other authority under which the rule is to be promulgated; and

(5) the justification, reason, or public benefit anticipated as a result of adopting, repealing, or amending the rule.

(c) A petition may be denied for failure to comply with the requirements of subsections (a) and (b) of this section.

(d) Within 60 days after submission of a petition, the comptroller shall consider the petition and either deny the petition in writing, stating the reason for the denial, or initiate rulemaking proceedings in accordance with Government Code, Chapter 2001 (Administrative Procedure Act).

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on December 2, 2016.

TRD-201606128

Don Neal

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: January 15, 2017

For further information, please call: (512) 475-0387


SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES

34 TAC §3.293

The Comptroller of Public Accounts proposes amendments to §3.293, concerning food; food products; meals; food service. The section is amended to reflect the changes made to Tax Code, §151.314 (Food and Food Products) by the following legislation: Senate Bill 1151, 83rd Legislature, 2013, effective September 1, 2013; House Bill 697, 83rd Legislature, 2013, effective September 1, 2013; House Bill 1905, 84th Legislature, 2015, effective September 1, 2015; and House Bill 2313, 84th Legislature, 2015, effective September 1, 2015.

Subsection (a) provides definitions. Paragraph (1), defining "bakery items," is amended to delete examples of snack items. This amendment implements Senate Bill 1151, which made "snack items" a defined term by adding subsection (b-1) to Tax Code, §151.314. In addition, to eliminate possible confusion regarding the use of the term "bars," the paragraph is amended to refer to lemon squares.

Paragraph (3), defining "candy," is amended to use the term "candy bars" to avoid confusion regarding the use of the term "bars." Other edits are included to clarify that nuts, raisins, and other fruits that have been coated with chocolate, yogurt, or caramel or have been candied, crystalized, or glazed are considered to be candy. Additional minor edits are proposed to make the paragraph easier to read.

Paragraph (4), defining "combine," is amended to replace the word "combine" with the word "join" and amends the definition to be more consistent with the statutory use of the term.

Paragraph (5), which defined "eating facilities," is deleted as the term does not appear in the amended section. Subsequent paragraphs are renumbered accordingly.

Re-numbered paragraph (6), defining "food and food ingredients," is amended to add "snack items" to the representative list of foods and food ingredients. This change implements Senate Bill 1151, which amended the definition of "food products" in Tax Code, §151.314 (b) to include "snack items." Paragraph (6)(A) is also amended to add oleomargarine and poultry to conform to the statute.

Renumbered paragraph (7) is amended to add "delis" and "mobile vendors" to the list of businesses that are like restaurants, lunch counters, and cafeterias, and to describe when a grocery store or convenience store is like a restaurant, lunch counter, or cafeteria. This change implements House Bill 1905 and Tax Code, §151.314 as amended.

Existing paragraph (10) is deleted. The information contained in this paragraph is relocated to new subsection (c)(9). Subsequent paragraphs are renumbered accordingly.

New paragraph (13) is added to define "snack items" to implement Senate Bill 1151, which amended Tax Code, §151.314 to add a definition of the term "snack items," and House Bill 1905, which amended the definition. The proposed definition is taken from the statute without change.

Subsection (b) is amended to add "delis" to the list of businesses that are required to collect sales tax on bakery items sold in conjunction with taxable meals. This change implements House Bill 1905, which amended Tax Code, §151.314(c-2) to add "delis" as an example of a business selling prepared food. Additional minor edits are proposed to make the subsection easier to read.

Subsection (c) is amended by amending paragraph (7) and adding paragraph (9). Paragraph (7) is amended to correct the cross-reference. Paragraph (7)(A) is amended to add the term deli and to make the paragraph easier to read. Paragraph (7)(C), addressing ice cream sundries, is deleted because ice cream and similar items now appear in the definition of "snack items." Paragraph (7)(D) is also deleted because it relies upon the presence or absence of eating facilities to determine when certain ready-to-eat foods are taxable as prepared foods. Because the taxability of sales at these locations is now addressed in the definition of food ready for immediate consumption, a separate subsection addressing the taxability of sales at eating facilities is no longer necessary. All of these changes are made to implement House Bill 1905.

New paragraph (9) is added to implement Senate Bill 1151, which defined "individual-sized portions" in Tax Code, §151.314(h), and added snack items sold in individual-sized portions to the list of food items that are subject to Texas sales tax, and House Bill 1905 which amended that definition.

Subsection (d) is amended to alert readers to exemptions from tax on sales made through certain vending machines as provided by subsection (e).

Subsection (d)(2) is amended to replace the examples given for "chips, crackers, pretzels" with "snack items" as these products are now included in the definition of "snack items."

Subsection (d)(4) is amended to change "his" sales tax return to "the" sales tax return for gender neutral language.

Subsection (e) is amended to implement House Bill 2313. The title of the subsection is changed from "Bulk vending machine sales" to "Exempt vending machine sales." The language in subsection (e) relating to bulk vending machine sales becomes paragraph (1). New paragraph (2) is added to include the exemption for sales made through vending machines operated by certain nonprofits as provided by House Bill 2313.

Subsection (f) is amended to include snack items in the list of items exempt when purchased with food stamps if the item can be legally purchased with food stamps.

Subsection (g) is amended to implement House Bill 697, which created a sales tax exemption for certain food products sold by booster clubs and similar school support organizations. Paragraphs within the subsection are amended to add snack items to the list of tax-free sales. In addition, paragraph (2) is amended by adding booster clubs and other school support organizations to the list of organizations that may sell prepared food, candy, snack items, and soft drinks tax-free, if the items are sold or served during a regular school day pursuant to an agreement with the proper school authorities. New paragraph (5) is added to include an exemption for sales of food, prepared food, soft drinks, snack items, or candy sold during an event sponsored or sanctioned by an elementary or secondary school or school district at a concession stand operated by a booster club or other school support organization formed to support the school or school district, provided the proceeds from the sales benefit the school or school district. Subsequent paragraphs are renumbered accordingly.

Changes are made in subsections (h) and (k) to reflect current rule titles referenced and to correct typographical errors.

New subsection (m) is added to clarify taxable food and drink sales of grocery stores and convenience stores.

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by conforming the rule to current statutes and clarifying agency policy. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

The amendment is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendment implements Tax Code, §151.314 (Food and Food Products).

§3.293.Food; Food Products; Meals; Food Service.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Bakery items--Baked goods typically made by bakeries including bread, rolls, buns, biscuits, bagels, croissants, pastries, doughnuts, Danishes, cakes, tortes, pies, tarts, muffins, [bars such as] lemon squares [bars], cookies, large pretzels, and tortillas. The term does not include candy,[;] snack items, [including chips, small pretzels, or crackers;] sandwiches,[;] tacos,[;] or pizzas.

(2) Bulk vending machine--A device that contains unsorted items and randomly dispenses goods in approximately equal amounts without selection of a particular item or type of item by the customer.

(3) Candy--A confection made with [of] natural or artificial sweeteners. Examples include: candy [and includes] bars;[,] gum;[, ] drops;[,] taffy;[,] and [chocolate, yogurt or caramel coated] nuts, [popcorn, ] raisins, and other fruits that have been coated with chocolate, yogurt, or caramel or have been candied, crystalized, or glazed. The term does not include products used exclusively for cooking, such as chocolate bits and cake sprinkles.

(4) Combine--To join [combine] two or more food products into a single item [until the products do not separate (e.g., salsa, pesto, dip, and hummus)].

[(5) Eating facilities--Tables, benches, booths, chairs, or other facilities that allow customers to eat either on or adjacent to the seller's premises. For example, a food seller located adjacent to the food court in a shopping mall is considered to have eating facilities.]

(5) [(6)] Eating utensils--Eating utensils include trays, plates, knives, forks, spoons, glasses, cups, or straws.

(6) [(7)] Food and food ingredients--Substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for taste, aroma, or nutritional value.

(A) Food and food ingredients include food products intended for human consumption, such as the following: cereal and cereal products; milk and milk products, [including ice cream,] butter, and yogurt; oleomargarine; meat and meat products; poultry and poultry products; fish and fish products; eggs and egg products; vegetables and vegetable products; fruit and fruit products; spices, condiments, and salt; sugar products; coffee and coffee substitutes; tea; juice (if more than 50% fruit or vegetable juice by volume); cocoa and cocoa products; canned foods; snack items; or any combination of these.

(B) Food products do not include:

(i) alcoholic beverages;

(ii) cigarettes, tobacco, or tobacco products;

(iii) candy;

(iv) ice;

(v) water; or

(vi) drugs, medicines, tonics, vitamins, dietary supplements, and medicinal preparations in any form. For further information about drugs, medicines, and dietary supplements, see §3.284 of this title (relating to Drugs, Medicines, Medical Equipment and Devices).

(7) [(8)] Food ready for immediate consumption--Food, drinks, or meals prepared, served, or sold by restaurants, lunch counters, hotels, cafeterias, delis, mobile vendors, or other like places of business, that, when sold, require no further preparation by the purchaser prior to consumption;[,] and food sold through vending machines. A grocery store or convenience store that contains a restaurant, lunch counter, deli, or other similar location is a like place of business selling food ready for immediate consumption, but only for items sold at that location.

(8) [(9)] Food sold through vending machines--Food dispensed from a machine or other mechanical device that accepts payment.

[(10) Individual-sized packages--Bottles or cartons of milk, juice, and tea of a half-pint or less (8 ounces or less) are individual-sized. Packages or bags of snacks such as chips, pretzels and crackers are individual-sized if less than 5 ounces.]

(9) [(11)] Mix--To blend two or more food items together into a single item that is more or less a uniform whole, but each ingredient may or may not retain its identity (e.g., potato salad, coleslaw or seafood salad).

(10) [(12)] Mobile vendor--A person who sells food from a motor vehicle, push cart, or any other form of vehicle.

(11) [(13)] Prepared food--Prepared food means:

(A) food ready for immediate consumption;

(B) food sold in a heated state or heated by the seller;

(C) food sold with eating utensils provided by the seller; or

(D) two or more food ingredients mixed or combined by the seller for sale as a single item, including items that are sold by weight or volume as a single item, but does not include food that is prepared at an off-site location, refrigerated food that is typically reheated prior to eating, or food that is only cut, repackaged, or pasteurized by the seller.

(12) [(14)] Retirement facility--A facility that provides permanent housing and residence to individuals, a majority of whom are 60 years of age or older.

(13) Snack items--Snack items means:

(A) breakfast bars, granola bars, nutrition bars, sports bars, protein bars, and yogurt bars, unless they are labeled and marketed as candy;

(B) snack mix and trail mix;

(C) nuts, but not including pine nuts or candy-coated nuts;

(D) popcorn;

(E) chips, crackers, hard pretzels, pork rinds, and corn nuts;

(F) sunflower seeds and pumpkin seeds;

(G) ice cream, sherbert, and frozen yogurt; and

(H) ice pops, juice pops, sorbet, and other frozen fruit items containing not more than 50 percent fruit juice by volume.

(14) [(15)] Soft drinks--Carbonated and non-carbonated non-alcoholic beverages that contain natural or artificial sweeteners. The term does not include beverages that contain milk or milk products, soy, rice, or similar milk substitutes, or juices that contain more than 50% vegetable or fruit juice by volume.

(b) Sales of exempt food products or water. Food and food ingredients are exempt from sales tax unless otherwise taxable under subsection (c) of this section. Water is exempt as explained in §3.318 of this title (relating to Water-Related Exemptions). Heated and unheated bakery items are exempt regardless of size or quantity unless sold with plates or other eating utensils provided by the seller. Separately stated charges for bakery items sold by caterers, mobile vendors, or [by] restaurants, fast food outlets, lunch counters, cafeterias, delis, hotels, and other like [similar] places of business, are taxable if sold in conjunction with taxable meals for [in ] which plates or other eating utensils are provided. For example, a roll served in a restaurant with a meal is taxable even if the roll is served rolled up in a napkin rather than directly on the plate. The [However, the] restaurant is not required to collect sales tax on bakery items purchased without eating utensils from its bakery.

(c) Taxable sales. The following are subject to sales tax:

(1) sales of soft drinks;

(2) sales of candy;

(3) sales of ice;

(4) sales of beer, wine, and other alcoholic beverages unless subject to mixed beverage gross receipts tax and mixed beverage sales tax under Tax Code, Chapter 183;

(5) sales of cigarettes and other tobacco products;

(6) vending machine sales of food, soft drinks, and candy as explained in subsection (d) of this section;

(7) sales of prepared food as defined in subsection (a)(11)[(13)] of this section, including:

(A) all food ready for immediate consumption, except bakery items, sold by caterers, mobile vendors, or [by] restaurants, fast food outlets, lunch counters, cafeterias, delis, hotels, and other like places of businesses; and [similar types of places]

(B) all sandwiches ready for immediate consumption, including refrigerated triangle-type sandwiches such as ham, cheese, tuna, egg salad, or chicken salad, but not sales of sandwiches that are frozen or partially frozen and that require thawing or heating by the customer prior to consumption;

[(C) all individual ice cream sundries, including ice cream served on cones, in cups or in dishes, ice cream sandwiches, bars, sticks, specialties, or similar ice cream sundries. It does not include ice cream sundries sold in prepackaged units containing multiple sundries or in cartons of ice cream greater than a half-pint. Popsicles are taxable regardless of the quantity in a package unless the popsicles are more than 50% juice;]

[(D) all individual-sized packages of food sold by a business that has eating facilities (e.g., a deli section of a grocery store with seating, or a convenience store, bakery, or doughnut shop with seating). For example, a half-pint carton of milk is taxable when sold in a convenience store with eating facilities but is exempt if sold in a convenience store without eating facilities; or]

(8) sales of bakery items sold with plates or other eating utensils provided by the seller; and[.]

(9) sales of snack items sold in individual-sized portions.

(A) A snack item is sold in an individual sized-portion if the snack item:

(i) is labeled as having not more than one serving; or

(ii) contains less than 2.5 ounces.

(B) Snack items do not include items sold in prepackaged units containing more than one package. For example, a box containing 6 prepacked, single-serving bags of nuts is not a snack item.

(d) Vending machine sales. Except as provided in subsection (e) of this section, food [Food], candy, and soft drinks sold through vending machines are taxable. The sales tax is determined as follows:

(1) Soft drink and candy vending machine sales. The vending machine operator must remit sales tax on the total gross receipts from sales of soft drinks and candy without any deduction for spoilage, waste, or other losses.

(2) Food product vending machine sales. The vending machine operator must remit sales tax on 50% of the total gross receipts from sales of food products without any deduction for spoilage, waste, or other losses. Examples of food products include snack items [chips, crackers, pretzels], milk, tea, coffee, and juice if more than 50% vegetable or fruit juice by volume.

(3) Water, including bottled water, spring water, sparkling water, or mineral water, is exempt from sales tax. A vending machine operator is not required to remit sales tax on the receipts from sales of water. Flavored water (carbonated or non-carbonated) is a soft drink and a vending machine operator must remit tax on the total gross receipts for vending machines sales of flavored water.

(4) A vending machine operator must place a sign on the vending machine stating that the vended price includes sales tax. If sales tax is included in the price of the taxable item, the vending machine operator may back out the amount of the tax before reporting the taxable sales on the [his] sales tax return. See §3.328 of this title (relating to Optional Reporting Methods for Grocers and Other Vendors).

(e) Exempt vending machine sales.

(1) Bulk vending machine sales. Food, gum, candy, and toys sold for $0.50 or less from a bulk vending machine, as defined in subsection (a)(2) of this section, are exempt from sales tax. A bulk vending machine operator that has only exempt bulk vending machine sales may choose to obtain a sales tax permit and file sales tax returns so that the operator is able to purchase the gum, candy, or toys tax free for resale by giving the supplier a properly completed resale certificate. If a vending machine operator has both taxable vending machine receipts as explained in subsection (d) of this section, and exempt bulk vending machine sales as explained in this subsection, the operator must keep detailed records showing which items are dispensed from the bulk vending machines.

(2) Sales through vending machines operated by certain non-profit organizations.

(A) The sale of tangible personal property through a vending machine is exempt from the taxes imposed by this chapter if:

(i) the sale is made by a nonprofit organization that is exempt from federal income taxation under Section 501(a), Internal Revenue Code of 1986, by being listed as an exempt organization in Section 501(c)(3) of that code;

(ii) the machine is owned by the nonprofit organization; and

(iii) the machine is stocked and maintained by individuals with special needs as part of an independent life skills and education program operated by the nonprofit organization.

(B) A nonprofit organization that makes a sale exempt from taxation under this section must maintain records demonstrating that the sale is eligible for the exemption.

(f) Food stamp purchases. Food, candy, snack items, and soft drinks are exempt if purchased with food stamps (including a Texas Lone Star debit card) under the food stamp program (7 U.S.C. Chapter 51) if the item can legally be purchased with food stamps. A seller should apply the amount of food stamps against the purchase of qualifying taxable items first so that the individual receives the best possible benefit from the food stamp exemption.

(g) Food sale exemptions. Certain organizations may sell prepared food, candy, snack items, and soft drinks tax-free. These tax-free sales are not counted against the two one-day, tax-free sales allowed to certain exempt nonprofit organizations under §3.322 of this title (relating to Exempt Organizations). Tax is due on sales of alcoholic beverages.

(1) Sales of food, prepared food, soft drinks, snack items, or candy by a church or at a function of the church are exempt.

(2) Sales of food, prepared food, soft drinks, snack items, or candy sold or served by public or private elementary or secondary schools, school districts, bona fide student organizations, booster club or other school support organization, or parent-teacher organizations and associations are exempt if the items are sold or served during a regular school day pursuant to an agreement with the proper school authorities. This exemption includes food, soft drinks, snack items, and candy sold through vending machines.

(3) Sales of food, prepared food, soft drinks, snack items, or candy by a parent-teacher organization or association during a fund-raising sale are exempt if the proceeds do not go to the benefit of an individual.

(4) Sales of food, prepared food, soft drinks, snack items, or candy by a group associated with a private or public elementary or secondary school are exempt if the sale is part of a fund-raising drive sponsored by the organization for its exclusive use.

(5) Sales of food, prepared food, soft drinks, snack items, or candy during an event sponsored or sanctioned by an elementary or secondary school or school district at a concession stand operated by a booster club or other school support organization formed to support the school or school district are exempt, but only if the proceeds from the sales benefit the school or school district.

(6) [(5)] Sales of food, prepared food, soft drinks, snack items, or candy by a member or volunteer for a nonprofit organization devoted to the exclusive purpose of education or religious or physical training of persons under 19 years of age are exempt if the sale is part of a fund-raising drive sponsored by the organization for its exclusive use.

(7) [(6)] Sales of food, prepared food, soft drinks, snack items, or candy served by hospitals, day care centers, summer camps, or other institutions licensed by the state for the care of humans are exempt if sold or served to the patients, children, students, or residents of the facility. Sales of prepared food, soft drinks, snack items sold in individual-sized portions, and candy to visitors or employees of the facility are taxable. Persons confined in correctional facilities operated under the authority, jurisdiction, or under a contract with the State of Texas or its political subdivisions are not exempt and must pay sales tax when they purchase taxable items such as prepared food, candy, snack items in individual-sized portions, soft drinks, and taxable items sold from vending machines. Meals and beverages served without charge to inmates confined in correctional facilities are not taxable.

(8) [(7)] Food, prepared food, soft drinks, snack items, or candy sold or served by a retirement facility to its permanent residents are exempt. Sales of taxable items to visitors or employees of the facility are taxable.

(h) Responsibilities of sellers of taxable food and beverages.

(1) A seller must collect sales tax on all taxable sales. The seller is required to obtain a sales tax permit, file sales tax returns and remit the tax to the comptroller. See §3.286 of this title (relating to Seller's and Purchaser's Responsibilities, including Nexus, Permits, Returns and Reporting Periods, and Collection and Exemption Rules).

(2) A seller must collect sales tax on the total sales price of taxable items, including separately stated charges for preparing, serving, or delivering taxable items, charges for the room or facility in which the meals and beverages are served, and charges for the cost or expense of items such as reusable tables, chairs, tableware, and tablecloths used by the seller in providing the food service. Reusable items that are used by the food service provider (not rented to the customer) may not be purchased tax free for resale.

(A) A cash discount (including a discount coupon) allowed by a seller reduces the sales price of a taxable item, and the seller should collect sales tax on the actual amount paid by the customer for the discounted meals or beverages. For example, a seller should charge sales tax on the price of the single meal when accepting a discount coupon that allows the customer to purchase two meals for the price of one.

(B) Separately stated charges for mandatory tips or gratuities may be excluded from the sales price if the charges meet the criteria for exclusion as explained in §3.337 of this title (relating to Gratuities). Voluntary tips or gratuities left by customers for food service employees are not subject to sales tax.

(3) A seller of taxable items must keep accurate records that clearly identify sales of exempt items and sales of taxable items. The records must separately state charges for the exempt items from the charges for taxable items. Examples of records include sales invoices, receipts, and cash register coding records. If a seller's records do not clearly identify exempt sales from taxable sales, all sales are presumed taxable.

(4) A seller must pay sales or use tax on the purchase, lease, or rental of all taxable items unless otherwise exempt under the law. Examples of equipment and supply items taxable to a food service business include, but are not limited to, tables, chairs, reusable place mats, tablecloths, cloth napkins, silverware, dishes, dispensers such as salt and pepper shakers and glass creamers, garbage cans and garbage can liners, janitorial items such as mops and mop holders, grill bricks, aprons, menus and menu inserts, and hand tools such as cooking utensils, cutting knives, and lime squeezers.

(5) A seller may give a resale certificate to a supplier for the tax-free purchase of items that are transferred to the customer with the food or beverages. Such items must not be reusable by the seller to qualify for the sale for resale exemption. See §3.285 of this title (relating to Resale Certificates; Sales for Resale). Persons who process food for sale qualify for an exemption on the wrapping and packaging used to package the food for sale and may give an exemption certificate to a supplier. See §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, Export Packers, and Stevedoring Materials and Supplies). Examples of items qualifying for exemption include disposable paper products, wooden, plastic, and aluminum products that are transferred to the customer. Other examples include cake boxes, lunch boxes, disposable cups, paper and plastic containers, bottle wraps, butter chip trays, disposable paper or plastic plates, plastic knives, forks, and spoons, paper napkins, soda straws, toothpicks, french fry boxes, stir sticks, ice cream sticks, disposable souffle cups, hot dog trays, and other types of disposable trays.

(6) A person processing food for sale is a manufacturer and may claim a sales or use tax exemption on purchases of equipment and other taxable items that qualify for exemption under Tax Code, §151.318. For example, a restaurant may claim an exemption on the purchase of an oven or a mixer directly used in baking or mixing. See §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing) for further information regarding these exemptions. The exemption in Tax Code, §151.317 for natural gas and electricity used in manufacturing is not applicable when the gas or electricity is used to prepare or store prepared food.

(7) As a matter of convenience, a food service business, such as a restaurant selling prepared food, may sell prepared food tax free to a food service employee immediately before, during, or immediately after the employee's shift. This provision applies to employees involved in preparing or serving food at the food service location.

(i) Universities, colleges, junior colleges, or other institutions of higher learning. Universities and colleges are required to collect sales tax on taxable sales as explained in subsection (c) of this section. If a charge for meals is not separately stated and is included in a lump-sum price to a student for room and board, sales tax is due on the portion of the lump-sum charge attributable to the taxable meals.

(j) Hotels and other places that provide sleeping accommodations. Persons that provide sleeping accommodations to the public, including motels, tourist houses, lodging houses, inns, rooming houses, bed and breakfast places, must collect hotel occupancy tax under Tax Code, Chapter 156.

(1) A hotel must collect tax on prepared food.

(2) If the charges for prepared food are not separately stated and are billed with the lodging as a lump-sum price, then hotel occupancy tax, not sales tax, is due on the lump-sum charge. See §3.162 of this title (relating to Hotel Occupancy Tax Base and Collection of the Tax).

(3) A hotel is not required to collect sales tax on a separately stated charge for use of a hotel meeting room if the charge is unrelated to the sale, provision, or service of prepared food or the sale of other taxable items such as an admission charge for a taxable amusement service. See §3.298 of this title (relating to Amusement Services). The charge for the meeting room is subject to hotel occupancy tax if the meeting room is located in the hotel building where sleeping accommodations are provided.

(4) A hotel is required to pay sales tax on its purchase of taxable items (e.g., prepared food purchased from a caterer, soft drinks, candy, ice) provided to guests free of charge as complimentary items. However, a hotel is not required to accrue and pay sales tax on its purchase of exempt food products (loaves of bread, milk, cereal, fruit) even if provided to guests as free complimentary items.

(k) Caterers.

(1) Caterers are persons engaged in the business of preparing and serving meals, drinks, or other food products at locations designated by customers. A caterer is a seller of prepared food and beverages and must collect sales tax on all charges billed in connection with the sale of taxable meals.

(2) A caterer owes tax on the purchase, lease, or rental of such items as tables, chairs, tablecloths, steam tables, and table decorations used in providing catered meals. A caterer may claim a resale exemption on the purchase of nonreusable items transferred to customers and a manufacturing exemption on qualifying equipment, such as mixers, used to prepare the food. See §3.300 of this title [(relating to Manufacturing; Custom Manufacturing; Fabricating; Processing)] for information on qualifying equipment.

(3) If a caterer uses a room or facility in a hotel that is subject to hotel occupancy tax, the caterer is required to pay the occupancy tax to the hotel. There is no resale exemption for hotel occupancy tax. In addition, a caterer must collect sales tax on a separately stated charge passed on to the customer for the cost or expense of the room (including the occupancy tax) when billed to a customer as part of the taxable sale of catered meals.

(l) For information on the responsibilities of persons who sell and serve mixed alcoholic beverages, see §3.289 of this title (relating to Alcoholic Beverage Exemptions).

(m) Grocery stores and convenience stores. Subject to the exemptions described in subsection (b) of this section, grocery stores and convenience stores should collect sales tax on the items listed in subsection (c) of this section. Taxable items include ice, candy, packaged soft drinks, and prepared food. Food and drinks sold in a heated state, fountain drinks, and food sold with eating utensils are considered to be prepared food ready for immediate consumption regardless of the location in the store from which the food is sold. Other food or drinks that can be immediately consumed and that are sold by a restaurant, lunch counter, deli, or other similar location within the store are also considered to be taxable prepared food. For example, a bottle of unsweetened iced tea sold at a grocery store deli is considered to be ready for immediate consumption and is taxable. However, a bottle of unsweetened iced tea sold at the checkout lane of a grocery store is not considered to be food ready for immediate consumption and is not taxable.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on December 2, 2016.

TRD-201606129

Don Neal

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: January 15, 2017

For further information, please call: (512) 475-0387


34 TAC §3.295

The Comptroller of Public Accounts proposes amendments to §3.295, concerning natural gas and electricity. This section is being amended to implement provisions of House Bill 2712, 84th Legislature, 2015; House Bill 1223, 83rd Legislature, 2013; House Bill 268, 82nd Legislature, 2011; Senate Bill 575, 81st Legislature, 2009; and Senate Bill 1125, 77th Legislature, 2001. This section is also being amended and reorganized for clarity and readability.

Subsection (a) is amended to renumber and alphabetize existing definitions and provide additional definitions. Paragraphs (1) and (4) are added to define the terms "crime control and prevention district" and "fire control, prevention, and emergency services district" respectively. These definitions are added to implement Senate Bill 575, 81st Legislature, 2009. Subsequent paragraphs are renumbered accordingly.

Former paragraph (6), relating to the definition of "residential use," is renumbered as paragraph (8). The definition is also amended for readability and to memorialize longstanding comptroller policies regarding the residential use of natural gas and electricity.

Provisions related to the purchase of natural gas or electricity by the owner of a building are now in new subparagraph (A). The subparagraph is amended to include condominiums and retirement homes in the list of facilities in which the use of natural gas or electricity by the owner is considered residential use. These amendments reflect guidance provided in STAR Accession Nos. 8503L0633E04 and 9803218L.

Provisions related to the purchase of natural gas or electricity by the tenant of a building are now in new subparagraph (B). The subparagraph is amended to include condominiums, campgrounds, and recreational vehicle parks in the list of facilities in which the use of natural gas or electricity by a tenant is considered residential use. These amendments reflect guidance provided in STAR Accession Nos. 8503L0633E04 and 200810187L.

New subparagraph (C) is added to include the use of natural gas and electricity for common areas of apartment complexes and other facilities in the definition of residential use. This subparagraph is added to memorialize guidance provided in STAR Accession Nos. 9106L1112D10, 201005039L, and 201103013L.

New subparagraph (D) is added to memorialize longstanding comptroller policy that the use of natural gas or electricity at a health care or detention center is not residential use. See, for example, Comptroller's Decision Nos. 38,990 (2002) and 36,425 (1998).

Paragraph (9) is added to define the term "tenant." The definition also memorializes longstanding comptroller policy regarding the use of natural gas and electricity by health care facilities and detention facilities.

Subsection (b) is amended to reflect longstanding comptroller policy that sales of tangible personal property, including natural gas and electricity, are presumed to be subject to sales and use tax. See Tax Code, §151.054 (Gross Receipts Presumed Subject to Tax). Subsection (b) is further amended to add references to the applicable local sales and use tax provisions.

Subsection (c) is amended to provide guidance that, except as provided by new subsection (d), the sales and use tax exemptions for uses of natural gas and electricity apply to state and local sales and use taxes. New paragraph (4) provides an exemption for natural gas and electricity used in timber operations which implements Senate Bill 1125, 77th Legislature, 2001. The subsequent paragraph is renumbered accordingly.

Renumbered paragraph (5)(A) is amended to include a reference to Tax Code, §151.3185 (Property Used in the Production of Motion Pictures or Video or Audio Recordings and Broadcasts) to provide a sales and use tax exemption for natural gas and electricity used to power exempt equipment used in the production of motion pictures or video or audio recordings and broadcasts. This amendment implements Senate Bill 1125, 77th Legislature, 2001. Subparagraph (A) is also amended to include a reference to §3.293 of this title (relating to Food; Food Products; Meals; Food Service).

Subparagraph (H) is added to provide a sales and use tax exemption for natural gas and electricity used for a qualifying data center under Tax Code, §151.359 (Property Used in Certain Data Centers; Temporary Exemption). This amendment implements House Bill 1223, 83rd Legislature, 2013.

Subparagraph (I) is added to provide a sales and use tax exemption for natural gas and electricity used for a qualifying large data center under Tax Code, §151.3595 (Property Used in Certain Large Data Center Projects; Temporary Exemption). This amendment implements House Bill 2712, 84th Legislature, 2015.

New subsection (d) is added to specify certain uses of natural gas and electricity that are exempt from state sales and use tax under Tax Code, Chapter 151 are subject to certain local sales and use taxes. Paragraph (1) provides that residential use of natural gas and electricity is subject to tax in certain municipalities, certain crime control and prevention districts, and certain fire control, prevention, and emergency services districts. See Tax Code, §321.105 (Residential Use of Gas and Electricity) and §321.1055 (Imposition of Fire Control or Crime Control District Tax on the Residential Use of Gas and Electricity). Natural gas and electricity used for a qualifying data center project is subject to local sales and use taxes imposed under Tax Code, Chapters 321, (Municipal Sales and Use Tax Act), 322 (Sales and Use Taxes for Special Purpose Taxing Authorities), and 323 (County Sales and Use Tax Act). See Tax Code, §151.317 (Gas and Electricity) and §151.359. Subsequent subsections are relettered accordingly.

Relettered subsection (e) is amended to correct a reference to subsection (c)(5) due to renumbering of paragraphs.

Relettered subsection (f) is amended to make the section easier to read. Paragraph (3) is amended to update a reference to subsection (c)(5) due to the renumbering of paragraphs in that subsection. No substantive change is intended.

Relettered subsection (g) is reorganized and amended to provide guidance and to improve readability. Paragraph (1) requires a person claiming a sales tax exemption based on the predominant use of natural gas or electricity through a meter to have a utility study performed to establish the exempt use. Specific items that are required to be a part of the study within paragraph (1) are now subparagraphs (A) through (E). Language is added in subparagraph (A) to provide that the study must state the percentage of exempt use. Language is deleted from subparagraph (E) that provided a power of attorney had to state when a refund of tax was involved.

Guidance previously contained in paragraph (1) for persons in business less than 12 months who have a utility study performed based on projected use of natural gas or electricity has been moved to paragraph (2). Provisions requiring a utility study to be on file at the location of the person claiming the exemption at the time an exemption certificate is provided to a utility company are now located in paragraph (3). Provisions regarding the assessment of tax, penalty, and interest when a refund is claimed without a valid study are now paragraph (4).

Guidance for utility providers related to the acceptance of exemption certificates is deleted from paragraph (4) and is relocated to subsection (h), regarding exemption certificates. Subsequent paragraphs are renumbered accordingly.

Renumbered paragraphs (5) through (7) are amended for readability. Paragraph (6) is also amended to state that the comptroller will not accept a predominant use study that cannot be independently verified.

New paragraph (8) is added to state that a new utility study is not required if a business claiming a sales tax exemption for natural gas or electricity changes its utility provider. This paragraph is added to memorialize longstanding comptroller policy provided in STAR Accession Nos. 200204015L and 200412974L.

Relettered subsection (h) is amended for readability. Current paragraph (1) is divided into two paragraphs. Paragraph (1) is amended to address refund claims. New paragraph (2) amends the language previously provided in paragraph (1) to expressly address when a natural gas or electricity utility company may accept an exemption certificate. Provisions deleted from relettered subsection (g) related to the acceptance of exemption certificates are now located in new paragraph (3). Subsequent paragraphs are renumbered accordingly.

New paragraph (7) is added to memorialize longstanding comptroller policy allowing owners of apartment complexes to provide an exemption certificate for natural gas and electricity used for vacant apartments that will be occupied as residences if at least one unit in a complex is occupied for residential use as provided in STAR Accession Nos. 9607L1431G01, 9610L1431G02, and 201103013L.

New paragraph (8) is added to require a person claiming a sales tax exemption for natural gas and electricity used for agricultural and timber operations to provide an exemption certificate that contains the person's Texas Agriculture and Timber Registration Number issued by the comptroller. This paragraph is added to implement House Bill 268, 82nd Legislature, 2011.

New paragraph (9) is added to require a qualifying owner, qualifying operator, or qualifying occupant of a qualifying data center or a qualifying large data center project who claims an exemption for natural gas or electricity used for a qualifying data center or used for a qualifying large data center to provide an exemption certificate that contains the Qualifying Data Center Registration Number and the Qualifying Owner, Qualifying Operator, or Qualifying Occupant Registration Number issued by the comptroller to the utility provider.

Relettered subsections (i) and (j) are amended for readability and to correct grammar and spelling.

Subsection (k) is added to memorialize longstanding comptroller policy regarding the purchase of natural gas and electricity by lessors of nonresidential real property. This policy was established in Direlco, Inc. v. Bullock, 711 S.W.2d 360 (Tex. App.--Austin, 1986) and was further applied in Comptroller's Decision Nos. 34,711 (1997) and 39,766 (2001).

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by conforming the rule to current statutes and would clarify agency policy. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

This amendment is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendment implements Tax Code, §151.317 (Gas and Electricity).

§3.295.Natural Gas and Electricity.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Crime control and prevention district--A district organized under Local Government Code, Chapter 363 (Crime Control and Prevention Districts), located within the boundaries of a municipality that imposes a sales and use tax on the residential use of natural gas and electricity.

(2) [(1)] Electric utility--Any entity owning or operating for compensation in this state equipment or facilities for producing, generating, transmitting, distributing, selling, or furnishing electricity whose rates for the sale of electric power are set by the Public Utilities Commission under the Public Utility Regulatory Act. The term does not include:

(A) a qualifying small power producer or qualifying co-generator, as defined in the Federal Power Act, §3(17)(D) and §3(18)(C), as amended (16 United States Code §796(17)(D) and §796(18)(C)); or

(B) any person not otherwise a public utility that owns or operates in this state equipment or facilities for producing, generating, transmitting, distributing, selling, or furnishing electric energy to an electric utility, if the equipment or facilities are used primarily for the production and generation of electric energy for the person's own consumption.

(3) [(2)] Fabrication--To make, build, create, produce, or assemble components of tangible personal property, or to make tangible personal property work in a new or different manner.

(4) Fire control, prevention, and emergency services district--A district organized under Local Government Code, Chapter 344 (Fire Control, Prevention, and Emergency Medical Services Districts), located within the boundaries of a municipality that imposes a sales and use tax on the residential use of natural gas and electricity.

(5) [(3)] Manufacturing--Every operation commencing with the first stage of production of tangible personal property and ending with the completion of tangible personal property. The first production stage means the first act of production and it does not include acts in preparation for production. For example, a manufacturer gathering, arranging, or sorting raw material or inventory is preparing for production. When production is completed, maintaining the life of tangible personal property or preventing its deterioration is not a part of the manufacturing process. Tangible personal property is complete when it has the physical properties, including packaging, if any, that it has when transferred by the manufacturer to another. Also see §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).

[(4) Remodeling--To make tangible personal property belonging to another over again without causing a loss of its identity, or without causing the property to work in a new or different manner.]

(6) [(5)] Processing--The physical application of the materials and labor necessary to modify or to change the characteristics of tangible personal property. The property being processed may belong either to the processor or the customer, the only tests being whether the property is processed and whether it will ultimately be sold. Direct use of natural gas or electricity in processing will be referred to as exempt use. Processing does not include remodeling or any action taken to prolong the life of tangible personal property or to prevent a deterioration of the tangible personal property being held for sale. The repair of tangible personal property belonging to another by restoring it to its original condition is not considered processing of that property. The mere packing, unpacking, or shelving of a product to be sold will not be considered to be processing of that product.

(7) Remodeling--To make tangible personal property belonging to another over again without causing a loss of its identity, or without causing the property to work in a new or different manner.

(8) [(6)] Residential use--Use of natural gas or electricity in a building or the portion of a building occupied as a residence and includes:

(A) use by the owner of a home, apartment complex, housing complex, condominium, campground, recreational vehicle park, nursing home, or retirement home occupied by the owner as a residence; [Use in a family dwelling or in a multifamily apartment complex or housing complex or nursing home or in a building or portion of a building occupied as a home or residence when the use is by the owner of the dwelling, apartment, complex, home, or building or part of the building occupied.]

(B) [Residential use also includes] use by a tenant in a home [dwelling], apartment[,] complex, housing complex [house], condominium, campground, recreational vehicle park, nursing home, or retirement home [or building or part of a building] occupied by the tenant as a [home or] residence [when the use is by a tenant who occupies the dwelling, apartment, complex, house, or building or part of a building] under a contract for an express initial term of more than 29 consecutive days. Absent a contract, only the period exceeding 29 consecutive days will be considered residential use, when supported by valid documentation (i.e., receipts, canceled checks, etc.); and[. For purposes of the exemption for residential use of natural gas and electricity, nursing homes qualify for exemption only for periods beginning after December 31, 1987.]

(C) use for common areas of an apartment complex, housing complex, condominium, campground, recreational vehicle park, nursing home, retirement home, or homeowners' association, such as use for a recreation room, swimming pool, security gate, or for street lights and exterior lighting in a walkway or parking area.

(D) Residential use does not include use in health care or detention facilities, including hospitals, rehabilitation centers, substance abuse treatment centers, psychiatric facilities, prisons, jails, or other detention centers, or use by the owner or operator of a health care or detention facility.

(9) Tenant--A person who is authorized by a lease to occupy a dwelling to the exclusion of others and who is obligated under the lease to pay rent. The term does not include a patient or inmate of a health care or detention facility, including a hospital, rehabilitation center, substance abuse treatment center, psychiatric facility, prison, jail, or other detention center.

(b) State and local sales and use taxes [Sales tax] applicable. The furnishing of natural gas or electricity is a sale of tangible personal property and presumed to be taxable. All the provisions in [the ]Tax Code, Chapters [ Chapter] 151 (Limited Sales, Excise and Use Tax), 321 (Municipal Sales and Use Tax Act), 322 (Sales and Use Taxes for Special Purpose Taxing Authorities), and 323 (County Sales and Use Tax Act), applying to the sale of tangible personal property, apply to the sale of natural gas or electricity.

(c) Exempt uses of natural gas and electricity. Except as provided in subsection (d) of this section, an exemption for natural gas and electricity applies to state and local sales and use taxes imposed by Tax Code, Chapters 151, 321, 322, and 323. Natural gas [Gas] and electricity are exempted from sales and use [the] taxes [imposed by this chapter] when sold for:

(1) residential use;

(2) use in agriculture, including dairy or poultry operations and pumping for farm or ranch irrigation;

(3) direct or indirect use or consumption, including electricity lost in the lines, by an electric utility engaged in the purchase of electricity for resale;

(4) use in timber operations, including pumping for irrigation of timberland;

(5) [(4)] direct use in:

(A) powering equipment that qualifies for exemption under Tax Code, §151.318 (Property Used in Manufacturing) or §151.3185 (Property Used in the Production of Motion Pictures or Video or Audio Recordings and Broadcasts), (including equipment that is permanently affixed to or incorporated into realty) to process tangible personal property for sale as tangible personal property, other than preparation of or the storage of prepared food, as defined in §3.293 of this title (relating to Food; Food Products; Meals; Food Service) [food for immediate consumption];

(B) lighting, cooling, and heating in the manufacturing area during the actual manufacturing or processing of tangible personal property for sale as tangible personal property, other than preparation or storage of prepared food [for immediate consumption];

(C) exploring for, producing, or transporting a material extracted from the earth;

(D) electrical processes, such as electroplating, electrolysis, and cathodic protection;

(E) the off-wing processing, overhaul, or repair of a jet turbine engine or its parts for a certificated or licensed carrier of persons or property; [or]

(F) providing, under contract with or on behalf of the United States government or foreign governments, defense or national security-related electronics, classified intelligence data processing and handling systems, or defense-related platform modifications or upgrades;

(G) the repair, maintenance, or restoration of rolling stock;[.]

(H) a data center that is certified by the comptroller as a qualifying data center under Tax Code, §151.359 (Property Used in Certain Data Centers; Temporary Exemption) in the processing, storage, and distribution of data by a qualifying owner, qualifying operator, or qualifying occupant of the data center; or

(I) a large data center project that is certified by the comptroller as a qualifying large data center under Tax Code, §151.3595 (Property Used in Certain Large Data Center Projects; Temporary Exemption) in the processing, storage, and distribution of data by a qualifying owner, qualifying operator, or qualifying occupant of the data center.

(d) Local sales and use taxes on natural gas and electricity.

(1) Residential use of natural gas and electricity is subject to local sales and use tax in the following local taxing jurisdictions:

(A) a municipality which has elected to impose the municipal sales and use tax on the residential use of natural gas and electricity under Tax Code, §321.105 (Residential Use of Gas and Electricity);

(B) a fire control, prevention, and emergency services district whose board of directors, by order or resolution, has imposed a sales and use tax on the residential use of electricity under Tax Code, §321.1055 (Imposition of Fire Control or Crime Control District Tax on the Residential Use of Gas and Electricity); or

(C) a crime control and prevention district whose board of directors, by order or resolution, has imposed a tax on the residential use of electricity under Tax Code, §321.1055.

(2) Natural gas and electricity used in a qualifying data center is subject to local sales and use taxes imposed under Tax Code, Chapters 321, 322, and 323.

(e) [(d)] Use of gas or electricity in an exempt manner by an independent contractor engaged by the purchaser of the gas or electricity to perform one or more of the activities described in subsection (c)(5) [(4)] of this section is considered use by the purchaser of the gas or electricity.

(f) [(e)] Predominant use.

(1) Natural gas or electricity used during a regular monthly billing period for both exempt and taxable purposes under a single meter is totally exempt or taxable based upon the predominant use of the natural gas or electricity measured by that meter. A person who performs a processing, manufacturing, or other exempt function [continually] must establish the predominant use of the natural gas or electricity based upon [on] 12 consecutive months of use.

(2) If, in the regular course of business, a person performs a processing, manufacturing, or other exempt function only part of the year and a nonprocessing, nonmanufacturing, or other taxable function for the remainder of the year, the predominant use may be established for that period of time the processing, manufacturing, or other exempt function occurs based on the predominant use during that period.

(3) When determining the predominant use of natural gas or electricity, utilities used to operate machinery exempt under subsection (c)(5) [(4)](A) of this section and for lighting, cooling, and heating in the manufacturing area during actual manufacturing or processing of tangible personal property for sale, as set out in subsection (c)(5)(B) of this section, are exempt. Natural gas [Gas] and electricity used to operate lighting, cooling, and heating in manufacturing support areas are taxable. Manufacturing support areas include, but are not limited to, storage, engineering, office, [and] accounting [areas], research and development, [and] break, eating, and restroom areas [facilities]. Natural gas and electricity [Utilities] used in an area open to the public for the purpose of marketing a product ready for sale are taxable. Utilities used to operate other nonproduction machinery or equipment are taxable.

(g) [(f)] Determining predominant use: utility studies.

(1) A person [Persons] claiming a sales tax exemption because the predominant use of natural gas or [and] electricity purchased through a single meter is for processing, manufacturing, fabricating, or another [other] nontaxable use must have [performed] a natural gas or electricity utility study performed to establish the [this] predominant exempt use of the natural gas or electricity.

(A) The study must list all uses of the utility, both exempt and taxable, the times of usage, the energy used, [and] whether the use was taxable or exempt, and the percentage of exempt use of the natural gas or electricity as determined by the study.

(B) Twelve consecutive months of utility usage must be a part of the study.

(C) The kilowatt rating or BTU rating, duty factor, where needed for cycling equipment, and electrical or natural gas computations must be certified by a registered engineer or a person with an engineering degree from an accredited engineering college.

(D) The owner of the business must certify that all items using natural gas or electricity (depending on which utility is covered by the study) are listed and that the hours of use for each item are correct. The certification of both the engineer and the owner must appear on the face of the study.

(E) If a person [the owner of the business] appoints an agent to act on its[the owner's] behalf, the person must execute a power of attorney [must] clearly stating[state that] the agent is attempting to qualify the principal for a sales tax exemption[, and if a refund of sales tax is involved, the power of attorney must also state that a sales tax refund will be made by the state through the utility company].

(2) A person in business less than 12 consecutive months may still apply for a sales tax exemption if a registered engineer or a person with an engineering degree performs a natural gas or electric utility study based upon projected uses of the natural gas or electricity which shows the predominant use to be [as] exempt. A person claiming an exemption based upon projected [estimated] use must be able to support the claimed exemption with a study of actual use after 12 consecutive months of operation if [so] requested by the comptroller.

(3) [(2)] A natural gas or electric utility [The] study must be completed and on file at the location of the person claiming the exemption at the time an exemption certificate is submitted to the utility company. Without the study, the claim for exemption will be presumed to be invalid.

(4) Persons obtaining a sales tax refund from a utility company without a valid study will be assessed tax, penalty, and interest by the comptroller on the full amount of the refund, if the exemption is not proved. [If the exemption certificate is fully completed with all information required by this section and bears an original seal of a registered engineer or is attached to a signed statement with an original signature from the owner of the business and a person with an engineering degree from an accredited engineering college, as required by paragraph (1) of this subsection, the utility company is not required to make any additional inquiry before honoring the exemption request.]

(5) [(3)] The comptroller may request a copy of a natural gas or electric utility [the] study for review, either before or after the sales tax exemption is granted. Neither the comptroller's review of [comptroller by reviewing] a study nor the utility company's acceptance of [company by accepting] an exemption certificate confirms [is confirming] the study's accuracy. If the comptroller subsequently determines a study is incomplete or inaccurate, tax [Tax], penalty, and interest will be assessed against the person claiming the exemption [on the business owner if the study is proven to be incomplete or inaccurate] to the extent that the predominant use of the natural gas or electricity is taxable.

(6) [(4)] If a person claims a sales tax refund, and the utility study establishing the predominant use of the natural gas or electricity was performed retrospectively [ is being claimed retroactively], the study must take into account any changes in equipment or other items using utilities, any changes in business activities, and any changes in square footage being served by the meter that occurred during or after the sales or use tax refund period. The comptroller will not accept a predominant use study that cannot be independently verified, such as a predominant use study performed for a closed utility account.

(7) [(5)] This subsection does not apply to persons who [whose] use [of ]natural gas or electricity [is] for processing, manufacturing, or another [other] exempt function if an industry-wide study for that particular industry reflects that the natural gas or electricity used would always qualify as exempt use. The industry-wide study must be submitted to the comptroller's office for review and approval. A subsequent study may be required[, in the future,] if factors relative to the original study change.

(8) If a business claiming a sales tax exemption for natural gas or electricity purchases based on predominant use changes its natural gas or electric utility provider, but does not change its natural gas or electricity usage, it is not required to perform a new utility study. A copy of the study must be on file at the business location for which the study was performed, and a properly completed exemption certificate must be filed with the new utility provider before the exemption may be claimed.

(h) [(g)] Exemption certificates.

(1) An exempt user may [Exempt users must] issue an exemption certificate [certificates ] to the utility company to claim a sales tax exemption on its purchase of natural gas or electricity, or request the utility company to [obtain a] refund [of] sales tax paid to the utility company in error. Exempt users may also request a refund of sales and use taxes paid on purchases of natural gas and electricity from the comptroller as provided in §3.325 of this title (relating to Refunds and Payments Under Protest).

(2) A natural gas or electricity utility company may only accept an exemption certificate in lieu of tax if the [The] exemption certificate is [must be] specific as to the reason for the claimed exemption. For example, if a person is claiming that the predominant use of the utility is for processing, the reason for the exemption must state, "A valid and complete study has been performed which shows that (insert the actual exempt percentage) of the natural gas or electricity is for processing tangible personal property for sale in the regular course of business." For more information regarding the exemption certificates, see §3.287 of this title (relating to Exemption Certificates).

(3) If an exemption certificate is fully completed with all information required by this section and bears an original seal of a registered engineer or is attached to a signed statement with an original signature from the owner of the business and a person with an engineering degree from an accredited engineering college, as required by subsection (g) of this section, the utility company is not required to make any additional inquiry before honoring the exemption request.

(4) [(2)] The exemption is valid only as long as the person continues to use natural gas and electricity [in a manner which is for] predominantly for exempt purposes. If [At the time] the use [uses] of the natural gas or electricity changes [utilities change] so that the predominant use becomes [is] taxable, it is the person's responsibility to [immediately] notify the utility company in writing that the exemption is no longer valid.

(5) [(3)] A person who uses [Persons whose use of] natural gas or electricity [is] solely in a single-family residence is [dwellings will] not [be] required to furnish an exemption certificate [certificates].

(6) [(4)] A person whose use of natural gas and electricity is in multifamily apartment complexes, housing complexes, nursing homes, or other residential buildings may be required to issue an exemption certificate if one is necessary for the utility company to distinguish exempt residential use from taxable use.

(7) A multifamily residential property may issue a blanket exemption certificate for vacant apartments that will be occupied as residences and billed under the property's corporate name or the name of the property owner, if at least one unit in the property is occupied for residential use.

(8) A person who claims an exemption for natural gas or electricity used for agricultural or timber operations must provide an exemption certificate to its utility provider that contains the person's Texas Agriculture and Timber Registration Number issued by the comptroller and the expiration date.

(9) A qualifying owner, qualifying operator, or qualifying occupant of a qualifying data center or a qualifying large data center project who claims an exemption for natural gas or electricity used for a qualifying data center or used for a qualifying large data center must provide an exemption certificate that contains the Qualifying Data Center or Qualifying Large Data Center Project Registration Number and the Qualifying Owner, Qualifying Operator, or Qualifying Occupant Registration Number issued by the comptroller to its utility provider.

(i) [(h)] Transportation of a material extracted from the earth.

(1) Sales or use tax is not due on natural gas or electricity used to transport a material or its components extracted from the earth. Examples of materials or components extracted from the earth would be oil, natural gas, coal or coal slurry, crushed stone, sand and gravel, and water.

(2) Sales or use tax is due on natural gas or electricity used to transport products that have been [a product which was] manufactured from a material extracted from the earth. Products which were manufactured from a material extracted from the earth include substances which do not exist in nature or are not components of crude oil, natural gas, coal, or other minerals extracted from the earth.

(3) For purposes of this section, a [A] material is [will] not [be] considered to be manufactured when an additive is combined with the [a] material for ancillary reasons, for example, when odorant is added to natural gas.

(j) [(i)] Pipeline safety fees. Sales or use tax is not due on any surcharge for pipeline safety fees added to the existing rates of each investor-owned and municipally owned natural gas distribution company and each natural gas master meter operator pursuant to Texas Utilities Code, §121.211 (Pipeline Safety and Regulatory Fees).

(k) Natural gas and electricity purchased by lessors of nonresidential real property.

(1) A lessor of nonresidential real property that purchases natural gas or electricity directly from a utility provider is the consumer of the natural gas or electricity, and is making a taxable use of that natural gas or electricity, unless the lessor is otherwise exempt from sales and use tax. See §3.322 of this title (relating to Exempt Organizations). A utility provider may not make a tax-exempt sale for resale to the lessor of the nonresidential real property.

(2) A lessor of nonresidential real property may not claim an exemption for the purchase of the natural gas or electricity based on a lessee's exempt status or a lessee's use of the natural gas or electricity.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on December 2, 2016.

TRD-201606130

Don Neal

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: January 15, 2017

For further information, please call: (512) 475-0387