TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES

34 TAC §3.295

The Comptroller of Public Accounts adopts amendments to §3.295, concerning natural gas and electricity, without changes to the proposed text as published in the December 16, 2016, issue of the Texas Register (41 TexReg 9886). This section is 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 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).

The comptroller received comments from Michael B. Seay of Seay and Traphagan. The comments related to the preamble's description of new subsection (k) as longstanding comptroller policy. The preamble's explanation regarding new subsection (k) is reasonable.

In 1986, Tax Code, §151.317 provided a sales and use tax exemption for natural gas and electricity except when sold for "residential use" or for "commercial use." Direlco v. Bullock established that commercial use included leasing of commercial real estate. The court held that Direlco's purchases from a utility provider of natural gas and electricity that Direlco subsequently provided to nonresidential tenants as part of a lease agreement were taxable.

Subsequent administrative hearings, such as Comptroller's Decision Nos. 34,711 (1997) and 39,766 (2001), specified that in regard to the lease of nonresidential real property, the use of natural gas or electricity is determined based on the use of the natural gas or electricity by the person making the purchase from the utility provider. Purchases of natural gas or electricity by a lessor of nonresidential real property are a taxable commercial use.

House Bill 3211, 76th Legislature, 1999, amended Tax Code, §151.317 to eliminate the definition of "commercial use" and provide a list of specific uses of natural gas and electricity that are exempt from Texas sales and use tax. House Bill 3211 was enacted as a clarification of existing law and did not affect the comptroller's policy regarding the taxability of natural gas and electricity used by a lessor of nonresidential real property.

New subsection (k) memorializes longstanding policy related to the use of natural gas and electricity used by a lessor of nonresidential real property. Such use is not an exempt use listed under Tax Code, §151.317 and is subject to Texas sales and use tax.

This amendment is adopted 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).

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on February 15, 2017.

TRD-201700617

Lita Gonzalez

General Counsel

Comptroller of Public Accounts

Effective date: March 7, 2017

Proposal publication date: December 16, 2016

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