In Texas's deregulated electric market, is a transmission/distribution utility's delivery charge to a retail electric provider taxable, and can a municipal franchise fee passed on to the end customer be taxed too?

Plain-English summary

This letter is a self-correction. The same Comptroller analyst had told this taxpayer, in an April 20, 2001 response, that a Retail Electric Provider (REP) could issue a resale certificate for the delivery charges a transmission and distribution utility (TDU) bills to the REP. That statement was wrong, and this October 1, 2001 letter formally corrects it.

The corrected analysis, set in the newly deregulated Texas electric market:

• TDU-to-REP delivery charges are not taxable. Under Tex. Tax Code § 151.0101(a)(16), a TDU's transmission/delivery service is a taxable service only when billed directly to an electricity end-use customer whose electricity consumption is itself taxable. A TDU's charge to a REP (a middleman, not the end user) doesn't meet that definition, so it's simply not a taxable service at all -- and if it's not taxable, no resale certificate is needed or available for it either.
• The REP's full charge to the end customer is taxable if the customer's electricity use is taxable -- and that total includes any transmission/distribution charges the REP passes through, per the general sales-price rule in § 151.007.
• A municipal franchise fee gets swept in too. If a transmission/distribution provider (or a REP) passes a municipal franchise fee on to the end user whose electricity use is taxable, that fee is part of the taxable sales price, because § 151.007(a)(2) defines sales price to include the total amount charged "without a deduction for the cost of materials used, labor or service employed, interest, losses, or other expenses" -- a franchise fee is just another cost being passed through.
• The analyst also notes no other taxes are known to apply to these transmission/distribution or REP charges beyond sales tax.

What this means for you

Retail electric providers (REPs) and transmission/distribution utilities

Don't try to use a resale certificate on TDU-to-REP delivery charges -- per this correction, those charges simply aren't taxable in the first place, so a resale certificate doesn't apply (and isn't needed). But make sure your total bill to the end customer -- delivery charges, franchise fees, and all -- is taxed in full when the customer's electricity use is taxable.

Municipalities and utilities discussing franchise-fee pass-throughs

If a franchise fee gets built into what a customer pays for taxable electricity or gas service, expect it to be part of the taxable sales price, just like any other cost component -- there's no separate carve-out for franchise fees.

Anyone who relied on the April 2001 letter to this taxpayer

If you were told (via this same taxpayer's earlier April 20, 2001 letter, or informally) that a REP could resale-certificate TDU delivery charges, that guidance has been formally withdrawn as incorrect by this October 2001 letter.

Common questions

Q: Can a REP issue a resale certificate for what a TDU charges it to deliver electricity?
A: No -- the Comptroller corrected its own earlier (April 2001) advice on this point. TDU-to-REP delivery charges aren't a taxable service at all, so a resale certificate isn't the right mechanism (and wasn't actually needed).

Q: Is a municipal franchise fee passed on to a customer's electric bill taxable?
A: Yes, when it's part of a bill for electricity or gas use that is itself taxable -- Texas's sales-price definition includes passed-through fees and costs without any deduction.

Q: Does this letter bind the Comptroller for other utilities?
A: No -- this is an informal 2001 letter (itself correcting an earlier informal letter) addressed to one taxpayer's specific facts, not a modern Private Letter Ruling or General Information Letter, and it cannot be relied on by anyone else.

Citations and references

Statutes:

• Tex. Tax Code § 151.0101(a)(16) (TDU transmission/delivery service as a taxable service when billed to an end-use customer)
• Tex. Tax Code § 151.007 and § 151.007(a)(2) (sales price includes total amount charged, no expense deduction)
• Tex. Utilities Code § 31.002 (definition of transmission and distribution utility)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200110507L

Original ruling text

October 1, 2001

Subject: Utility Tax Question

Dear **:

My April 20, 2001 response to your email inquiry contained an incorrect
statement.

I stated that a Retail Electric Provider (REP) could issue a resale certificate
for the charges a transmission and distribution utility (TDU) makes for
delivering electricity to the REP's retail customer. This statement is
incorrect.

Texas Tax Code Section 151.0101(a)(16) defines taxable services to include: "a
sale by a transmission and distribution utility, as defined in Section 31.002,
Utilities Code, of transmission or delivery of service directly to an
electricity end-use customer whose consumption of electricity is subject to
taxation under this chapter."

Under a deregulated electric market, transmission and distribution services
will be a taxable service if the transmission or delivery is directly to an end
use customer whose consumption of the electricity is taxable. Transmission and
distribution charges made by transmission or distribution service provider to a
retail electric provider (REP) will not be taxable.

The REP's charge to the end-user, including the transmission or distribution
charges, will be taxable in total if the consumers use of electricity is
taxable. See Texas Tax Code Section 151.007).

Texas sales tax applies to the franchise fee imposed on a transmission or
distribution services provider when the service provider passes the fee on the
end user whose use of the electricity is taxable. Texas Tax Code Section
151.007(a)(2) defines sales price to include "the total amount for which a
taxable item is sold, leased, or rented, valued in money, without a deduction
for the cost of the materials used, labor or service employed, interest,
losses, or other expenses."

I am not aware of any other taxes that a transmission or distribution services
provider or a REP is required to collect from the consumer.

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

1. Texas Taxes
2. Tax Code under Texas Laws and Rules
3. Tax Code
4. Scroll down to referenced statutory cite

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, P.O. Box 13528, Austin, Texas 78711-3825. My
email address is .

Sincerely,

Eddie C. Washington
Tax Policy Division