When a natural gas utility offers customers a voluntary, separately billed charge to purchase carbon offset credits for their gas usage, is that charge subject to Texas sales tax and the Miscellaneous Gross Receipts Tax?

Plain-English summary

A natural gas utility wants to offer Texas customers a voluntary carbon-offset program, already running in other states: customers can choose to pay a small additional fee (e.g., $1.50 for 25% offset, $6.00 for 100% offset for residential customers, or a per-mcf rate for commercial customers) so the utility buys and retires third-party-verified carbon offset credits equal to a chosen percentage of the emissions from that customer's gas use. The charge is separately listed on the bill and doesn't change what the customer pays for the gas itself; customers don't get an individual credit, and credits are retired in bulk annually based on total participation. The utility asked whether this optional add-on charge is subject to Texas sales tax and the state's Miscellaneous Gross Receipts Tax (MGRT, a utility-specific tax).

Sales tax: Yes, the charge is taxable — but as part of the natural gas sale, not as its own separate product. Texas's sales-price definition sweeps in any expense connected to selling a taxable item, and the Comptroller treated the carbon-offset charge as exactly that: an expense tied to the customer's purchase and consumption of gas, folded into the gas's taxable sales price. That means the carbon-offset charge inherits gas's own tax treatment: residential natural gas is exempt from state sales tax (so the offset charge is too, for residential customers), but certain cities and special districts can and do impose their own local sales tax on residential gas use — and where they do, the offset charge is taxed right along with the rest of the bill. Commercial gas use is taxable unless a specific exemption (agriculture, timber, manufacturing equipment, etc.) applies via exemption certificate — and the same holds for the commercial offset charge.

Miscellaneous Gross Receipts Tax: Also yes. The MGRT applies to a utility's gross receipts from providing gas, electricity, or water to customers in incorporated cities/towns over 1,000 population. That "gross receipts" concept is broad — it already includes things like a utility's own MGRT-reimbursement charges passed on to customers — and the Comptroller found the carbon-offset charge is "directly related to providing" the gas, so it counts toward gross receipts too, on top of whatever sales tax treatment applies.

What this means for you

Gas, electric, and water utilities offering green/sustainability add-ons

A voluntary environmental or sustainability surcharge tied to a customer's utility usage is likely to be treated as part of the sales price of the underlying utility service, not as a stand-alone nontaxable product — even when it's optional, separately billed, and doesn't fund anything physically delivered to that specific customer (here, credits are pooled and retired in bulk, not individually assigned). Expect it to follow the same state/local sales tax rules as the utility itself, and to count toward gross receipts for MGRT purposes.

Utilities operating in Texas cities/districts with local gas tax elections

Don't assume a residential add-on charge is automatically state-and-local tax-free just because residential gas usually escapes state tax — check the specific list of jurisdictions that have elected to impose local sales tax on residential gas use, since those local taxes still apply to add-on charges tied to the gas sale.

Accountants and tax professionals

This is a useful precedent for the broader principle that Texas's expansive "sales price" definition (§ 151.007(a)(2)) can pull in optional, separately stated charges that don't change the underlying commodity delivered — the analysis hinges on whether the charge is an "expense related to" the taxable sale, not on whether it's mandatory or delivers a distinct product to that customer.

Common questions

Q: Does this mean every residential customer pays sales tax on the carbon-offset charge?
A: Not automatically — state sales tax doesn't apply to residential natural gas (or its associated offset charge), but customers in cities/special districts that have elected to tax residential gas use locally will see local sales tax on the offset charge too.

Q: Why does the MGRT apply even though the utility isn't literally selling "gas" via the offset charge?
A: Because MGRT's gross-receipts base isn't limited to receipts for the commodity itself — it reaches any receipt directly related to providing gas, electricity, or water, and the Comptroller found the offset charge fits that description since it's tied to the customer's gas purchase.

Q: Does this ruling apply to other utilities' environmental or sustainability charges?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific program structure. Other utilities should evaluate their own charge structure with a Texas tax professional, especially regarding local tax jurisdictions and MGRT gross-receipts treatment.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010, § 151.009 (sales tax imposition; taxable item; tangible personal property)
• Tex. Tax Code § 151.007(a), (a)(2) (Sales Price or Receipts)
• Tex. Tax Code § 151.317(a), (a)(1) (residential gas/electricity exemption)
• Tex. Tax Code § 321.105 (local option tax on residential gas/electricity use)
• 34 Tex. Admin. Code § 3.295(b), (c), (d) (Natural Gas and Electricity)
• Tex. Tax Code § 182.021(2), § 182.022 (Miscellaneous Gross Receipts Tax)
• Comptroller Publication 96-1309 (Texas Tax Information for Retail Sellers of Electricity)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202312015L

Original ruling text

NOTE: This document is also indexed as a Miscellaneous Gross Receipts Tax (MGRT) document under STAR 202312016L.

December 29, 2023

RE: Private Letter Ruling No. 20230515102255

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. We are responding to your request dated May 12, 2023, and supplemental information provided Aug. 30, 2023 and Sept. 7, 2023. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the tax treatment of charges for participating in the ** Carbon Offset Credit program (Program) offered by ** (Taxpayer) for sales and use tax and miscellaneous gross receipts tax (MGRT).

Facts Presented

The relevant facts are based on information included in Taxpayer’s initial request and supplemental information provided via email.

Taxpayer sells natural gas to Texas residential and nonresidential customers. Taxpayer currently offers the Program in states outside Texas and plans to offer the Program to Texas customers. For the Program, Taxpayer purchases Carbon Offset Credit Certificates (Certificates) from third parties that verify and retire carbon offset credits. Certificates are verifiable emission reductions from certified climate action projects to compensate for emissions made elsewhere, like residential or commercial natural gas usage.

Participation by Taxpayer’s customers in the Program is voluntary. Taxpayer’s charge to its customers for the customer’s natural gas usage is not impacted by the customer’s participation in the Program. When enrolling in the Program, residential customers choose a percentage of the carbon emissions related to their natural gas usage to offset and pay a fixed amount to offset that percentage (for example $1.50 offsets 25% of emissions, $3.00 offsets 50% of emissions, $6.00 offsets 100% of emissions). Commercial customers choose a percentage to offset and pay a fixed rate per natural gas mcf (for example $1.23 per natural gas mcf). The charge for the Program is separately stated on a customer’s bill.

Taxpayer’s customers will not purchase a specific credit, and credits will be retired in bulk annually depending on how many offset credits have been purchased by customers participating in the Program. Taxpayer does not sell carbon offsets outside of the Program.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: Is Taxpayer’s Program charge subject to sales and use tax?

Ruling One: Yes, Taxpayer’s Program charge is subject to sales and use tax as part of the sales price of natural gas.

Analysis: Texas imposes sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Tangible personal property is personal property that is perceptible to the senses in any manner. Section 151.009 (“Tangible Personal Property”). Natural gas is considered tangible personal property and sales of it are subject to sales tax. See Rule 3.295(b) (Natural Gas and Electricity).

Section 151.007(a) (“Sales Price” or “Receipts”) provides that the sales price of a taxable item means the total amount for which a taxable item is sold, valued in money, without deduction for the cost of the materials used, labor or service employed, interest, losses, or other expenses.

Taxpayer’s Program charge is a charge to offset the carbon emissions of the natural gas purchased by a customer. The charge is an expense related to the customer’s purchase and consumption of the gas. Taxpayer’s Program charge is therefore an expense included in the sales price of the natural gas. See Section 151.007(a)(2).

The sale of natural gas for residential use is exempt from state sales and use tax. Section 151.317(a)(1) (Gas and Electricity). Certain cities and special purpose districts can, however, choose to impose local sales and use tax on the residential use of natural gas. Section 321.105 (Residential Use of Gas and Electricity) and Rule 3.295(d). A list of jurisdictions imposing local sales and use tax on the residential use of natural gas is accessible at https://comptroller.texas.gov/taxes/sales/utility/. Therefore, the Program charge to residential customers would be exempt from state sales and use tax but could be subject to local sales and use tax in those jurisdictions that impose local sales tax on residential use.

The sale of natural gas for commercial use is taxable unless an exemption applies. Rule 3.295(b), (c). Exempt uses of natural gas include use for agriculture, timber operations, and powering exempt manufacturing equipment. Section 151.317(a). The Program charge to commercial customers is subject to state and local sales and use taxes unless a customer provides a properly completed exemption certificate.

Question Two: Are Taxpayer’s Program charges includable in gross receipts for the MGRT?

Ruling Two: Yes, Taxpayer’s Program charges are includable in gross receipts for the MGRT.

Analysis: Texas imposes the MGRT on a utility company that makes a sale to an ultimate consumer in an incorporated city or town having a population of more than 1,000, according to the last federal census. Section 182.022 (Imposition and Rate of Tax).

Section 182.022 imposes tax on the “gross receipts from business done.” Section 182.021(2) provides that business means providing of gas, electric light, electric power, or water. Receipts for items related to providing gas, electricity, or water are includable in gross receipts even if the item is not itself gas, electricity, or water. For example, charges to customers for reimbursement of the MGRT are includable in gross receipts. See Publication 96-1309 (Texas Tax Information for Retail Sellers of Electricity).

Taxpayer’s sale of credits to offset emissions are directly related to providing electricity or gas. Thus, the charges for Taxpayer’s Program are includable in gross receipts for the MGRT.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20230515102255.

Sincerely,

Tax Policy Division – Direct/Indirect Taxes

Texas Comptroller of Public Accounts