Could a Texas electricity customer exempt only the percentage used in processing, or did predominant use make all electricity taxable or exempt?

Plain-English summary

The Texas Comptroller said a percentage exemption for electricity was not authorized. Although a prior hearing had found 6.7% exempt use and allowed that amount as audit credit, it had not authorized an exemption certificate for all electricity or instructed the customer to self-report the other 93.3%.

Under the predominant-use rule described in the letter, electricity was either all exempt or all taxable. Because only 6.7% of use was exempt, total consumption was taxable and the utilities were instructed to add tax to the bills. If the customer could establish that more than 50% of the electricity was used for processing, all electricity purchases would qualify.

What this means for you

The result did not track each exempt and taxable use proportionally. The customer had to prove processing was the predominant use—more than half—to exempt the whole purchase.

Common questions

Could the customer exempt 6.7% of each bill? No.

What happened when only 6.7% was exempt use? All electricity was taxable.

What threshold would exempt all purchases? More than 50% processing use.

Citations and references

• Colonial Cafeteria-Arlington Inc. v. Bullock, 587 S.W.2d 211 — cited for predominant use.
• Houston Natural Gas Corp. v. Southwestern Apparel Inc., 558 S.W.2d 950 — cited for predominant use.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8701L0789F12

Original ruling text

January 12, 1987

Dear *****:

Thank you for the information you supplied regarding the reason you are
claiming a sales tax exemption on electricity purchased from *****.

I have reviewed the Hearing you had before what you refer to as the review
board and see that they did indeed determine that 6.7% of the electricity
purchased was used in an exempt manner. You were allowed that much credit in
the audit. I did not find any statements in the hearing that authorized you to
issue an exemption certificate to ***** for all the electricity purchased
from them. I found no instructions to you to report the other 93.3% as taxable
purchases on your sales tax returns.

Although you have been benefiting for years from the results of the hearing, a
percentage exemption is not authorized either by law or rule. Since the
hearings decision was issued, two court cases have confirmed that the
"predominant use" of electricity determines taxability. See Colonial
Cafeteria-Arlington Inc. v. Bullock, 587 S.W.2d 211, and Houston Natural Gas
Corp. v. Southwestern Apparel Inc., 558 S.W.2d 950. A person must qualify for
a sales tax exemption on electricity based on the predominant use of the
electricity. It's either all exempt or all taxable. Since you have established
that only 6.7% of the uses are exempt, your total electrical consumption should
be taxable.

We are instructing ***** and the other utility companies involved to
begin adding sales tax to your bills as soon as possible. To qualify for an
exemption, you must show that over 50% of the electricity is for processing.
If this can be established, you would be entitled to an exemption on all
electricity purchases.

Please feel free to contact me if you have additional questions. You may write
me, call toll free 1-800-252-5555 from anywhere in Texas or phone 512/463-4633.

Sincerely,

(Mrs.) Wanda Hutcheson
Tax Administration Division