When gas sold through a common-carrier pipeline changes hands at an in-state meter point but is ultimately delivered out of state, is the sale subject to Texas sales tax, and what documentation is needed to prove any exemption?

Plain-English summary

A natural gas marketer asked the Comptroller how Texas sales tax applies to gas sold through common-carrier pipelines, where title and possession pass to the buyer at a specific meter point inside Texas ("Meter X"), but the gas is ultimately delivered and used outside Texas. The letter addresses three fact patterns, all sharing the assumption that the out-of-state buyer holds no Texas sales tax permit.

In the first scenario, gas is sold to a broker for resale, with title passing in Texas before the gas continues on to an out-of-state destination. The Comptroller confirmed this can be a tax-free sale for resale, but the seller is entitled to demand a resale or exemption certificate before treating the sale as exempt, and such a certificate is the only acceptable proof of the exemption. Notably, the seller does not need to require the out-of-state buyer to hold a Texas sales tax permit just to issue a resale certificate — a permit-less resale certificate is acceptable if the buyer claims the sales are for resale or to exempt customers and the seller has no actual knowledge the claim is false.

In the second scenario, gas is sold to an end user (not a reseller) who is located in another state and will consume the gas there, but title still passes in Texas. Because title transfers within Texas, the sale is subject to Texas sales tax and the seller must collect it — unless the predominant-use exemption in Rule 3.295 applies, in which case the buyer must furnish a completed exemption certificate along with an engineer's certification supporting the predominant-use claim.

The third scenario — a sale to an out-of-state local distribution company or utility/reseller, with title passing in Texas but the gas ultimately resold in another state — was treated the same as the first scenario (a resale, exempt with proper certification). The ruling stresses that its conclusions are based on the specific facts presented and that different facts, even similar ones, could produce different results.

What this means for you

Gas marketers and sellers using common-carrier pipelines

The location of the pipeline meter where title and possession pass to the buyer — not the buyer's ultimate location or where the gas is consumed — determines whether the sale happens "in Texas" for sales tax purposes. If title passes in Texas, Texas sales tax rules govern the transaction regardless of the gas's final destination.

Out-of-state resellers and utilities buying Texas gas

You do not need to hold a Texas sales tax permit merely to issue a resale certificate for gas you are buying for resale. However, you must still give the seller a resale certificate if requested, and you must be prepared to support your claim that the gas is being purchased for resale or for an exempt customer.

Accountants and tax professionals advising sellers

Sellers should insist on proper documentation before treating any pipeline gas sale as exempt: a resale certificate for reseller/broker/utility transactions, or a completed exemption certificate plus engineer's certification for end-user transactions relying on the predominant-use exemption under Rule 3.295. Absent that documentation, tax should be collected on any sale where title passes within Texas to an end user.

Common questions

Q: If the gas is ultimately delivered and used outside Texas, does that make the sale exempt from Texas sales tax?
A: Not by itself. What matters is where title and possession transfer to the buyer. If that happens at a meter point inside Texas, the sale is treated as occurring in Texas, and taxability then depends on whether the buyer is a reseller (potentially exempt with a resale certificate) or an end user (taxable unless a specific exemption like Rule 3.295's predominant-use exemption applies).

Q: Does an out-of-state buyer need a Texas sales tax permit to buy gas tax-free for resale?
A: No. The Comptroller does not require out-of-state sellers who make only exempt resale of natural gas to hold a Texas sales tax permit solely to report those exempt sales, but they must still issue a resale certificate if the seller asks for one.

Q: What documentation does an end-user buyer need to avoid paying Texas sales tax?
A: A completed exemption certificate, and if the exemption is based on predominant use, an engineer's certification supporting that claim, consistent with Rule 3.295.

Q: Does selling to an out-of-state local distribution company/utility change the analysis?
A: No — the letter treats that scenario the same as a straightforward resale to a broker: it can be exempt with a proper resale certificate, since the utility/reseller will itself resell the gas in another state.

Citations and references

Rules:

• 34 Tex. Admin. Code § 3.295 (natural gas and electricity predominant-use exemption; requires exemption certificate and engineer's certification)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1170B05

Original ruling text

May 12, 1992

Dear ***:

Thank you for your recent letter which is restated in part with responses
below.

Facts: In the past year, changes in the marketing of natural gas have occurred.
Resellers and end-users are now allowed to buy gas directly from a marketing
company and to have transportation rights on gas transmission pipelines. Title
and possession will transfer based on the point in the pipeline at which the
purchaser's transportation rights begin.

We are requesting guidance on the application of your sales and use tax in the
following situations. The sales may be in the spot market or based on long-term
contracts. The pipelines are assumed to be common carriers, and Meter X is the
point in the common carrier pipeline where the purchaser's transportation
rights begin. It is also assumed that the purchaser is not registered for sales
tax purposes in your state.

We have the following situations regarding gas produced either in or outside
Texas.

1) The gas is sold to a broker for resale. Title and possession passes while in
the pipeline to the broker at Meter X in your state for ultimate delivery
outside your state.

Response 1: Natural gas is subject to limited sales tax and properly executed
resale or exemption certificates are the only proof that may be offered to show
that a particular transaction qualifies for exemption. Sellers of natural gas
who demand a resale or exemption certificate before making a tax free sale are
completely within their
rights.

You asked us to assume that your customers do not hold Texas Sales and Use Tax
permits. We currently do not require out-of state sellers who make only exempt
sales of natural gas to hold a sales tax permit solely to report those exempt
sales. However, these sellers must issue a resale certificate (enclosed) to a
supplier who asks for one. A resale certificate for natural gas without a
permit number may be accepted if the buyer claims all sales are for resale or
are to exempt customers and the seller does not have actual knowledge that the
claim is invalid.

2) The gas is sold to an end user who is located in another state. The title
and possession passes while in the pipeline to the end user as Meter X in your
state. The gas is purchased for use by the end user in another state.

Response 2: Because title to the gas passes to the purchaser in Texas, the
sales tax is due and must be collected unless the exemption outlined in Rule
3.295 (enclosed) applies and the customer issues *** a completed
exemption certificate and engineer's certification if the exemption is based on
predominant use.

3) The gas is sold to a local distribution company (***) located in
another state which is classified as a utility or reseller. The title and
possession passes while in the pipeline to ***** at Meter X in your
state but the gas will be sold in another state.

Response 3: Same as response 1.

This opinion is based on the facts you presented. Other facts, though similar,
may yield different results.

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441. My direct line number is (512)
463-4680. The number for FAX transmissions is (512) 475-0900. You may write to
me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division