House Bill 11 let telephone utilities pass through an increase in their own tax liability to customers as a billing adjustment. Is that pass-through adjustment itself subject to Texas sales tax?

Plain-English summary

A telephone utility asked whether a billing adjustment required by House Bill 11 — which let utilities pass through an increase or decrease in their own tax liability to customers under Section 16.072 — would itself be subject to Texas sales tax, given that it's just a pass-through of a tax.

Note: this letter's own STAR subject-matter heading refers to a "Gas Cost Recovery Rate (GCR)," but nothing in the letter's actual text discusses gas utilities or a gas cost recovery rate — the letter is about a telephone company's billing adjustment tied to House Bill 11's tax increase under Section 16.072. This page's subject_title has been corrected to match what the letter actually addresses.

The Comptroller's answer: yes, the pass-through adjustment is taxable. Telephone company billings already contain components of various taxes imposed on the carrier (not the customer) that aren't separately, visibly broken out — and sales tax is due on those charges even though a portion of them is tax. The House Bill 11 tax increase works the same way: it's levied on the carrier, not directly on the customer, so even when the carrier visibly passes it through as a line-item adjustment, it remains subject to sales tax like the rest of the telephone billing.

What this means for you

Telephone (and other) utility companies

If your tax liability goes up because of legislation like House Bill 11, and you're permitted to pass that increase through to customers as a billing adjustment (here, under Section 16.072), don't assume the pass-through itself escapes sales tax just because it is, in substance, a tax. The Comptroller treated it the same as other tax components baked into a telephone bill: since the underlying tax is imposed on the carrier rather than directly on the customer, the reimbursement charge to the customer is part of the taxable billing.

Customers/ratepayers

A separately labeled "tax pass-through" or surcharge line on a utility bill does not mean that line is tax-exempt. Because the tax is legally owed by the utility (not you), the utility's recovery of that cost from you is treated as part of its taxable charge, and sales tax applies to it.

Accountants and tax professionals

This letter is a useful example of the general principle that a cost pass-through billed by a seller (here, a utility) is not automatically excluded from the tax base merely because the underlying cost being recovered happens to be a tax. What matters is who the tax is legally imposed on — here, the carrier, not the customer.

Common questions

Q: A utility's tax liability increased because of new legislation, and the utility is allowed to pass that increase through to customers on their bills. Is that pass-through charge subject to Texas sales tax?
A: Yes, per this letter — because the tax increase is levied on the carrier, not directly on the customer, the pass-through amount remains part of the taxable billing even though it is visibly identified as a tax pass-through.

Q: Does it matter that the amount being passed through is itself a tax?
A: Not according to this letter. Telephone billings already include various tax components imposed on the carrier that are subject to sales tax, and the letter treats the House Bill 11 adjustment the same way.

Q: What was House Bill 11 and Section 16.072 about?
A: The letter states only that House Bill 11 increased a number of fees and taxes, and that Section 16.072 allows utilities to pass through, via a billing adjustment, any increase or decrease in tax liability resulting from that legislation. No further detail on the statute is given in this letter.

Q: Is this letter specifically about gas utilities or a "Gas Cost Recovery Rate"?
A: No. Despite the STAR system's subject heading referencing a Gas Cost Recovery Rate, the letter's text discusses telephone company billings and a House Bill 11 tax pass-through, with no mention of gas costs or a GCR.

Q: Can I rely on this letter for my own utility billing situation?
A: No. This opinion is based on the facts the requester presented, and other facts, though similar, may yield different results; it can be relied on only by the taxpayer it was issued to.

Citations and references

• House Bill 11 (referenced by name only; no statutory citation given for the bill itself)
• Section 16.072 (section of what code is not specified in the letter text)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206199L

Original ruling text

June 23, 1992

Dear **:

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

Facts: House Bill 11 increased a number of fees and taxes. According to Section
16.072, utilities are allowed to pass through vis-a-vis an adjustment on their
billings any increase or decrease in tax liability resulting from the
legislation. The question is this, would this adjustment be subject to the
state sales tax even though it is strictly a pass through of a tax?

Response: Telephone company billings contain components of various taxes that
are imposed on the carriers and not visibly passed through to their customers.
Sales tax is due on those charges even though taxes comprise a portion thereof.
The tax increases you mentioned are levied on the carriers, not directly on
the customers, and are subject to sales tax even though they are visibly
passed through to the telephone subscribers.

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