Are the House Bill 11 franchise-tax surcharges that utility companies show as a separate line item on customer bills included in the sales tax base?

Plain-English summary

This is a June 9, 1992 internal Comptroller memo (Memo AM 1547) from Ledford Kelly at Audit HQ to all audit managers, forwarding an earlier internal memo from Wade Anderson. It is not a letter ruling issued to a taxpayer -- it's guidance telling state sales tax auditors how to treat a specific line item on utility bills. Because it's internal guidance rather than a taxpayer-specific ruling, it doesn't create detrimental-reliance protection for any particular business, though it does show the Comptroller's audit policy at the time.

Note on the title: the auto-generated heading inherited for this stub was "Utility Bills Surcharge — Gas Cost Recovery Rate (GCR) Passed Through To Customers — Part Of Tax Base." That phrase, "Gas Cost Recovery Rate (GCR)," does not appear anywhere in the memo's actual text and is inaccurate -- the memo is about a House Bill 11 (H.B. 11) franchise-tax surcharge, not a gas-cost-recovery rate. The title has been corrected above to reflect what the memo actually discusses.

The substance: House Bill 11 imposed additional franchise tax on utility companies. Under Art. 1446c(j), the Public Utility Commission (P.U.C.) -- on its own motion or the utility's request -- may allow a utility to adjust customer bills to reflect the increase (or decrease) in the utility's own tax liability caused by H.B. 11. The P.U.C. authorized utilities to add this charge to bills. The memo concludes that even though the bill doesn't explicitly label the line item as "a reimbursement to the utility," that is legally what it is (the customer is deemed to have legal notice of this via the P.U.C.'s authorizing action), not a tax collected by the utility from the customer. Because it functions as a reimbursement rather than a passed-through tax, the Comptroller's position is that this surcharge amount should be included in the tax base for sales tax purposes on the customer's bill.

What this means for you

Utility companies

If your bill includes a separately stated H.B. 11 (or similarly authorized P.U.C.-approved) franchise-tax-related surcharge, this memo reflects the Comptroller's audit position that the amount is treated as a reimbursement to the utility -- not an excludable pass-through tax -- and should be included when calculating sales tax due on the bill.

Businesses paying utility bills

A line item on your utility bill described as a tax adjustment or surcharge tied to the utility's own franchise tax liability is not a tax charged to you directly; per this memo it is factored into the amount subject to sales tax, so don't assume such surcharges are tax-exempt add-ons.

Accountants and tax professionals

When reviewing a utility's sales tax base calculations, check whether any H.B. 11-type surcharges authorized under Art. 1446c(j) have been included in the taxable base. Remember this document is internal audit guidance from 1992, not a letter ruling addressed to a specific taxpayer -- treat it as evidence of historical Comptroller audit policy rather than as binding, reliance-worthy authority for any one business.

Common questions

Q: Is the H.B. 11 surcharge shown on a utility bill a tax collected from the customer?
A: No. Per this memo, even though it appears on the bill, it is a reimbursement to the utility for its own increased franchise tax liability, not a tax collected from the customer.

Q: Should the surcharge be included when calculating sales tax on the utility bill?
A: Yes. Because the Comptroller treats it as a reimbursement (part of the utility's charge for service) rather than an excludable tax pass-through, it is included in the sales tax base.

Q: What gives the utility the authority to add this charge to bills?
A: Art. 1446c(j) allows the P.U.C., on its own motion or the utility's request, to permit a utility to adjust its bill to reflect an increase or decrease in tax liability to the utility resulting from H.B. 11. The P.U.C. authorized utilities to include these tax increases.

Q: Does this memo constitute a letter ruling a taxpayer can rely on?
A: No. It is an internal Audit HQ memo to audit managers explaining how to treat this bill item during audits, not a letter ruling issued in response to a taxpayer's request. It shows Comptroller audit policy but doesn't carry the same detrimental-reliance protection as a taxpayer-specific ruling.

Citations and references

Statutes:

• Tex. Rev. Civ. Stat. Art. 1446c(j) (P.U.C. authority to allow utility bill adjustment for H.B. 11 tax liability)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206L1181E04

Original ruling text

DATE: June 9, 1992

MEMO AM 1547

TO: ALL AUDIT MANAGERS

FROM: LEDFORD KELLY, AUDIT HQ

SUBJECT: SALES TAX/Utility Bills

Attached is a memo from wade Anderson regarding the adjustments on utility
bills for House Bill 11 taxes.

This pertains to additional franchise taxes due by the utility companies. Part
of the franchise tax is included in the utility company's rate. The additional
amount due to HB 11 is set out specifically on the utility company bill to the
customer. It may be referred to as a variety of names, but it is a
reimbursement to the utility rather than a tax collected from the customer. The
reimbursement amount should be included in the tax base for sales tax purposes.

Please make all auditors aware of this memo. If you have any questions, please
let us know.

June 2, 1992

To: Lucy Glover and Harold Lee

From: Wade Anderson

Re: Adjustments on Utility Bills for H.B. 11 Taxes

A question has arisen as to whether utilities should be required to report
taxes shown on their bills to consumers as a result of H.B. 11. These taxes are
imposed on the utility companies and not their customers. No explanation for
the tax is given the customer.

The utilities rates are set by the P.U.C. However, under Art. 1446c(j), the
P.U.C. on its own motion or that of the utility may allow a utility to adjust
its bill to reflect an increase or decrease of tax liability to the utility
resulting from H.B. 11.

The P.U.C. has authorized the utilities to include the tax increases. Because
the taxes shown on the customers bills by the utilities are included as a
result of P.U.C. action as specifically authorized by the Legislature, we
should not treat them as taxes collected from a customer even though the bill
does not reflect it is a reimbursement to the utility. Essentially, the
customers are given legal notice as to why the tax item is on their bills by
the action of the P.U.C.