When a Texas gas company passes its municipal franchise fee on to customers as part of the gas bill, does sales tax apply to that fee?

Plain-English summary

The Texas Comptroller's Tax Administration Division responded to a taxpayer question about an assessment that Southern Union Gas Company had made on natural gas bills. At issue was the municipal franchise fee — a charge municipalities impose on a gas company for the right to do business within the municipality.

The Comptroller explained that natural gas is taxable as tangible personal property, and Texas Tax Code § 151.051(a) imposes sales tax on the "sales price" of any taxable item. Under § 151.007(a)(2), "sales price" is defined broadly as the total amount charged for a taxable item, with no deduction allowed for the cost of materials, labor, interest, losses, or other expenses.

Because the municipal franchise fee is an expense the gas company incurs (owed to the municipality, not to the state) and then passes on to customers as part of its charge for the gas, that fee becomes part of the sales price. The gas company must therefore charge sales tax on the municipal franchise fee, even though the fee itself is paid directly to the municipality and is not administered by the Comptroller's office.

The letter also flagged a separate compliance point: if the gas company bundles a municipal gross receipts tax together with sales tax into a single line item on the bill, it must remit the entire amount it collected under that label to the Comptroller as tax, citing Texas Tax Code § 111.016.

What this means for you

Gas and electric utility companies

If your company passes along a municipal franchise fee (or any similar cost of doing business) to customers as part of your charge for gas or electricity, that pass-through amount is part of the taxable sales price. You cannot treat it as a non-taxable reimbursement or fee — sales tax applies to it just like it applies to the rest of the bill.

Billing and line-item practices

Be careful about how fees are labeled and combined on customer bills. If a gross receipts tax and sales tax get commingled into one line item, the Comptroller's position is that the full amount collected under that line item must be remitted as tax — you don't get to keep or under-remit any portion of a commingled tax line.

Businesses that pay these bills

If you're a customer receiving a gas or electric bill that includes a municipal franchise fee, expect sales tax to be calculated on top of that fee, not just on the base gas charge — that is how the seller is required to compute it.

Common questions

Q: Is the municipal franchise fee itself a state tax?
A: No. The municipal franchise fee is an expense imposed by a municipality for the gas company's right to conduct business there. The municipalities administer it, and the gas company pays it directly to the municipality — the Comptroller's office does not administer this fee.

Q: Why is sales tax charged on a fee that isn't even a state tax?
A: Because Texas defines "sales price" very broadly — the total amount charged for a taxable item, with no deduction for expenses the seller incurs (like labor, materials, or in this case a municipal franchise fee) and passes on to the buyer. Since the gas company passes this cost along as part of its charge for gas, it's part of the sales price subject to tax.

Q: What happens if a company bills sales tax and a municipal gross receipts tax as one combined line item?
A: Under Texas Tax Code § 111.016, if the amounts are commingled and billed as a single "tax" line, the company must remit the entire amount collected under that line to the Comptroller.

Q: Does this ruling apply to electricity as well as natural gas?
A: The ruling's facts and analysis are about a natural gas company's bills, though the subject line also references electricity. The reasoning — that a municipal franchise fee passed on as part of the seller's charge is part of the taxable sales price — turns on the general sales price definition and would apply the same way to comparable utility charges.

Q: Can I rely on this letter for my own situation?
A: This is a STAR letter ruling addressed to a specific taxpayer based on the facts they presented. Under 34 Tex. Admin. Code Rules 3.1 and 3.10, only that taxpayer can rely on it for detrimental-reliance protection, and the Comptroller notes the opinion could change if the facts differ. Consult a Texas tax professional for your own situation.

Citations and references

• Texas Tax Code § 151.051(a) — sales tax imposed on the sales price of a taxable item
• Texas Tax Code § 151.007(a)(2) — definition of "sales price" (no deduction for costs/expenses passed through)
• Texas Tax Code § 111.016 — tax collected, even if mislabeled or commingled, must be remitted to the Comptroller

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9208L1194E01

Original ruling text

August 20, 1992

Dear **:

Thank you for your letter of July 2, 1992, concerning a particular assessment
made by Southern Union Gas Company on natural gas bills.

Natural gas is taxable as tangible personal property under the Texas Tax Code.
Texas Tax Code Sec. 151.051(a) imposes a sales tax on the sales price of a
taxable item.

Texas Tax Code Section 151.007(a)(2) defines "sales price" as the total amount
for which a taxable item is sold without a deduction for the cost of materials
used, labor or service employed, interest, losses or other expenses. The
municipal franchise fee is an expense imposed by a municipality on the gas
company's right to conduct business in the municipality.

The gas company is passing along this incurred expense as a part of the sales
price of the gas. The gas company is required to charge sales tax on the
municipal franchise fee.

The municipalities, not our agency, administer the municipal franchise fee. The
gas company is required to pay the municipal franchise fee directly to the
municipality(ies).

If the gas company is commingling the gross receipts tax with the sales tax and
billing them as a single line item, the gas company is also required to remit
the entire amount collected as tax to the Comptroller. Texas Tax Code Sec.
111.016.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call toll free 1-800-252-5555, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division