Texas Letter Ruling 9209L1192G09: Heating Manufacturing/Processing Areas — Gas/Electricity Used

Subject

Heating Manufacturing/Processing Areas — Gas/Electricity Used

Plain-English summary

A taxpayer asked the Comptroller how to allocate natural gas usage between taxable and exempt purposes in a shop area that is used for two different things: repairing other people's tangible personal property (a taxable, "commercial" use) and re-manufacturing items for resale (a non-taxable use).

The Comptroller's answer: utilities used to heat and cool a manufacturing area are exempt, but where the same physical space is used for both repair work and re-manufacturing, the gas used to heat and cool it has to be allocated, not simply treated as fully exempt or fully taxable. The allocation happens in two steps:

1. First, figure out how much of the utility usage goes toward heating/cooling the combined repair/manufacturing area versus all other areas of the building (offices, storage, and other non-production spaces).
2. Then, within that repair/manufacturing area's utility usage, further allocate based on how much time the space is actually used for re-manufacturing versus other (non-production) uses. Only the portion tied to the time re-manufacturing is being performed counts as exempt non-commercial use.

The taxpayer must support this allocation with documentation in a predominant use study explaining the method used.

What this means for you

Business owners with mixed-use shop space

If your shop performs both taxable repair services and exempt re-manufacturing in the same physical area, you cannot treat all the heating/cooling gas or electricity for that space as exempt. You need to determine, and document, how much time the area is used for re-manufacturing versus repair and other purposes, and allocate the utility usage accordingly.

Accountants and tax professionals preparing predominant use studies

This ruling describes a two-tier allocation: (1) separate production-area (repair + manufacturing) usage from non-production-area (office, storage) usage, and (2) within the production area, separate re-manufacturing time from all other uses. Only the second-tier re-manufacturing portion is exempt. The allocation method and its supporting documentation must go into the predominant use study.

Taxpayers relying on this letter

This is a STAR letter ruling addressing one taxpayer's specific facts (one shop area used for both repairs and re-manufacturing). Under Texas rules, it can only be relied on by the taxpayer to whom it was issued, and the Comptroller notes the opinion is based on the facts presented — different facts could lead to a different result.

Common questions

Q: Is gas or electricity used to heat/cool a manufacturing area exempt from tax?
A: Yes, per this ruling, utilities used for cooling and heating in the manufacturing area are exempt.

Q: What if the same area is used for both repairs and manufacturing?
A: Then the utilities for heating and cooling that area must be allocated between the taxable (repair/commercial) use and the exempt (re-manufacturing) use — it isn't automatically all exempt or all taxable.

Q: How is the allocation supposed to be done?
A: First, separate the utilities used for the combined repair/manufacturing area from those used for other areas like offices and storage. Then, within the repair/manufacturing area, allocate further based on the amount of time the area is used for re-manufacturing versus other, non-production uses. Only the re-manufacturing-time portion is treated as exempt.

Q: Do I need to document this allocation?
A: Yes. The ruling states the allocation method must be explained and supported by documentation in the predominant use study.

Citations and references

No statutes, rules, or other legal authorities are cited in the text of this letter ruling.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1192G09

Original ruling text

September 21, 1992

Dear ***:

Thank you for your letter regarding the proper way to allocate between taxable
and exempt natural gas usage in the following situation:

A business has one shop area where they perform repairs on tangible personal
property belonging to others and they also re-manufacture items for resale.
What is the proper way to allocate the natural gas used to heat the shop area?

Utilities used for cooling and heating in the manufacturing area are exempt.
Where the same area is used for both repair (commercial utilities) and for
re-manufacturing (non commercial use), the utilities for heating and cooling
must be allocated. First, it must be determined how much of the utilities are
for cooling and heating the area where the manufacturing and repair are
performed and all other areas (offices, storage, and other non production
areas). After this is determined, the utilities for cooling and heating within
the repair/manufacturing area must be further allocated. Only the utilities for
cooling and heating the area during the period of time the re-manufacturing is
performed will be considered non commercial use and exempt. This means that it
will be necessary to determine the amount of time the area is used for
re-manufacturing and for all other non production uses. The allocation method
must be explained and supported by documentation in the predominant use study.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. If you have any questions or need
additional information, you may call me toll free at 1-800-252-5555, extension
34666 or the regular Austin number 512/463-4666. You may write to Tax
Administration Division.

Sincerely,

Jo Ann Deick
Tax Administration Division