If a Texas manufacturing plant is sold to a new owner, can the new owner keep using the seller's predominant use utility study to claim a sales tax exemption on utilities?

Plain-English summary

This 1993 Comptroller letter answers a narrow but practical question: when a manufacturing facility is sold to a new company, does the new owner have to get its own predominant use engineering study before it can claim the sales tax exemption on utilities used at the plant?

The facts: COMPANY A was selling its plant (the "CITY A Division") to CORPORATION B. COMPANY A's utilities at that plant were exempt because of a predominant use engineering study performed for COMPANY A. The taxpayer had apparently been told verbally that CORPORATION B would not need its own study, since the manufacturing operations at the plant were not going to change.

The Comptroller's office corrected that verbal advice in writing. CORPORATION B is required to have its own predominant use engineering study performed at the plant before it can claim the utility exemption — even though the manufacturing process itself is staying the same. The letter explains that a sale of the business "is more than a mere name change," and notes that the utility companies will likely open new accounts for the new owner, who won't yet have an exemption certificate on file. The letter also states this opinion is based on the facts presented and could change if the facts are different.

What this means for you

Buyers of a manufacturing facility or business

If you're acquiring a plant or division that currently claims a utility sales tax exemption based on predominant use, don't assume that exemption transfers with the sale — even if you plan to keep the equipment and process exactly the same. You need to commission your own predominant use engineering study and obtain your own exemption certificate before the utility provider can bill you tax-free. Expect the utility company to set up a new account under your name, which will have no exemption on file until you provide one.

Sellers and accountants advising on plant sales

Don't rely on informal or verbal Comptroller guidance that a buyer can "step into" the seller's existing utility exemption. This letter shows the Comptroller's office will put a correction in writing: a change of ownership is treated as a substantive change, not a mere formality, for purposes of the utility exemption.

Common questions

Q: We're buying a plant and won't change anything about how it manufactures products. Can we just use the seller's old utility exemption study?
A: No. According to this letter, the buyer must have its own predominant use engineering study performed at the location, regardless of whether the manufacturing operations change.

Q: Why does a sale matter if nothing about the manufacturing process changes?
A: The letter states that "the transfer of ownership is more than a mere name change." The exemption certificate is tied to the entity that had the study performed, and utility companies are likely to open new accounts for the new owner without an exemption certificate on file.

Q: Does this letter cite a specific statute or rule for this requirement?
A: No statutes or rules are cited in this letter.

Q: Can we rely on this letter for our own transaction?
A: This is a taxpayer-specific letter ruling from 1993. Under Texas rules, letters published on STAR can generally be relied on only by the taxpayer who received them, and the letter itself says its conclusion is based on the specific facts presented and could change with different facts. Consult a Texas tax professional about your own situation.

Citations and references

No statutes or rules are cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302L1221B13

Original ruling text

February 17, 1993

Dear ***:

Thank you for your letter of February 5, 1993, requesting written
confirmation of a verbal answer given to you by Ms. Pauline Behrends
of our Tax Assistance Section.

COMPANY A is selling its CITY A Division to CORPORATION B.
COMPANY A' utilities used at the CITY A Division are exempt based on
predominant use engineering studies performed for your firm.

You were advised that CORPORATION B would not have to have a predominant
use engineering study in order to claim exemption on utilities used at
the location because there will be no change in the manufacturing
operations.

The CORPORATION B is required to have its own predominant use
engineering study performed at the CITY A Division in order to claim
exemption on utilities.

The transfer of ownership is more than a mere name change.

The utility companies are likely to change the account number(s) at that
location and will not have an exemption certificate from CORPORATION B
claiming exemption.

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

You may call toll free 1-800-531-5441, 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 Washington
Tax Administration Division