If a commercial landlord separately bills tenants for chilled and heated water (air conditioning and heating), does the landlord owe Texas sales tax as if selling utilities?

Subject

Real Property/Commercial Space Rental — Electricity/Gas Purchased By Owner/Landlord To Provide To Exempt Tenants Is Taxable — Landlord Is Making A Commercial Use

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1288E03

Plain-English Summary

The taxpayer's client owns and operates a large commercial building. The client leases office space to tenants and separately bills those same tenants for chilled water (for air conditioning) and heated water or steam (for heating). The client asked whether these separately stated utility charges are taxable sales, pointing to Administrative Hearing No. 8,134, which involved an energy company selling chilled and heated water.

The Comptroller distinguished that prior hearing: in Hearing No. 8,134, the seller was an energy company selling chilled/heated water to customers who owned and operated their own heating and cooling systems — a true retail sale of a utility. Here, by contrast, the client is the landlord renting the real property itself to the same tenants it bills for chilled/heated water.

The Comptroller instead applied Administrative Hearing No. 22,870, which holds that charges for electricity billed in conjunction with the rental of real property are considered part of the lease payment, not a separate sale of electricity. Citing that reasoning (and the Position Letter for Hearing No. 24,586, Rule 3.294(k), and Texas Tax Code § 151.006(2)), the Comptroller concluded that the client's separately stated chilled/heated water charges are not taxable, and that the landlord is not considered a manufacturer for making chilled or heated water available to its tenants.

What This Means For You

If you are a commercial landlord who separately bills tenants for utilities like chilled or heated water, air conditioning, or heating: Where those charges are billed to the same tenants you lease real property to, they are generally treated as part of the lease payment rather than a taxable retail sale of a utility — even if stated as a separate line item on the bill.

If you are comparing your situation to a case where a seller has no landlord relationship with its utility customers (as in Administrative Hearing No. 8,134): That precedent does not control your situation. A seller who is not renting real property to its water/steam customers is instead making a taxable retail sale of the utility.

If you are unsure whether your specific billing arrangement fits this pattern: This ruling is based on the specific facts presented — a landlord renting office space and separately billing chilled/heated water to its own tenants. Different facts (such as billing non-tenant third parties) could yield a different result.

Q&A

Q: Is a commercial landlord's separately stated charge for chilled or heated water to its tenants taxable as a sale of a utility?
A: No. The Comptroller ruled that because the landlord rents the real property to the same tenants it bills, the chilled/heated water charges are considered part of the lease payment, not a taxable sale.

Q: Does billing tenants separately for chilled/heated water make the landlord a "manufacturer" of that water or steam?
A: No. The ruling states the lessor will not be considered a manufacturer for this activity.

Q: How is this different from the situation in Administrative Hearing No. 8,134?
A: In that hearing, the seller was an energy company selling chilled and heated water to customers who owned and operated their own heating and cooling systems — there was no landlord-tenant relationship. Here, the client rents the real property itself to the tenants it bills, which brings the charges within the rule that utility charges tied to a real property lease are part of the lease payment.

Citations

• Tex. Tax Code § 151.006(2)
• 34 Tex. Admin. Code § 3.294(k)
• Administrative Hearing No. 8,134 (distinguished — seller had no landlord relationship with its utility customers)
• Administrative Hearing No. 22,870 (electricity charges billed with a real property lease are part of the lease payment, not a utility sale)
• Position Letter for Hearing No. 24,586

Original ruling text

March 10, 1994

Dear ****:

Thank you for your letter of March 1, 1994, concerning the sale of
chilled water charges (for air conditioning) and heated water or steam
charges (for heating).

Your client owns and operates a large commercial building. The client
leases office space and separately bills for chilled and heated water
(air conditioning and heating). You have reviewed Administrative Hearing
No. 8,134 and believe that the findings therein may apply to your client.

Administrative Hearing No. 8,134 concerned an energy company that was
selling chilled water, heated water or steam to customers. Unlike your
client, the petitioner did not rent real property to the water or steam
"customers". The customers owned and operated their own heating and
cooling systems.

Administrative Hearing No. 22,870 states that charges for electricity in
conjunction with the rental of real property is considered part of the
lease payment and not a sale of electricity. [See also Position Letter
for Hearing No. 24,586, Rule 3.294(k), and Texas Tax Code Section
151.006(2).]

The separately stated charges are not taxable and the lessor will not be
considered a manufacturer.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct
line is 512/475-0613. You may also write to Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division

NOTE: Previous Accession Number 9403094L