How does Texas decide whether a bed-and-breakfast pays residential or commercial (nonresidential) tax on its gas and electricity?

Plain-English Summary

This 1994 letter was sent in the middle of a Comptroller's office survey of bed-and-breakfast establishments across Texas, prompted by an informant's tip that some B&Bs weren't paying the correct utility tax. But rather than just discussing enforcement, the letter lays out the Comptroller's general rule for how B&Bs (and similar mixed residential/rental properties) are classified for gas and electricity tax purposes.

The rule is a "predominant use" test, and it can be measured two different ways:

1. By square footage: divide the total square footage of rooms held out for rental by the total square footage of the dwelling. If that percentage is 50% or more, the property is nonresidential and utility tax is due. If it's under 50%, the property is treated as a residence and no tax is due.
2. By time: look at what percentage of the year the rooms are offered for rent. If rooms are offered for rent 50% or more of the year, the establishment is nonresidential (tax due); otherwise it's residential (no tax).

If a bed-and-breakfast qualifies as a residence under either test, it's treated as a residence for utility tax purposes and no tax is owed — the owner doesn't need to satisfy both tests.

The letter also notes that the Comptroller's office can generally assess back tax for four years (seven years if fraud is alleged), and that in this particular case the office was not assessing penalty or interest and was willing to work out a payment plan.

What This Means For You

Bed-and-breakfast owners

If you rent out rooms in what is otherwise your residence, figure out your predominant use two ways: (1) rented square footage divided by total square footage of the dwelling, and (2) the percentage of the year rooms are actually offered for rent. If either calculation comes in under 50%, your property should be treated as residential for gas/electricity tax purposes, meaning no utility tax is due on it. If either calculation is 50% or higher, expect the property to be classified as nonresidential and utility tax to apply.

Owners facing a utility-tax inquiry or audit

This letter shows the Comptroller's office does proactively survey B&Bs for utility tax compliance based on tips, and can look back four years (seven if fraud is alleged). If you're contacted, it may be worth proactively calculating your predominant-use percentages before responding, since the classification — not just self-reporting — determines whether tax is owed.

Accountants and tax professionals

Note that this is an informal letter responding to a taxpayer/association inquiry, issued in the context of a compliance survey — it isn't a formal rule or published policy statement, and being decades old, it may not reflect the Comptroller's current position. Still, it's a useful illustration of how "predominant use" has been applied to mixed residential/rental lodging for utility tax purposes.

Q&A

Q: How is "predominant use" measured for a bed-and-breakfast's utility tax?
A: Two ways: by dividing the square footage of rooms held out for rental by the total square footage of the dwelling, or by looking at the percentage of the year the rooms are offered for rent. A result of 50% or more under either method makes the property nonresidential (utility tax due); under 50% makes it residential (no tax due).

Q: If my bed-and-breakfast passes one test but not the other, do I still owe tax?
A: No. The letter states that if a B&B qualifies as a residence under either predominant-use test, it is treated as a residence and no utility tax is due.

Q: Why did the Comptroller's office send this letter?
A: It was issued during a statewide survey of bed-and-breakfast establishments, prompted by an informant's allegation that some hadn't paid proper utility taxes. The letter responds to a taxpayer/association inquiry about that survey while also explaining the general predominant-use rule.

Citations

No specific statute or administrative rule is cited in the body of this letter.

Source

Bed And Breakfast Establishments — Predominant Use Of Electricity/Gas Determines Residential/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/9409677L

Original ruling text

September 2, 1994

Dear **:

Thank you for your recent correspondence regarding bed and breakfasts in Texas.
As you may know, this office is surveying bed and breakfast establishments
across the state concerning payment of utility taxes for the past four years.
This effort results from a list of such establishments furnished us by an
informant who has alleged that proper utility taxes have not been paid to the
state. As you can imagine we are obligated to pursue such information.

It is always our desire to apply the tax laws of Texas in as uniform and fair
manner as possible. Should you have knowledge of any situation where you feel
someone is not collecting and remitting taxes under the law, my office is eager
to follow up on this information as part of our effort to achieve a level
playing field.

Predominant use determines whether or not utility tax is assessed and can be
determined by predominant use of square footage or by predominant use
throughout the year. In this regard, this office will apply a predominant use
test for square footage which divides the total square footage of rooms held
out for rental by the total square footage of the dwelling. In situations where
this percentage is 50 percent or more, the established will be classified as
nonresidential and the tax will be due. Likewise, in situations where the
percentage is less than 50 percent, the tax will not be due because it will be
considered a residence.

With regard to predominant use throughout the year, this determination will be
made based on the percentage of the year the rooms are offered for rent. Again
a percentage of 50 or more classifies the establishment as non-residential.

If a bed and breakfast qualifies as "residence" under either predominant use
test, it is considered a residence for purpose of the utility tax on loges and
no tax is due.

Under the law this office is obligated to assess tax, when tax is found to be
due, for four years in the past. In addition, should fraud be alleged, we can
assess an additional three years of tax plus penalty and interest. Of course,
no one is suggesting there was any fraud in the cases at hand. As you know, we
are not assessing penalty or interest and are certainly willing to work with as
taxpayer on a payment plan should that be necessary.

Staff from our ** office is available to assist your association's
members in determining residential/non-residential usage of an establishment
and the amount of tax, if any that may be due. I realize these are not the
answers you hoped to receive from your inquiry. I do want to assure that the
Comptroller's office will do everything we can to assist you and your
association members in resolving this issue.

If I can be of any further assistance to you, please give me a call. I can be
reached toll-free at 1-800-531-5441, extension 5-0220. On a local level, please
feel free to call Gary Moerbe at (903) 561-1601.

Sincerely,

Glen D. Hunt
Director, Tax Administration