Can a landlord who buys gas and electricity, sub-meters it, and bills each tenant claim a manufacturing/processing exemption because most tenants are manufacturers who use the utilities predominantly in processing?

Plain-English summary

An industrial park operator (Company A) owned and managed a multi-tenant complex of eleven buildings. Company A bought gas and electricity from the local utility companies through master meters, then used sub-meters it had installed to measure and bill each tenant for its own usage. Many of the tenants were manufacturers or processors, and the utilities used at the park were predominantly consumed in manufacturing or processing. Company A asked whether it could claim a sales/use tax exemption on its utility purchases by submitting engineer's studies showing that the metered gas and electricity were used predominantly in manufacturing or processing.

The Comptroller's office said no. Citing Hearing Number 22,870 and the Direlco case, the office explained that a landlord who purchases electricity and gas in connection with leasing commercial real estate is making its own "commercial" (taxable) use of those utilities — a use distinct from what its tenants do with the utilities afterward. The ruling noted this result does not depend on whether charges to tenants are separately stated: in Hearing Number 22,870, the tenant reimbursed the landlord for electricity that had already been separately billed, and the landlord's purchase was still found taxable. Because Company A was purchasing the gas and electricity for use by its lessees as part of operating the leased property, Company A — not the tenants — was the taxable consumer, and the tenants' predominant manufacturing/processing use did not exempt Company A's purchase.

What this means for you

Landlords and property managers of multi-tenant industrial or commercial space

If you buy utilities in bulk and sub-meter or rebill tenants for their usage, you are generally considered to be making your own commercial use of that electricity and gas — a taxable use — even though your tenants may use the metered utilities predominantly for manufacturing or processing. The manufacturing/processing exemption belongs to the entity that actually purchases the utility for use in manufacturing; it does not extend up the chain to a landlord who purchases only to resupply tenants under a lease.

Manufacturers and processors leasing space

If you lease your facility and your landlord purchases and re-bills you for the gas and electricity you use in manufacturing, this ruling indicates the tax exemption analysis runs through your landlord's purchase, not directly through your own predominant use — so simply proving your own usage percentage is not, by itself, enough to make the landlord's underlying utility purchase exempt.

Accountants and tax professionals

This ruling turns on the "commercial use" doctrine from the Direlco case and Hearing Number 22,870: a lessor purchasing utilities in conjunction with leasing property is making a taxable commercial use of those utilities, independent of whether tenant charges are separately stated or reimbursed. When advising landlord clients on utility tax exemptions for tenant-occupied industrial space, consider whether the client (rather than the tenant) is the party actually purchasing the utility from the retail utility company.

Common questions

Q: Can a landlord claim a manufacturing exemption on electricity and gas it purchases for a leased industrial park, based on tenants' manufacturing use?
A: No. The Comptroller ruled that the landlord is making its own taxable commercial use of the utilities by purchasing them in connection with leasing the property, regardless of how the tenants use the utilities afterward.

Q: Does it matter whether the tenant separately reimburses the landlord for its metered utility usage?
A: No. The ruling notes this result does not depend on whether charges are separately stated — even where a tenant reimbursed the landlord for separately billed electricity in the cited hearing, the landlord's purchase was still found taxable.

Q: What case/hearing did the Comptroller rely on?
A: Hearing Number 22,870, which in turn cited Direlco, a case holding that the definition of taxable commercial use of gas and electricity includes leasing commercial real estate.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter. The letter references Comptroller Hearing Number 22,870 and the Direlco case as precedent for the "commercial use" analysis.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9409764L

Original ruling text

September 27, 1994

Dear **:

You asked about the tax treatment of electricity purchased by an operator
(Company A) of an industrial park.

Company A owns and manages a multi-tenant industrial complex. The complex
comprises eleven buildings. There is a meter for gas and one for electricity.
Company A buys the gas and electricity from the appropriate local utility
companies. Additionally, Company A has installed sub meters so Company A can
measure and bill each tenant for its utility usage. Many of the tenants are
manufacturers or processors, and the utilities used at the park are used
predominately in manufacturing or processing.

You asked if Company A could claim exemptions for taxes on the gas and
electricity by submitting engineer's studies indicating that the gas and
electricity measured by the utilities' meters are used predominantly in
processing or manufacturing.

As you pointed out, Hearing Number 22,870 addresses a similiar situation.
In that hearing, the judge held that the lessor (landlord) was making a
commercial use of the electricity when it purchased the electricity in
conjunction with leasing the property. This decision does not appear to be
predicated on the lack of separated charges. The facts in this hearing show
that the lessee reimbursed the lessor for the electricity after the lessor
had paid for the electricity. In order to reimburse the lessor for the
electricity, the charge for the electricity would have to have been separately
stated. Instead, the judge in Hearing Number 22,870 cites Direlco. (In
Direlco, the court concluded that the definition of commercial (taxable) use
of gas and electricity includes the leasing of commercial real estate.)

Company A is making a commercial use of the electricity and gas when it purchases
these utitlities for use by its lessees.

Thank you for your patience. My number is 512/463-4004, if you have any questions.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration