Is electricity used in a separately metered manager's office at an apartment complex taxable, or does it count as residential (exempt) use?

Plain-English summary

The Texas Comptroller's Tax Policy Division addressed a complaint about sales tax billed on electricity for a separately metered office at the ABC APARTMENTS, a 156-unit apartment complex whose tenants average 77.8 years old (91% female) — essentially a retirement home. UTILITY CO. had recently begun billing sales tax on the electricity for that office, which is not occupied as a residence by an on-site manager, after not having billed tax on it before. The Comptroller confirmed the billing is proper.

The reasoning: because the separately metered office is not occupied as a residence, the electricity used there is a taxable commercial use, regardless of the fact that the rest of the complex is residential housing. The letter draws a distinction based on how the office is metered. If the office instead shares a single meter with apartment units that are occupied as residences, then the taxability of the electricity through that meter is determined by the predominant use of the meter, under Rule 3.295 (Natural Gas and Electricity) — not an automatic "taxable" result.

The letter also clears up some confusion: the property manager had been given a copy of Rule 3.357 (Nonresidential Real Property Repair and Remodeling) after asking a Comptroller employee about the office's electricity taxability, but the Comptroller notes that rule is about construction/repair contracts and the 5% discussion in it doesn't apply to electricity at all — Rule 3.295 is the correct rule. Finally, the letter notes that residential use of electricity is subject to city sales and use tax only on a local-option basis, meaning some cities tax it and some don't; the particular city involved here does tax residential electricity and gas use.

What this means for you

Apartment complex owners and property managers

If you have a separately metered office (leasing office, manager's office, etc.) at a residential property, and that space is not itself used as someone's residence, expect the electricity to that meter to be taxed as a commercial use — even if the rest of the property is a retirement home or otherwise fully residential.

Properties where the office shares a meter with residential units

If the manager's office is on the same meter as residential apartment units, don't assume the whole meter is automatically taxable or automatically exempt. Under Rule 3.295, the taxability of that shared meter is determined by which use — commercial or residential — predominates.

Utility companies billing apartment complexes

Billing sales tax on electricity delivered to a separately metered, non-residential office within an otherwise residential complex is consistent with this letter's guidance, even if tax wasn't billed on that meter previously.

Anyone relying on informal guidance from a Comptroller employee

Be careful about verbal or informally provided guidance. Here, the property manager was given Rule 3.357 (a real property repair/remodeling rule) in response to a question about electricity taxability, but that rule doesn't actually govern electricity — Rule 3.295 does. Confirm you have the correct, applicable rule before relying on it.

Common questions

Q: Is electricity used in an apartment complex's manager's office taxable?
A: Yes, according to this letter, if the office is separately metered and not occupied as a residence, the electricity to that meter is a taxable commercial use.

Q: What if the manager's office and residential apartments share the same electric meter?
A: Then the taxability of that meter isn't automatic either way — it's determined by predominant use under Rule 3.295, i.e., whether the meter's electricity is used mostly for the commercial office or mostly for residential apartments.

Q: Does it matter that the apartment complex is essentially a retirement home?
A: No. The letter notes the complex's elderly, predominantly female tenant population, but that residential character doesn't exempt a separately metered, non-residential office from tax.

Q: Is residential electricity use always exempt from tax in Texas?
A: Not entirely. The letter notes residential electricity (and natural gas) use is subject to city sales and use tax only on a local-option basis — meaning it depends on whether the specific city has chosen to tax it. The city discussed in this letter does tax residential electricity and gas use.

Q: Does Rule 3.357 apply to electricity taxability?
A: No. The letter clarifies that Rule 3.357 concerns nonresidential real property repair and remodeling contracts, not electricity, and that the property manager was given that rule by mistake in response to an electricity question. Rule 3.295 is the rule that actually governs natural gas and electricity taxability.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.295 (Natural Gas and Electricity — predominant use theory for commercial vs. residential use)
• 34 Tex. Admin. Code Rule 3.357 (Nonresidential Real Property Repair and Remodeling — referenced only to clarify it does NOT apply to electricity)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9509505L

Original ruling text

September 21, 1995

Dear ** :

Thank you for your correspondence of August 18, 1995, concerning the taxability
of electricity sold for use in a separately metered office at the ABC
APARTMENTS, a 156-unit apartment complex.

The complex is inhabited by tenants whose age averages 77.8 years, with 91% of
the occupants being female. Thus, the complex is essentially a retirement home.
Recently, UTILITY CO. billed the complex for sales taxes that had not been
billed for the separately metered office that is not occupied as a residence by
an on-site manager. The billing is proper.

The separately metered office is not occupied as a residence, thus the
electricity used in the office is a taxable commercial use. If such an office
is in a building that also contains apartment units that are occupied as
residences and are on a single meter, the taxability of the electricity
measured through the meter must be determined by predominant use.

I am enclosing an edited letter written by Wade Anderson, Director of Tax
Policy, reaffirming the agency's position on this issue.

** , the property manager for the ABC APARTMENTS, received a copy of
Rule 3.357 after talking to a Comptroller employee about the taxability of the
office's electricity usage. Rule 3.357 concerns nonresidential real property
repair and remodeling, not electricity. The 5% discussions in Rule 3.357 apply
to contracts that involve new construction and non-residential real property
repair and remodeling.

Rule 3.295 concerns natural gas and electricity. The predominant use theory
discussed in Rule 3.295 applies to commercial and noncommercial or residential
uses of electricity measured through a single meter.

Residential use of electricity is subject to city sales and use tax on a local
option basis. Certain cities may either exempt or tax residential use of
electricity and natural gas. The City of CITY taxes residential use of
electricity and natural gas.

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
1-800-531-5441, extension 3-4683. The direct line is 512/463-4683. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division