If an apartment resident operates a store or business out of their unit, is the electricity or gas used there still exempt as a residential utility in Texas?

Plain-English summary

The Texas Comptroller's Tax Policy Division responded to a question about whether a statement in the Texas Apartment Association, Inc.'s October 2, 1995 publication was correct. That publication's first sentence under "Residential Utilities" apparently suggested that utilities used in a residential unit are simply exempt from tax. The Comptroller said that statement was wrong.

The letter explains that while electricity and gas consumed within a residential unit will almost always be exempt as a practical matter, it is not exempt automatically just because the space is a residence. The key example given: if a residential unit has a separate meter and the resident operates a business out of that residence, the electricity or gas is only exempt if the predominant use of it is for residential purposes.

Two illustrations were given. If gas is used only to keep the residence warm, that use is exempt. But if the owner of the residence operates a store out of the residence, and the electricity used in the store portion exceeds the electricity used in the residential portion, then the electricity is taxable — because business use, not residential use, predominates.

What this means for you

Apartment owners and property managers

Don't assume every unit's utilities qualify as exempt "residential" utilities just because someone lives there. If a resident runs a business (like a home-based store) out of a separately metered unit, you need to know whether the resident's business use of electricity or gas exceeds their residential use — that determines whether the utility is taxable.

Residents operating a business out of their home or apartment

If you live in an apartment and also run a business there — say, selling goods out of your unit — and your unit has its own separate meter, the electricity or gas isn't automatically tax-exempt just because you also live there. If the electricity or gas you use for the business portion of your activities exceeds what you use for ordinary residential living, that utility becomes taxable.

Accountants and tax professionals advising landlords or apartment associations

This letter is a useful corrective for any guidance (such as an industry association's publication) that states residential utilities are exempt without qualification. The Comptroller's position turns on a predominant-use test applied at the level of the individual, separately metered unit — not a blanket residential exemption.

Common questions

Q: Are utilities used in a residential apartment unit always exempt from Texas sales tax?
A: No. This letter directly corrects a publication that said so. Residential use of electricity or gas is usually exempt as a practical matter, but it is not exempt per se — it depends on whether residential use predominates.

Q: What happens if a resident runs a business out of a separately metered apartment?
A: The electricity or gas for that unit is only exempt if the predominant use is residential. If the resident operates a store and the electricity used in the store portion exceeds the electricity used in the residential portion, the electricity is taxable.

Q: What if the gas is only used to heat the residence?
A: The letter gives that as an example of exempt use — if gas is used only to keep the residence warm, the Comptroller considers that use exempt.

Q: Who requested this letter, and can I rely on it directly?
A: The requester's identity is redacted in the published letter. STAR letters generally may be relied upon only by the taxpayer to whom they were directly issued; others should treat this as informational guidance on the Comptroller's reasoning, not a ruling for their own situation.

Citations and references

No specific statutes or administrative rules are cited in the text of 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/9510L1415G08

Original ruling text

October 23, 1995

Dear ***:

You asked me if the first sentence under Residential Utilities in the Texas
Apartment Association, Inc.'s publication issued October 2, 1995, was
correct. The answer is "no."

While as a practical matter, electricity and gas consumed within a residential
unit will almost always be exempt, it is not exempt per se. For instance, if
a residential unit had a separate meter and the resident operated a business
out of the residence, the electricity or gas would only be exempt if the
predominant use was for residential purposes.

For example, if the gas was used only to keep the residence warm, we would
consider the use exempt. But, if the owner of the residence operated a store
out of his residence and the use of the electricity in the store portion of
the residence exceeded the use of electricity in the residential portion of
the residence, the electricity would be taxable.

I hope this answers your question. Please feel free to contact me should
you have any further questions.

Sincerely,

Wade Anderson
Director, Tax Policy

NOTE: Previous Accession Number 9510321L