Is an electric cooperative exempt from Texas sales tax on the materials it buys to build a distribution line, and is the cooperative's charge to a customer for that line taxable?

Plain-English summary

A taxpayer wrote in asking about a client — an electric cooperative — that charges customers for the cost of a distribution line when the line's length exceeds what the cooperative's tariff allows to be built for free. The charge is a lump sum, and the cooperative (not a third-party contractor) constructs the line itself and keeps ownership of it once it's built.

The Comptroller answered two questions:

Question 1 — is the cooperative liable for sales/use tax on the materials it buys to build the line? No. The Electric Cooperative Act (Texas Civil Statutes, Article 1528b, Section 30) exempts electric cooperatives from all excise taxes, which includes sales and use tax. Because the cooperative is a consumer of the materials (it isn't acting as a contractor building the line for someone else — it owns the finished line), it doesn't owe sales tax on any of its purchases.

Question 2 — is the charge to the customer for their share of the distribution line taxable? Yes, if the underlying electricity charge is taxable. The Comptroller treated the customer's line-extension charge as part of the charge for electricity itself, so its taxability follows whatever the taxability of the electricity charge is (rather than being analyzed separately as a real property or construction charge).

The letter notes that the remaining questions in the original request didn't need to be answered, since a response was only required if the cooperative turned out to be liable for sales tax — and it wasn't.

What this means for you

Electric cooperatives organized under the Electric Cooperative Act

Your purchases of materials and supplies are exempt from Texas sales and use tax under Article 1528b, Section 30 — this exemption is broad and applies "without regard" to whether a given project relates to rural electrification, as long as you're a cooperative formed under that Act and you're the consumer (owner) of what you build, not a contractor building it for someone else's benefit.

Cooperatives or utilities that charge customers for line extensions

Don't assume a line-extension or facilities charge escapes tax just because it looks like a real-property or construction charge. If the Comptroller views it as part of what you charge for electricity, it will be taxed the same way your electricity charges are taxed.

Businesses relying on this letter

This is a fact-specific letter ruling addressed to one taxpayer about one cooperative's specific arrangement. It doesn't establish a general rule for all utility line-extension charges or for entities other than electric cooperatives formed under Article 1528b.

Common questions

Q: Does an electric cooperative pay Texas sales tax on materials it buys to build a distribution line?
A: No. The Electric Cooperative Act (Article 1528b, Sec. 30) exempts electric cooperatives from all excise taxes, including sales and use tax, when the cooperative is the consumer/owner of what it builds.

Q: Is a customer's contribution toward the cost of a distribution line extension taxable?
A: According to this letter, yes — if the charge for electricity itself is taxable, because the Comptroller treats the line-extension charge as part of the electricity charge.

Q: Does it matter whether the project is related to rural electrification?
A: No — the exemption for the cooperative's own purchases applies regardless of whether the project is or isn't associated with rural electrification.

Q: Can any other business rely on this specific letter?
A: No. Under STAR's rules, a letter ruling can only be relied on by the taxpayer it was issued to, and this opinion is based on the specific facts presented; different facts could change the outcome.

Citations and references

Statutes:

• Texas Civil Statutes, Article 1528b, Section 30 (Electric Cooperative Act — exemption of electric cooperatives from all excise taxes, including sales and use tax)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9602957L

Original ruling text

February 13, 1996

Dear **:

In your letter of December 20, 1995, you asked about the taxability of your
client charging a customer for a distribution line. The customer contributes
to the construction when the length of the line is in excess of what the tariff
allows it to be without charge. The charge is a lumpsum charge. In a phone
conversation, you confirmed that the client constructed the distribution line.

The Electric Cooperative Act [Texas Civil Statutes, Article 1528b] exempts the
electric cooperative from all excise taxes, such as sales and use tax.

I have copied or restated your questions, with a response as follows:

Question 1) Is it not correct, therefore, that if CORP A, being a corporation
formed under the Texas Electric Cooperative Corporation Act, in performing a
lump-sum contract to do new real property construction for a third party,
purchases materials that will be consumed in the project and/or incorporated
into the improvements, the cooperative will not be liable for Texas' limited
sales and use tax on such materials, without regard to whether the project is
or is not associated with rural electrification?

Response: It should be noted that we did not examine an agreement between your
client and its customer for this charge. Your client is not a contractor, but
a consumer of tangible personal property and will own the distribution line
upon its completion.

Texas Revised Civil Statutes article 1528b Sec. 30 exempts the electric
cooperatives from all excise taxes which would include sales and use tax. Sales
tax does not have to paid on any purchases by an electric cooperative.

Question 2) Is the charge to the customer for their portion of the
distribution line taxable?

Response: The charge for distribution line is considered as part of the charge
for electricity, so the charge for the distribution line is taxable if the
charge for electricity is taxable.

The remaining questions did not need to be answered, since a reply is only
required if the cooperative was liable for sales tax.

This opinion is based upon 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 extension 50892. The direct line is 512/475-0892. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

John J. Fitzgibbons, CPA
Tax Policy