If I buy natural gas in Texas and ship it out of state by pipeline to generate electricity at my out-of-state plant, do I owe Texas sales tax on the gas?

Subject

Natural Gas — Shipped Oos Via Pipeline And Used In Manufacturing Electricity Is Noncommercial Use

Plain-English summary

A Pennsylvania-based public utility asked the Texas Comptroller whether its purchase of natural gas would be subject to Texas tax when the gas was bought and title taken in Texas, then shipped by interstate pipeline to Pennsylvania to be burned at one of the utility's generating facilities to produce electricity. The electricity produced was sold only within Pennsylvania.

The Comptroller ruled that no Texas tax was owed. Under Tex. Tax Code § 151.317(a), natural gas and electricity are exempt from tax unless used for a "commercial use." Manufacturing electricity is specifically treated as a noncommercial use of natural gas under § 151.317(c)(2)(A)(i). Because the gas was going to be used to manufacture electricity, the utility could give its Texas supplier a resale/exemption certificate instead of paying Texas tax on the gas at the time of purchase.

What this means for you

Out-of-state utilities and electricity generators buying gas in Texas

If you take title to natural gas in Texas and ship it out of state (including via interstate pipeline) to burn it in generating electricity, that use is treated as noncommercial under Texas law, so you can issue an exemption certificate to your Texas gas supplier rather than paying Texas tax on the purchase.

Natural gas suppliers/sellers in Texas

A customer's exemption certificate claiming this "manufacturing electricity" noncommercial use is a valid basis to sell the gas tax-free, provided the facts match (gas purchased/titled in Texas, shipped out and consumed to generate electricity).

Accountants and tax professionals

The key legal hook is that "commercial use" is defined by exclusion in § 151.317(c), and manufacturing electricity falls within the carved-out noncommercial uses in § 151.317(c)(2)(A)(i) — this lets gas destined for power generation avoid Texas sales/use tax at the point of sale in Texas, regardless of where the electricity is ultimately generated or sold.

Common questions

Q: Does it matter that the electricity was generated and sold outside Texas?
A: The ruling doesn't hinge on where the electricity is sold — the determinative fact was that the gas would be used to manufacture electricity, which the statute treats as a noncommercial use regardless of the generating facility's location.

Q: Can the purchaser just give the supplier an exemption certificate instead of paying tax and seeking a refund?
A: Yes — the letter states the purchaser "may issue an exemption certificate to your supplier in lieu of paying tax on the natural gas."

Q: Is this ruling limited to the specific facts described?
A: Yes. The Comptroller notes the opinion is based on the facts presented, and if there are additional or different facts, the opinion may change.

Citations and references

Statutes:

• Tex. Tax Code § 151.317(a) (exempts natural gas and electricity from tax unless used for a commercial use)
• Tex. Tax Code § 151.317(c)(2)(A)(i) (manufacturing electricity is a noncommercial use of natural gas)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9605L1411A08

Original ruling text

May 15, 1996

Dear***:

Thank you for your letter of May 6, 1996. You asked if your purchase of
natural gas to generate electricity in Pennsylvania qualifies for exemption
from Texas tax.

Facts: Your company is a Pennsylvania-based public utility, generating and
selling electricity within the borders of its home state of Pennsylvania. It
is contemplated that you will be buying and taking title to natural gas
within Texas and shipping it, via interstate pipeline carrier, to
Pennsylvania where it will be consumed in one of its generating facilities
in the manufacture of electricity.

Response: Section 151.317(a) of the Texas Tax Code exempts natural gas and
electricity from tax unless the gas or electricity is used for a commercial
use. Manufacturing electricity is a noncommercial use of natural gas. See
subsection (c)(2)(A)(i) of 151.317. Therefore, you may issue an exemption
certificate to your supplier in lieu of paying tax on the natural gas you
take title to in Texas.

This opinion is based on the facts presented. If there are any additional
or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line
is 512/475-0037. You also may write to Sales Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division

NOTE: Previous Accession Number 9605613L