I'm a cotton ginner and I use gas and electricity to keep my warehouse or storage area cool and dry so cotton seed doesn't sprout, including during the off-season -- is that electricity exempt from Texas sales/use tax?

Subject

Cotton Ginners — Gas And Electricity Used To Keep Warehouse Or Storage Areas Cool And Dry To Prevent Cotton Seeds From Sprouting Or During Non — Processing Time Periods

Plain-English summary

A cotton gin asked the Comptroller how electricity used in its warehouse or storage area is taxed. The area has to be kept cool, and a dehumidifier has to run, or the stored cotton seed will sprout if it gets too warm or too moist.

The answer splits the electricity use into two categories. Electricity used to lower the temperature and humidity down to the target levels is treated as processing, and that portion is exempt. Electricity used just to hold the temperature and humidity at that already-reached level is treated as maintenance, and that portion is taxable.

If the warehouse has its own meter, predominant use decides the whole bill. When the storage area is separately metered, the Comptroller doesn't try to split the single bill -- instead, the entire bill is either fully exempt or fully taxable, based on whichever use (lowering vs. maintaining temperature/humidity) predominates.

Season matters too, on top of the temperature/humidity issue. Cotton gins already qualify for an electricity exemption during the ginning (processing) season, based on an industry-wide usage study. But electricity used during the nonprocessing season is taxable commercial use. And if cotton seed is simply being stored during the nonprocessing season (as opposed to being actively ginned), the letter says that electricity use is "clearly" taxable commercial use.

What this means for you

Cotton gin operators with a separately metered warehouse or storage building

Track whether the electricity in that building is mostly being used to actively cool/dehumidify seed down to target levels (exempt processing) or mostly to hold an already-reached temperature and humidity (taxable maintenance). Because the meter covers the whole building, the predominant use determines whether the entire bill is exempt or taxable -- there's no partial split on a single meter.

Cotton gins storing seed in the off-season

Electricity used to store cotton seed during the nonprocessing season is taxable commercial use, regardless of the temperature/humidity question. The processing-season exemption (based on the industry-wide study) doesn't carry over to the off-season.

Anyone trying to apply this to facts that differ even slightly

The Comptroller notes this opinion is based on the specific facts presented, and the outcome may change if the facts are different.

Common questions

Q: Is electricity used to cool and dehumidify a cotton gin's warehouse exempt or taxable?
A: It depends on what the electricity is doing. Lowering the temperature or humidity to a target level is exempt processing. Maintaining that target level once reached is taxable maintenance.

Q: What if the warehouse has its own separate electric meter?
A: Then the whole bill on that meter is either fully exempt or fully taxable, based on whichever use -- lowering vs. maintaining temperature/humidity -- predominates.

Q: Is electricity used by a cotton gin exempt year-round?
A: No. Cotton gins qualify for the electricity exemption during the ginning (processing) season, based on an industry-wide study. Electricity used during the nonprocessing season is taxable commercial use.

Q: What about electricity used just to store cotton seed in the off-season?
A: The letter says that use is clearly taxable commercial use.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611832L

Original ruling text

November 15, 1996

Dear ***:

Thank you for your letter of November 1, 1996, asking about the taxation
of electricity used by a cotton gin in a warehouse or storage area.

The warehouse or storage area must be kept cool and a dehumidifier must
be used to prevent cotton seed from sprouting. Seeds apparently sprout
if they become too warm or too moist.

The electricity used to lower the temperature of the
cotton seed to a target temperature and to lower the humidity to a specified
level is considered processing and is exempt. The electricity used to maintain
the target temperature and specific humidity level is considered maintenance
and is taxable. If the warehouse or storage area is separately metered, the
total utility bill will be either totally exempt or taxable based on
predominant use (lowering the temperature and humidity versus maintaining the
lower temperature and humidity).

Cotton gins qualify for exemption for electricity based
on an industry-wide study for electricity used during the ginning (processing)
season. The electricity used by gins during the nonprocessing seasons is
taxable commercial use. If the cotton seed is stored during the nonprocessing
seasons, the electricity use is clearly taxable commercial use.

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