Can a utility company rely on an exemption certificate from an apartment complex owner or property management company to exempt utility service from sales tax, without checking whether the property actually qualifies?

Subject

Apartment Complex/Multifamily Dwelling Owners/Property Management Companies — Wording Or Language Used In Exemption Certificates Given To Utility Companies To Claim Residential Exemption

Plain-English summary

A utility company asked the Comptroller how much it needs to verify before accepting an exemption certificate from an apartment complex owner or property management company claiming the residential utility exemption. The utility had already been told in an earlier letter (referred to here as "Wade's letter," from Wade Anderson, Director of Tax Policy) that certain sample certificate language was acceptable, but the utility pointed out that in practice it often has no way of knowing whether a given property actually meets the conditions described in that earlier letter.

The Comptroller's answer: a utility company is treated like any other retailer. It may accept and rely on an exemption certificate from an apartment complex owner or property manager as long as the certificate is (1) complete and (2) accepted in good faith. The utility is not expected to demand documentation proving the exemption is valid. The only carve-out is that if the utility actually knows the complex is a short-term rental complex, it should not accept an exemption certificate in lieu of collecting tax from the owner or property manager.

The letter also notes a practical option: if a utility wants extra certainty that its acceptance of certificates qualifies as "good faith," it can require apartment owners or property managers to use specific certificate language that documents that the customer meets all the conditions set out in Wade's letter.

Bottom line: this is a favorable, low-friction result for utilities and for apartment/multifamily owners and their property managers -- a complete, good-faith-accepted certificate is enough to support the residential exemption, with no independent verification required, except where the utility has actual knowledge the property is a short-term rental.

What this means for you

Utility companies

You can accept a complete exemption certificate from an apartment complex owner or property management company and rely on it in good faith, without investigating or requesting proof that the property qualifies for the residential exemption. The only situation where you should not accept the certificate in lieu of tax is when you actually know the complex is a short-term rental complex. If you want added assurance that your acceptance counts as good faith, you can require owners/managers to use certificate language that specifically documents that all of the conditions from Wade's letter are met.

Apartment complex owners and property management companies

Providing a complete exemption certificate to your utility company should be sufficient for the utility to treat the account as exempt -- you generally won't need to supply additional proof. Because your utility may ask you to use specific documenting language (per the option described above), be prepared to use the certificate wording your utility requests if it wants that extra certainty.

Tax professionals and accountants advising either side

This letter confirms that the "good faith acceptance of a complete certificate" standard -- the general rule that applies to retailers accepting resale and exemption certificates -- applies equally to utility companies accepting residential exemption certificates from multifamily property owners/managers. The narrow exception is actual knowledge that the complex is a short-term rental operation, not merely suspicion or a failure to independently confirm eligibility.

Common questions

Q: Does a utility company have to verify that an apartment complex actually qualifies for the residential exemption before accepting an exemption certificate?
A: No. The utility may accept and rely on a complete exemption certificate accepted in good faith, without asking for documentation proving the exemption's validity.

Q: Is there any situation where a utility should refuse to accept the certificate?
A: Yes -- if the utility knows the complex is a short-term rental complex, it should not accept an exemption certificate in lieu of tax from the owner or property manager.

Q: What if a utility wants more certainty that it's acting in good faith?
A: The utility may require apartment complex owners or property management companies to use specific certificate language that documents that the customer meets all the conditions described in Wade's letter.

Q: Who is "Wade" and what did his letter say?
A: Wade Anderson, Director of Tax Policy, had earlier advised the requester that certain sample exemption certificate language was acceptable and could be used under certain conditions; this letter builds on that earlier advice.

Citations and references

No specific Texas statutes or administrative rules are cited in the original ruling text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611L1441E02

Original ruling text

November 27, 1996

Dear **:

Thank you for your recent phone call requesting clarification of the tax
responsibilities of utility companies.

In your letter of October 18, 1996, you asked if utility companies could rely
on exemption certificates completed with sample language included in your
letter. Wade advised you that the sample language was acceptable and could be
used under certain conditions. You followed up with a phone call pointing out
that in many cases a utility company won't know whether properties meet the
conditions listed in Wade's letter.

As with all retailers, a utility company may accept and rely on an exemption
certificate from an owner of an apartment complex or a property management
company provided the certificate is complete and is accepted in good faith. We
don't expect the utility company to ask for documentation to prove the validity
of the claimed exemption. On the other hand, if a utility knows that a complex
is a short-term rental complex, then the utility should not accept an exemption
certificate in lieu of tax from the owner or property manager.

If a utility company wants to be sure that there will be no question as to its
"good-faith" acceptance of certificates, the company may require apartment
complex owners or property management companies to use specific language that
will document that customers meet all conditions set out in Wade's letter.

I hope this satisfactorily answers your question.

Sincerely,

Karey Barton
Manager, Tax Policy

cc: Wade Anderson
Director Tax Policy

NOTE: Previous Accession Number 9611801L