Texas Utility Exemption Tax Law Facts

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In 1961 the state legislators enacted a state sales tax law that placed taxation on the purchase of tangible personal property. It was the intent of the law that the final consumer shall be the one to pay this tax on the finished product. Therefore, materials or tangible property purchased for the manufacturing, processing or fabrication of a new or remanufactured product may be purchased "wholesale" or without taxation. Natural gas and electricity for this purpose, in the state of Texas, is considered by the State Comptroller to be the purchase of tangible personal property.

Utility companies are required to charge state, city and MTA sales tax on all natural gas and electricity usage when used for commercial purposes. However, certain activities are allowed exemptions from this taxation. Taxation on the purchase of natural gas or electricity used in manufacturing, processing or fabricating tangible personal property can be exempted, provided proof is established that more than 50% of each natural gas or electric meter's consumption is directly used in causing a chemical or physical change to the product that will ultimately be sold. This process of establishing proof is referred to as a predominate use study.

To do a predominate use study, a technician will collect data from every item that consumes gas or electricity in both the office area and the production facility, and verify the gas and/or electric meter(s). No interruption of service will transpire in this process. The technician then gives the data to an energy consultant who will use a specialized computer program to determine if the business qualifies as exempt. The final step of the process is a professional engineer will certify the study. The whole process takes approximately 3 days from the time the technician collects his data till the engineer certifies the exemption status.

Next stage of the process, we will request the utility provider to code your company as tax exempt. Depending on the specific utility provider, and how many different providers you use, this generally takes about a week. Once the utility provider codes your company as tax exempt, it generally takes 1 to 2 billing cycles to see the changes on your utility bill where you will have no tax charges.

The final stage of the process is submitting the data to the State Comptroller for a refund of the previous 48 months of taxes that you paid. The auditor will review the data, validate the data from the utility providers, our data on the exemption qualifications, and associated data in support of the exemption. The process for this can be anywhere from a couple of weeks to as much as 90 days, depending on how extensive the data for your company is. Once approved by the auditor, a warrant (check) is issued for the amount of taxes withheld during the preceding 48 months you were charged.

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