Understanding the Sales Tax Exemption in Texas for Cutting Energy Costs

You’ve heard about how Texas supports business growth. Among the many measures in place, certain businesses (as well as select residential communities) don’t have to pay the sales tax on their electricity bill. And any business that uses electricity in its production activities could qualify.

In this article, we’ll help you understand how to qualify for Texas’s sales tax exemption for commercial electricity.

Sales Tax in Texas and Commercial Electricity

Sales tax is a reality nearly everywhere in the U.S. But sales tax percentages vary. In Texas, the sale, lease or rental of many products and services comes with a 6.25-8.25% charge. Both businesses and consumers pay this amount.

On the other hand, Texas has implemented a sales tax exemption for energy usage that applies to certain types of manufacturing businesses and residential communities:

• Should your business qualify, you’ll be exempt from paying state and local taxes on any electricity and natural gas used to manufacture, process or fabricate a physical product.
• At least 50% of the gas or electricity you use must go toward manufacturing your product; any light, AC and heat used in the manufacturing process counts toward this figure.
• “Manufacturing” in Texas is a broad category that also includes agriculture.
• In all cases, you’ll need to undergo an assessment first, called a Predominant Use Study, for the state to determine if you qualify for this exemption.

To get this process started, the Predominant Use Study proves what percent of your electricity usage goes into production. If 50% or more of your power is for production, you can file a Form 01-339 Exemption Certificate with the state in order to get the Utility Sales Tax Exemption.

But it’s worth it to save anywhere from 6-8% or more on your business electricity bill. Here’s what you need to know about the Texas Sales Tax Exemption and how your business can qualify.

Is There Sales Tax on Electricity in Texas?

Yes, there is sales tax on electricity in Texas.

Residential customers are exempt from paying sales tax on electricity. Commercial customers in Texas pay sales tax of 6.25 to 8.25% on their electricity bill. Your business may also pay a city tax depending on where you live.

Plus there may be taxes for the Metropolitan Transit Authority (MTA), City Transit Departments (CTD), Special Purpose Districts (SPD) and county sales taxes.

However, depending on the type of business you operate, you may be exempt from paying sales taxes on your commercial electricity.

Sales Tax Exemptions for Texas Electricity

Electricity is exempt from sales and use taxes when the electricity is used for specific manufacturing or production purposes. You may be eligible for a sales tax exemption if you are in these businesses: 

• Oil and Gas
• Mining
• Golf Courses
• Steel Mills
• Agriculture
• Food Processors
• Print Shops
• Horticulture
• Clay Shops
• Electronics
• Chemical Plants
• Refineries
• Beverage Processors
• Audio Recording Production
• Video Recording Production
• Pharmaceuticals
• Textile Operations
• Medical Devices
• Wood Shops
• Bakeries

Companies that operate large residential facilities may also qualify for an exemption. These include nursing homes, assisted living facilities, mobile home parks, and apartment/condominiums with a master meter.

Understand that your facility needs to manufacture or process a product in some form. Texas’s tax exemption doesn’t apply to businesses that collect, sort, organize or store raw materials, nor does it consider remodeling, packing or restoration related to the manufacturing and production process.

>>Find out more about electricity for manufacturing and electricity for oilfield services in our guides for those industries.

How Can My Texas Company Become Sales Tax Exempt?

In order to qualify for a tax exemption, your company must undergo a Predominant Use Study.

To qualify, the Predominant Use study must show that 50% or more of the power purchased is for your business is used in processing, manufacturing, fabricating, or another nontaxable use.

You can review this regulation in the Texas Comptroller’s Office tax codes (TAC Title 34, Part 1, Chapter 3, Subchapter O, Rule 3.295).

What’s Involved in a Texas Predominant Use Study?

To obtain a Predominant Use Study, you will need to contract with an accredited engineering firm that can document your processes.

The engineering firm will evaluate what percentage of your electricity usage is for manufacturing and fabricating, and what percentage is for other uses, such as lighting, or heating and cooling.

If you have multiple meters at your business, they’ll evaluate each meter individually.

To prepare for a predominant use study, your engineering firm will ask for a number of items. Some of these may include:

• A list of all appliances and machinery separated into non-processing items vs. processing items.
• Description of how that appliance is used
• The KW rating for each piece of equipment
• Number of hours each piece of equipment runs daily.
• Copies of electricity bills.

And, if the study shows that more than 50% of the electricity passing through that meter is used for tax exempt purposes, 100% of the electricity passing through that meter is tax exempt.

Once the study is complete, the engineer will create an official Texas Sales and Use Tax Exemption Certification form.  

Then, simply provide a copy to your electricity provider to have your tax waiver applied.

You may also be able to receive a refund of up to 4 years worth of tax payments based on the results of the study. Your engineering firm will advise you on this process.

Saving on Your Business Electricity Costs

Once you have completed your predominant use study, it’s a good time to take a close look at your electricity bill.

First, make sure your contract hasn’t expired. If you are out of contract with your electricity supplier, you are paying a variable or market index rate. That gives you no protection against market volatility.

Second, make sure you are paying a competitive electricty rate. Larger commercial electricity customers with medium or high demand should call us at 844-814-5559 to get a custom quote. Low demand customers using less than 20,000 kWh monthly can shop online to find current business rates.

Third, take a look at your demand charges and the impact they have on your bill. You can lower your overall bill substantially by controlling your usage on “4CP” days. These are the 4 days in June, July, August And September, when the ERCOT electricity grid has it’s highest usage. You can find out more about load factor and controlling your commercial demand charges in our blog.

Here are the latest business electricity rates in Texas. These rates are for the Oncor delivery market (Dallas/Fort Worth). To see rates in your area, click details for any plan, or enter your zip code below.