In about 30 states across the U.S., including Texas, certain types of businesses can qualify for sales tax exemptions on natural gas and electricity. Your company could qualify for an exemption and refund of sales taxes paid in the past—up to 48 months in Texas. An non-exhaustive list of businesses that may qualify are companies engaged in manufacturing, oil and gas, mining, printing, textiles, radio and television production, and off-wing overhaul of aviation engines and components. The specific rules vary from state-to-state but, in general, obtaining an exemption requires a Predominant Use Study (in Texas, see the Texas Administrative Code, Title 34, Rule §3.295). A Predominant Use Study is a special kind of engineering study used to establish whether the predominant (over 50%) consumption of natural gas or electricity is for sales tax-exempt purposes. Basically, if the predominant use of natural gas or electricity consumed through a particular meter is used for sales-tax-exempt purposes, then all consumption through that meter is sales-tax exempt. The applicable sales-tax rate varies depending on where your company is located but, the savings and refund can be significant and amount to several percent of your natural gas or electric utility bills.
Some states give you the option of performing your own Predominant Use Study. In Texas, Rule §3.295 allows allows “a registered engineer or a person with an engineering degree from an accredited engineering college” to perform the study. However, most companies opt to have these studies performed by an outside firm since staff engineers are often not skilled in this area and more appropriately and efficiently engaged supporting their core business. Also, state comptrollers perform audits from time-to-time, so it is important for Predominant Use Studies to be thorough and accurate. Completing a thorough and accurate study is a detailed and painstaking process.
Some firms base their fees for performing Predominant Use Studies on a percentage of the potential sales-tax refund for which their clients may be eligible. While this generally reduces or eliminates up-front fees, companies normally pay a lot more for a study under this type of agreement. As always, beware of anyone who promises to do something for “free.” A more transparent approach is a fixed-price fee based on the cost estimate for completing the study. This type of agreement maximizes your refund and minimizes your costs.
The bottom line is, if your company qualifies for a sales-tax exemption on natural gas and electricity and you are not taking advantage of the savings, you are leaving money on the table.