Texas Utility Tax: Electricity, Natural Gas, And Exemptions

Quick Facts

How Texas Taxes Electricity

Texas treats the furnishing of electricity as a sale of tangible personal property, and Comptroller Rule 3.295 presumes it taxable. The state rate is 6.25%, and local jurisdictions add up to 2% more, for a combined cap of 8.25%. Sales tax is imposed on the end-use customer. The REP, utility, or cooperative that bills the customer collects it, states it separately on the bill as Texas state and local sales tax, and remits it to the Comptroller.

The customer's use decides whether the tax applies. Tax Code §151.317 exempts electricity sold for residential use, so a household pays no state sales tax and no county or transit tax on its electric bill. The same section exempts a list of business uses, the largest being electricity that directly powers manufacturing equipment and electricity for lighting, cooling, and heating in the manufacturing area during production. A commercial customer outside that list pays the full rate: 6.25% plus the city, county, transit, and special district rates in force where the meter sits.

Deregulation changed who sends the bill and left the tax rules alone. In choice areas the REP bills for the energy it sells and for the TDU's delivery charges, and the Comptroller's guidance for retail sellers of electricity says sales tax applies to both when the use is taxable. A municipally owned utility or cooperative that bills its own customers follows the same rules.

How Texas Taxes Natural Gas

Natural gas follows the same statute and the same rule as electricity. Tax Code §151.317 and Rule 3.295 cover "gas and electricity" together, so residential use is exempt from state tax, business use is taxable at the state and local rates, and the manufacturing and agricultural exemptions apply on the same terms, including the predominant use test for a single meter.

Two gas-specific points differ. First, the seller is a gas distribution utility regulated by the Railroad Commission of Texas. Electric sellers answer to the Public Utility Commission of Texas (PUC). Second, the seller-side tax is different: gas utilities pay a gas utility tax of one-half of 1% of gross income to the Railroad Commission under Utilities Code chapter 122, and a pipeline safety fee surcharge under Utilities Code §121.211 may appear on the bill. Rule 3.295(j) says no sales tax is due on that pipeline safety surcharge. The miscellaneous gross receipts tax reaches gas utilities as well as electric sellers, because Tax Code §182.021 defines a utility company to include a person who owns or operates gas works for local sale and distribution inside an incorporated city.

What Gets Taxed On The Bill

The Comptroller's publication for retail sellers of electricity sorts the common line items on a Texas electric bill. Charges for the electricity itself and for transmission and distribution service are part of the taxable sales price, and so are competition transition charges and municipal franchise fees billed to the customer. Rule 3.303 confirms the general principle: transportation and delivery charges are taxable even when stated separately from the price of the item. System benefit fund fees, nuclear decommissioning fees, and transition charges are not subject to sales tax, provided the seller gives the customer a separate listing of them, either monthly or in a yearly statement.

The reimbursement rows deserve attention. When a seller passes its miscellaneous gross receipts tax or PUC assessment through to the customer, the Comptroller requires the line to be labeled a "reimbursement." The word "tax" may not appear on it, because the tax is imposed on the seller. The reimbursement may only be billed to customers for whom the seller owes the tax, at the exact rate the seller pays, and the amount collected counts as additional gross receipts subject to the same tax. For sales tax, the reimbursement becomes part of the price of the electricity, so a taxable customer pays sales tax on it too.

Customer Classes And Use

Residential. Rule 3.295 defines residential use as use in a building, or the part of a building, occupied as a residence. That covers an owner-occupied home, apartment complex, condominium, campground, recreational vehicle park, nursing home, or retirement home; a tenant under a lease with an initial term of more than 29 consecutive days; and the common areas of those properties, such as a pool, security gate, or parking lot lighting. It excludes hospitals, rehabilitation centers, prisons, jails, and other health care or detention facilities. A single-family residential customer does not need to give the utility an exemption certificate. A multifamily property may need one so the utility can separate residential from taxable use, and a property may issue a blanket certificate for vacant units that will be occupied as residences.

Commercial. Any use that is neither residential nor on the exempt-use list is taxable at the full state and local rate. Rule 3.295(k) adds a trap for landlords: a lessor of nonresidential property that buys electricity or gas directly is the consumer of it and cannot claim an exemption based on a tenant's exempt status or the tenant's use. The utility may not sell to the lessor tax-free as a sale for resale.

Manufacturing and processing. Electricity or gas that directly powers equipment exempt under Tax Code §151.318, or that lights, cools, and heats the manufacturing area during actual production, is exempt. Energy used in support areas is not: storage, engineering, office, accounting, research and development, break rooms, restrooms, and any area open to the public for selling the product. Because one meter usually serves both, the predominant use test decides the whole meter.

Agriculture and timber. Use in agriculture, including dairy and poultry operations and irrigation pumping, and use in timber operations are exempt. Since January 1, 2012 the customer must give the utility an exemption certificate carrying a Texas Agriculture and Timber Registration Number issued by the Comptroller, along with its expiration date.

Government and exempt organizations. The state, its political subdivisions, public schools, and the federal government are exempt from sales tax under Tax Code §151.309, and a purchase order or voucher is enough proof, and no certificate is required. Nonprofit organizations exempt under §151.310 follow the Comptroller's exempt organization rules.

Resale. An electric utility's direct or indirect use, consumption, or loss of electricity purchased for resale, including line losses, is exempt.

Exemptions And Documentation

Texas exemptions for gas and electricity are all-or-nothing at the meter. Tax Code §151.317(e) says energy used under a single meter for both exempt and taxable purposes during a monthly billing period is totally exempt or totally taxable based on the predominant use. Rule 3.295(g) sets out how to prove it:

• A utility study must list every use of the utility, exempt and taxable, with times of use, energy consumed, the taxability of each use, and the resulting exempt percentage.
• The study must cover 12 consecutive months of use. A business open less than 12 months may use a projected-use study and must be able to back it with actual use after 12 months if the Comptroller asks.
• Equipment ratings, duty factors, and the electrical or gas computations must be certified by a registered engineer or a person with an engineering degree from an accredited engineering college. The owner must certify that every energy-using item is listed and the hours of use are correct. Both certifications appear on the face of the study.
• The study must be complete and on file at the customer's location when the exemption certificate reaches the utility. Without it, the claim is presumed invalid.
• A customer that changes providers without changing its use does not need a new study. It does need to file a new certificate with the new provider before the exemption applies.

The certificate itself must state the specific reason for the exemption. For predominant use, the rule supplies the wording: "A valid and complete study has been performed which shows that (insert the actual exempt percentage) of the natural gas or electricity is for processing tangible personal property for sale in the regular course of business." The Comptroller's general exemption certificate is Form 01-339. Agriculture and timber claims use Forms 01-924 and 01-925.

Liability sits with the customer. Rule 3.295(g)(5) says neither the Comptroller's review of a study nor the utility's acceptance of a certificate confirms the study is accurate, and if the study proves incomplete or wrong, tax, penalty, and interest are assessed against the person claiming the exemption. Rule 3.295(h)(3) gives the seller its protection: a fully completed certificate bearing an engineer's original seal, or attached to a signed statement from the owner and an engineer, requires no further inquiry before the utility honors it. The exemption lasts only as long as the predominant use stays exempt, and the customer must notify the utility in writing when it changes.

Overpayments can be recovered two ways: the customer asks the utility to refund tax paid in error, or the customer claims a refund from the Comptroller under Rule 3.325, which requires an Assignment of Right to Refund (Form 00-985) from the seller. A retrospective study supporting a refund must account for equipment, activity, and square-footage changes during and after the refund period, and the Comptroller will not accept a study for a closed account.

Manufacturers evaluating their own bills can start with the CereTax manufacturing page and the exemption certificate management guide. This page is written for the companies that bill them.

Local Taxes And Sourcing

Local sales tax in Texas comes from cities, counties, transit authorities, and special purpose districts, each under its own chapter of the Tax Code, and each applies to business use of electricity and gas at the meter location. The Comptroller's guidance is explicit: local taxes are due based on where the customer receives the service, and the location of the meter where the energy is delivered determines which jurisdictions apply. A customer's billing address is irrelevant, and a customer with 40 sites has 40 answers.

Residential use is the exception with a history. Tax Code §151.317(b) exempts gas and electricity from municipal sales tax, and Tax Code §321.105 carves out the cities that imposed a sales tax before October 1, 1979 and either kept the tax on residential use by ordinance before May 1, 1979 or have since reimposed it by a majority vote of the governing body. The Comptroller's list of cities imposing local tax on residential use ran to more than 780 cities on September 8, 2026, including Houston, Dallas, Austin, and Fort Worth. San Antonio and El Paso did not appear on it. Since January 1, 2010 two kinds of special purpose district inside those cities can also tax residential use: fire control, prevention, and emergency medical services districts and crime control and prevention districts. The Comptroller listed 26 such districts on the same date. Counties, transit authorities, and other special districts cannot tax residential use at all.

A city's change takes time to reach the bill. Under Tax Code §321.102, a local tax adoption or repeal takes effect on the first day of the first calendar quarter after a full calendar quarter has passed since the Comptroller received notice. The Comptroller publishes the imposing cities and the eligible-but-not-imposing cities, and a residential customer's local tax status can change on a quarter boundary without any change to the customer.

The miscellaneous gross receipts tax has its own geography. It applies only to sales made to customers inside incorporated cities with a population above 1,000 by the most recent federal census, and the rate depends on that population: 0.581% for cities of more than 1,000 and fewer than 2,500 people, 1.07% for 2,500 up to 10,000, and 1.997% for 10,000 or more. The tax is reported quarterly, due January 31, April 30, July 31, and October 31. Sales to public school districts and electricity generated by an advanced clean energy project are excluded, and electric cooperatives are exempt unless they enter the competitive market.

Worked Billing Example

Illustration; assumptions stated. The structure follows the Comptroller's own example in publication 96-1309. The local rates are assumptions and belong to no named city.

Assumptions: a customer in a city of more than 10,000 people; a 1% city sales tax and a 1% transit authority tax at the meter; the city taxes residential use of electricity; the REP passes through both seller-side charges as reimbursements.

Three things the example shows. The transition charge stays out of every tax base because it is separately listed. The reimbursements are calculated on the taxable energy and delivery charges and then join the sales tax base, so the commercial customer pays sales tax on the reimbursements. And the manufacturing exemption removes the sales tax without touching the reimbursements, because the gross receipts tax and the assessment are the seller's liabilities on its own receipts.

Common Mistakes

• Taxing residential customers in the wrong city. More than 780 cities tax residential use and hundreds do not. Applying one rule statewide overcharges or undercharges every residential meter in the other group.
• Sourcing to the billing address. Local tax follows the meter. A customer headquartered in one city with meters in a dozen others owes a dozen different local rates.
• Applying a customer-level exemption to a meter that fails predominant use. The study is per meter. A manufacturer's office building, warehouse, or showroom meter is taxable even when the plant meter is exempt.
• Exempting delivery. TDU transmission and distribution charges are part of the taxable sales price, whether or not they are separately stated.
• Taxing the separately listed fees. System benefit fund fees, nuclear decommissioning fees, and transition charges are not taxable when the seller gives the customer a separate listing. Skipping the listing makes them taxable.
• Calling the reimbursement a tax. The gross receipts tax and the PUC assessment are imposed on the seller. Billing them as a "tax," billing them to customers for whom the seller owes nothing, or billing above the actual rate creates a refund liability.
• Leaving the reimbursements out of the sales tax base. Once passed through, they are part of the sales price.
• Honoring a certificate that does not state the reason and the exempt percentage. A generic certificate does not meet Rule 3.295(h)(2), and the seller loses the protection of a properly completed one.
• Missing the new certificate on a provider switch. The study carries over. The certificate does not.

How CereTax Handles Texas

Texas puts the answer at the meter. Whether a charge is taxable depends on the customer class of that meter, which city and districts it sits in, whether that city taxes residential use this quarter, and which line items on the bill belong in the base. CereTax applies customer-class and exemption logic per service location, sources every local rate to the meter location, and taxes energy, delivery, riders, and pass-through reimbursements line item by line item under transparent rules. No black boxes. The Texas rates and the residential-use city list are maintained from the Comptroller's own publications with effective dates tracked, so a city that reimposes the tax next quarter shows up in the calculation next quarter.

When something on a Texas invoice looks wrong, you reach a tax person who knows the state, not a ticket queue. If you bill electricity or gas in Texas, book a demo and bring a real invoice.

For the product side of this problem, see CereTax for deregulated energy providers and billing platforms.

Sources

• Texas Tax Code §151.317, Gas and Electricity. Accessed September 8, 2026.
• Texas Tax Code §151.1551, Registration Number Required for Timber and Certain Agricultural Items. Accessed September 8, 2026.
• Texas Tax Code §321.105, Residential Use of Gas and Electricity. Accessed September 8, 2026.
• Texas Tax Code §321.102, Effective Dates: New Tax, Tax Repeal, Boundary Change. Accessed September 8, 2026.
• Texas Tax Code §§182.021 and 182.022, Miscellaneous Gross Receipts Tax, definitions and rate. Accessed September 8, 2026.
• 34 Texas Administrative Code §3.295, Natural Gas and Electricity (Comptroller Rule 3.295, amended effective March 7, 2017). Accessed September 8, 2026.
• 34 Texas Administrative Code §3.303, Transportation and Delivery Charges. Accessed September 8, 2026.
• Texas Comptroller of Public Accounts, publication 96-1309, Texas Tax Information for Retail Sellers of Electricity (revised January 2012). Accessed September 8, 2026.
• Texas Comptroller of Public Accounts, Sales and Use Tax. Accessed September 8, 2026.
• Texas Comptroller of Public Accounts, Local Sales Tax on Residential Use of Gas and Electricity, with the lists of cities and special purpose districts imposing the tax (cities list, districts list). Accessed September 8, 2026.
• Texas Comptroller of Public Accounts, Miscellaneous Gross Receipts Tax, overview and frequently asked questions (FAQ). Accessed September 8, 2026.
• Texas Comptroller of Public Accounts, publication 94-124, Manufacturing Exemptions. Accessed September 8, 2026.
• Texas Comptroller of Public Accounts, Form 01-339, Texas Sales and Use Tax Resale Certificate and Exemption Certification. Accessed September 8, 2026.
• Texas Utilities Code §16.001, Assessment on Public Utilities. Accessed September 8, 2026.
• Texas Utilities Code §39.102, Customer Choice. Accessed September 8, 2026.
• Texas Utilities Code §§122.051 and 122.101, Gas Utility Pipeline Tax. Accessed September 8, 2026.
• Public Utility Commission of Texas, Municipally-Owned Electric Utilities and Electric Cooperatives FAQs. Accessed September 8, 2026.
• Public Utility Commission of Texas, 2021 Biennial Agency Report (customer choice within ERCOT; vertically integrated utilities outside ERCOT). Accessed September 8, 2026.
• Railroad Commission of Texas, Gas Services (rate jurisdiction inside and outside city limits). Accessed September 8, 2026.

Note: Always confirm current rates and filing obligations directly with the state's comptroller, public utility commission, or other taxing authority before applying charges or remitting payments.

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