The Texas Comptroller ruled that the purchase of a battery system did not qualify for the manufacturing exemption from Texas sales and use taxes because it was used to store electricity, not manufacture it. The taxpayer operated a wind farm and began a project to participate in the Electric Reliability Council of Texas’ Fast-Responding Regulation Service (FRRS). Each participant in the FRRS was required to make energy available on demand. To do this, the taxpayer needed a battery system, which could store and maintain the electricity so it would be available and ready for distribution.

The taxpayer argued that its purchase of the battery system qualified for the manufacturing exemption – which is available for items directly used or consumed during manufacturing of tangible personal property (such as electricity) if the use or consumption is necessary for the manufacturing operation and makes or causes a chemical or physical change to the property being manufactured. The taxpayer argued that the exemption applied because the energy underwent a chemical change when the battery converted the direct current energy from the wind farm from electrical energy to chemical energy and, upon discharge, converted the chemical energy to direct current electrical energy. However, the Comptroller disagreed and ruled that the chemical change was done for storing manufactured electricity, not to manufacture electricity, and the manufacturing exemption specifically excludes property used to maintain or store tangible personal property.


Texas Private Letter Ruling No. 20180110142309 (Aug. 14, 2018).

The Texas Comptroller of Public Accounts recently ruled that the physical presence nexus standard continues to apply for the Texas Franchise Tax, even after South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). As a result, a California company whose only contacts with Texas were sales of digital products, software and e-commerce transaction processing and subscription management services to third parties did not have franchise tax nexus with the state. In the Comptroller’s view, retaining ongoing rights in software used in Texas, by itself, is not sufficient to create physical presence in the state. The Comptroller observed that although Texas has not yet moved away from the physical presence requirement, the agency will give “ample notice through various means” of any change to the current requirement.


Texas Private Letter Ruling No. No. 201809005L (09/07/2018).

The Texas State Office of Administrative Hearings (“SOAH”) found that the receipts of a non-nexus member of a combined group (Company A) “should be deleted” from the computation of the group’s gross receipts for purposes of apportioning revenue to the state.  The group was in the business of franchising fast food restaurants.  On audit, the Texas Comptroller of Public Accounts determined that Company A had nexus with Texas because the group’s Texas franchisees were required to purchase their food products and supplies from an unrelated distributor that purchased the same items from Company A.  The Comptroller contended the distributor was acting as an agent for Company A in Texas and imputed the distributor’s nexus in Texas to Company A.  SOAH disagreed with the auditor’s determination and concluded that an agency relationship did not exist between the distributor and Company A.  An agency relationship only exists if: (1) one person acts for another, (2) both consent to the arrangement, and (3) the agent is under the principal’s control.  SOAH determined that there was insufficient evidence that Company A controlled the distributor.  In addition, Company A did not have nexus with Texas based on its own activities with Texas because it did not have physical assets or employees working in Texas.

The Texas Comptroller ruled that, for Texas apportionment purposes, the sale for resale of mobile voice and data services, purchased from third-party mobile telecommunications carriers and sold to an out-of-state third-party retailer using the carrier’s network infrastructure, is characterized as the sale of telecommunications services and internet access services, respectively, not the sale of an intangible right to access a service. Accordingly, unlike receipts from the sale of an intangible asset which are sourced to the purchaser’s location, the taxpayer’s service receipts were sourced to the state to the extent that the Internet was accessed in Texas or the mobile voice services were provided in Texas. Private Letter Ruling No. 201711016L (Nov. 27, 2017).

By Jessie Eisenmenger and Jonathan Feldman

The Texas Supreme Court held that a non-discriminatory tax on stored gas held for future resale does not violate the Commerce Clause of the US Constitution. Harris County imposed an ad valorem tax on natural gas stored in the county on January 1 of the tax year. Applying the four-prong Complete Auto test after first finding that the gas was in interstate commerce, the court reasoned that: (1) the gas had substantial nexus with the county because it was not merely in transit through the county; (2) the tax was fairly apportioned because it was limited only to the amount of gas in the county on a certain day and therefore was internally consistent; (3) the tax did not discriminate against interstate commerce because it applied equally to gas that will be sold in the state and gas that will be sold outside the state; and (4) the tax was fairly related to services provided by the state because the stored gas benefited from services (specifically, fire department services). The ruling is consistent with similar cases in Oklahoma and Kansas. ETC Marketing Ltd. v. Harris County Appraisal District, No. 15-0687 (Tex. Dec. 6, 2016).

By Nick Kump and Todd Lard

The Texas Comptroller of Public Accounts has issued a private letter ruling finding that a Texas company’s revenue from sales of real-time payment risk and fraud prevention services should be sourced to the location of Taxpayer’s customers. In Texas, receipts from a service are sourced to the location where the service is performed, and in determining where a service is performed, the Ruling notes, “the focus is on the specific, end-product act for which the customer contracts and pays to receive, not on non-receipt producing, albeit essential, support activities” (citing previous Comptroller Decisions). Taxpayer’s customers access Taxpayer’s services by submitting certain information on Taxpayer’s website and then receiving a response within seconds of the submission after Taxpayer’s servers access the databases of third-party vendors. The Comptroller explained that “while the processing of information is essential to the performance of Taxpayer’s service, it is nonetheless a support activity and not the service for which the customers contract.” Instead, Taxpayer’s customers pay to receive Taxpayer’s response at the customers’ location. Therefore, for purposes of the Texas franchise tax, gross receipts from providing that response should be sourced based on the customers’ location. (Tex. Private Letter Ruling No. 201703005L (Mar. 15, 2017) (released May 2017).)

A recent US Supreme Court decision on surcharges strengthened taxpayers’ First Amendment rights when deciding how they present pass-through fees and taxes to their customers.

  • The Supreme Court held that a New York statute prohibiting a seller from imposing a credit surcharge was a speech regulation, subject to heightened scrutiny, because it regulates how retailers communicate their prices.
  • The decision’s reasoning regarding the communication of prices as speech clarifies that the heightened scrutiny standard also applies to state and local tax statutes regulating a taxpayer’s ability to separately identify taxes and fees on customer invoices.

Prior to this decision, courts and states have taken differing positions on whether a seller may be prohibited from separately identifying tax on a customer invoice when the seller is not required to pass through the tax.

View the full Legal Alert.

By Chelsea Marmor and Tim Gustafson

The Texas Comptroller of Public Accounts issued a franchise tax letter clarifying that “total mileage” for purposes of computing the Texas special apportionment formula for transportation receipts may either include or exclude “empty miles” provided symmetry is maintained between a taxpayer’s numerator and denominator. “Empty miles,” or deadhead miles, are miles traveled without goods or passengers. The policy allows taxable entities to either include empty miles in both the numerator and denominator of the apportionment formula, or exclude empty miles from both. The Comptroller indicated the governing rule will be amended to clarify the treatment of empty miles.  Letter No. 201609008L, Texas Comptroller of Public Accounts, September 8, 2016.

By Charles Capouet and Todd Lard

The Supreme Court of Texas held that an oil and gas exploration and production company’s purchases of casing, tubing, other well equipment, and associated services were not exempt from sales tax under various processing exemptions. Texas provides multiple exemptions from sales tax for certain tangible personal property related to the “actual manufacturing, processing, or fabrication of tangible personal property.” The court held that “processing” meant “the application of materials and labor necessary to modify or change characteristics of tangible personal property.” The taxpayer’s equipment was used in the process of extracting hydrocarbons from underground mineral reservoirs, separating the hydrocarbons into their component substances, and bringing them to the surface. However, there was “no evidence that the equipment acted upon the hydrocarbons to modify or change their characteristics.” Because the changes in the hydrocarbons were instead caused by the natural pressure and temperature changes occurring as the hydrocarbons traveled from the reservoir to the surface, the court held that the taxpayer was not entitled to the processing exemptions from sales tax on its purchases of the equipment. Southwest Royalties, Inc. v. Hegar, No. 14-0743 (Tex. June 17, 2016).

By Mike Kerman and Amy Nogid

The Texas Comptroller of Public Accounts concluded that a Texas-based national radio network must apportion its advertising receipts based on the ratio of radio stations that license and broadcast its programming from Texas compared to the total number of radio stations that license and broadcast such programming. The taxpayer develops, produces and syndicates radio programming, and generates receipts by incorporating customers’ advertisements into the programming. The taxpayer licenses the programming to radio stations across the country, and uploads the programming to satellites for the radio station licensees to download and broadcast to their respective audiences. The Comptroller found that the taxpayer’s receipts are from the performance of a service and must be sourced to where the service is performed. The Comptroller stated that it is “well-established” that where services are performed depends on the “specific, end-product acts for which the customer contracts,” and not on support activities. Here, the Comptroller determined the end-product act for which the customers contract is the radio stations’ broadcasts of the customers’ advertisements. Thus, the Comptroller concluded that the taxpayer must source its advertising receipts based on where radio stations broadcast the advertisements to their audiences, using the percentage of Texas radio stations that license programming compared to the total number of radio stations that license programming. Tex. Private Letter Ruling No. 143010942 (Apr. 21, 2016).