Texas Comptroller Issues Letter To ERCOT Regarding QSE Tangible Personal Property Taxation Issue

November 19, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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The Director of the Tax Policy Division of the Texas Comptroller has issued a letter to ERCOT concerning tangible personal property tax-related issues for Qualified Scheduling Entities (QSEs)

ERCOT had asked the Comptroller if Qualified Scheduling Entities (QSEs) are required to file a resale certificate with the Electric Reliability Council of Texas (ERCOT). If they are so required, ERCOT asked whether the Comptroller could allow the QSEs to 'opt-out' of that requirement

ERCOT on Nov. 14 received a response from the Comptroller

In a communication to TAC members, Chad V. Seely, Vice President, General Counsel & Corporate Secretary for ERCOT, said that, under current law, the Comptroller letter agrees with ERCOT Legal’s analysis that electricity is tangible personal property and QSEs are required to provide resale certificates to ERCOT.

However, ERCOT will work with the Texas Comptroller on a rule amendment in the Tax Administration Code (likely the State and Local Sales and Use Tax Subchapter) that will exempt QSEs from the resale certificate requirement with ERCOT, Seely said

As described in a letter from the Director of the Tax Policy Division of the Texas Comptroller to ERCOT, "ERCOT manages the flow of more than 90 percent of the electricity in Texas. To do that, ERCOT works with several different entities that fulfil necessary functions. QSEs are one such entity. QSEs buy and sell electricity themselves on the wholesale market or on behalf of entities the QSE represents. ERCOT is part of each sale and purchase of electricity under its purview. ERCOT purchases electricity and then sells that electricity to QSEs who, in turn, sell the electricity to another entity."

"Typically, in order to purchase tangible personal property (TPP) tax-free for resale, the purchaser must provide a resale certificate to the seller. Rule 3.285(c)," the letter from the Texas Comptroller states

"Electricity is TPP. An entity which purchases electricity for resale (i.e. QSEs) should issue resale certificates to the seller (i.e. ERCOT)," the letter from the Texas Comptroller states

"However, there is precedent for purchases for resale to be made tax-free without a certificate, when the purchase must result in the re-selling of the TPP. In Rule 3.285(c)(5), brokers or dealers who purchase bulk commodities may do so tax-free without issuing a resale certificate. Additionally, per Rule 3.289(c), licensed manufacturers, wholesalers, or distributors of alcohol are not required to present a resale certificate in order to make a tax-free purchase," the letter from the Texas Comptroller states

"Under current law and policy, the QSEs should provide a valid resale certificate to ERCOT. However, the comptroller may waive this requirement by rule. Since QSEs have no use for the electricity themselves and must sell it to another entity, the comptroller will, in cooperation with ERCOT, draft a rule amendment which exempts QSEs from the resale certificate requirement. Prior to such a rule taking effect, the comptroller will issue a memo to audit staff informing them of the policy change," the letter from the Texas Comptroller states

Given such communication from the Comptroller, Seely said that ERCOT will not issue a Market Notice nor sponsor a Nodal Protocol Revision Request (NPRR) concerning the matter in the interim.

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