Audit Procedures for Utilities Gross Receipts Tax
Chapter 4 - Audit Information
- Records to be Examined
- Uniform System of Accounts
- Entrance Conference
- Audit Procedures
- Audit Write-Up
Records to be Examined
Generally, for an electric utility, the same records can be used to audit for both the Miscellaneous Gross Receipts Tax (MGRT) and the PUC Gross Receipts Assessment
The taxable receipts for electric utilities for the PUC Assessment include more items than are taxable for the MGRT. For example, the PUC Assessment applies to receipts in unincorporated areas of the state, while the MGRT is limited to incorporated areas.
The PUC Assessment does not apply to the gas or water utilities.
To audit for any electric, gas, or water utility, the records to be examined generally consist of:
- Work orders
These are the initial records used when a customer is first placed on service. The work orders will assist in determining the first business activity, and may be necessary to determine the physical location of the meter.
- Meter records
These are the records that indicate the meter location history and are identifiable by meter number. It may be necessary to use these records if customer billings only indicate meter number and not meter location. The meter location is necessary information for proper application of the MGRT.
- Customer billings
These are the monthly billings to the utility company's customers and are the source documents for most revenue accounts. The customer billings may also include nontaxable revenues such as garbage collection, service connection fees, etc. Customer addresses should not be used as absolute indicators for location of service since the billing address and service address may not be the same.
- Billing summaries
These are the monthly summaries that are divided into residential and commercial customers, and also may be divided into billing cycles to correspond with the method used to bill customers (i.e., customers billed by meter read dates, alphabetically, or areas, etc.).
- General ledgers and/or subsidiary ledgers
These are the summary records of account details including billing summaries.
- Reports to cities for payment of street/alley use
Some cities may charge a utility company a fee based on receipts for the use of streets/alleys for utility access. This may be a good source to verify taxable and nontaxable receipts within an incorporated city. This may not be in the form of a formal report; it may be simply a letter.
- PUC Gross Receipts Assessment Report,
An electric utility that is responsible for Miscellaneous Gross Receipts Tax will also be responsible for the Public Utility Commission (PUC) Gross Receipts Assessment. This report is completed by public utilities, retail electric providers, and electric cooperatives within the jurisdiction of the Public Utility Commission that serve the ultimate consumer. It can be used as an audit tool, but the gross receipts subject to the PUC Assessment do not exactly match those that are taxable for the Miscellaneous Gross Receipts Tax since the PUC includes revenues that are not taxable for the Miscellaneous Gross Receipts Tax.
- Railroad Commission Gas Utilities Division – Tax Form
This report is to be filed by all gas utility companies and lists their gross receipts quarterly.
Example of Railroad Commission – Gas Utility Tax Form
Types of Railroad Commission Gas Utilities Division General Annual Reports are also shown on this website.
- Texas Commission on Environmental Quality- Water and Wastewater Utilities Annual Report, Form TCEQ-20052
- FERC Form 1- Annual Report of Major Electric Utilities
- FERC Form 2- Annual Report of Major Natural Gas Companies
- These are annual reports to be filed by electric and gas utility companies with the Federal Energy Regulatory Commission (FERC if the utility is required to report to the FERC. The forms contain data for a calendar year including a statement of income. An example of the form can be found at
Uniform System of Accounts
Most utility companies will have a chart of accounts which is set up under a specific system required or specified by a federal or state regulatory agency:
- Gas companies maintain their records in accordance with the National Association of Regulatory Utility Commissioners' System of Accounts (NARUC), or the FERC account system, with a cross-reference system between these two or their own account numbers.
- Water companies maintain their records in accordance with the National Association of Regulatory Utility Commissioners' System of Accounts (NARUC), with a cross-reference system to their own account numbers if different.
NOTE: The NARUC publishes a manual setting out the uniform system that should be available at the taxpayer's office.
- Electric companies, both interstate and intrastate, maintain their records in accordance with the uniform system of accounts adopted by the FERC, with a cross-reference to their own account numbers if different.
NOTE: The FERC publishes a manual setting out the uniform system that should be available at the taxpayer's office. Many intrastate utility companies use this manual even though not required to.
There may be utility companies not using the above described uniform systems of accounts, but this should occur infrequently.
For the purposes of accounting and reporting under the regulations listed previously, the utilities are divided into classes as follows:
- Gas companies
- Class A: Utilities having annual gas operating revenues of $2,500,000 or more.
- Class B: Utilities having annual gas operating revenues of $ 1,000,000 or more but less than $2,500,000.
- Class C: Utilities having annual gas operating revenues of $150,000 or more but less than $1,000,000
- Class D: Utilities having annual gas operating revenues of $25,000 or more but less than $150,000.
NOTE: A gas utility may at its option adopt a system of accounts for a larger class of utility, and a gas utility having operating revenues of less than $25,000 may have its own system of accounts.
- Water companies
- Class A: Annual operating revenues exceeding $500,000.
- Class B: Annual operating revenues exceeding $250,000 but not more than $500,000
- Class C: Annual operating revenues exceeding $50,000 but not more than $250,000
- Class D: Annual operating revenues not exceeding $50,000.
- Electric companies
- Class A: Annual operating revenues exceeding $2,500,000.
- Class B: Annual operating revenues exceeding $1,000,000 but not more than $2,500,000.
- Class C: Annual operating revenues exceeding $150,000 but not more than $1,000,000.
- Class D: Annual operating revenues not exceeding $150,000.
Determine which services the taxpayer performs. Determine the locations of these services. Determine whether any areas serviced by the company annexed into or de-annexed by the city during the audit period. Request a chart of accounts for revenues and determine under which classification under federal guidelines the taxpayer falls.
Determine which accounts need to be examined
Request the taxpayer's chart of accounts and the publication prescribing the uniform system of accounts for the utility. From the taxpayer's account description or the description stated in the publication, determine those accounts that include taxable revenue or will affect taxable revenue.
The types of accounts to be examined may include the following, but are not limited to:
- Residential/general sales
- Commercial and industrial sales
- Sales to governmental entities (public sales)
- Sales for resale
- Forfeited discounts
- Miscellaneous/other service revenues (This account should not include any taxable revenues; however, it should be examined for verification.)
- Customer deposits (Forfeited deposits may/may not be included.)
- Bad debts
Determine all locations where the taxpayer is doing business in Texas
Request a list of the locations where the taxpayer is providing gas, electricity, or water if this information is not clearly provided in the chart of accounts. Determine whether the area is incorporated or unincorporated. Only incorporated areas are taxable for MGRT; all receipts are taxable for PUC.
Determine whether any areas were annexed into the city during the audit period, and if receipts have been reported since date of annexation.
Addresses on customer billings should not be used as absolute indicators of service locations since the billing address may be different from the service location due to rent property, farm property, etc. Meter locations should be used to determine locations of business.
Determine the population of each incorporated city
The population of each city is the population according to the most recent Federal Census as published by the U.S. Department of Commerce, Bureau of the Census. The census is published every ten (10) years. A copy of the census reports for 1990 and 2000 can be found in Appendix A. Any cities incorporated after the census is taken are considered unincorporated areas until the next census is taken and made official.
Testing the taxpayer's records
The taxpayer's records for Class A, Class B, Class C. and Class D utility companies will be maintained by account number using the prescribed Uniform System of Accounts or by the taxpayer's own account number which references the applicable uniform system account number. Within each account, sub-accounts may be maintained by location.
- Verify that all Texas locations are being accounted for using the chart of accounts, ledgers or whatever reliable source is obtained.
- Verify that revenue for each location is being accounted for under the correct tax bracket using the census report to verify the rate applicable to incorporated areas.
NOTE: Any time a utility company provides gas, electricity or water to a city and also the rural area outside the city limits of this city, revenue has to be accounted for separately for both areas, which should be done on an actual revenue basis. The basis for separating revenue for the correct tax bracket should be verified.
- Verify all sources of taxable revenue being reported.
- Verify the method used to arrive at nontaxable revenue within each account using account codes, subaccounts, customer billings, billing summaries or whatever source is used by the taxpayer to identify revenue sources. The taxpayer worksheets will probably show the net amount for each account, as nontaxable receipts are not required to be reported.
- Verify the method used to arrive at bad debts. The deduction for bad debts should be verified as those debts charged off per the federal income tax returns, and only the net uncollected amount applicable to reported taxable receipts should be allowed.
- A common error for MGRT is to deduct the total of all bad debts when only a portion of the bad debts are applicable to taxable receipts. For MGRT, the bad debts should not be deducted for unincorporated areas, nor for incorporated areas of less than 1,000 population. Since the PUC includes unincorporated areas and those with a population of less than 1,000, the bad debt figure allowable for MGRT may be smaller than that allowable for the PUC.
- The method of reporting collections of bad debts should also be verified as the bad debt account may be a net account, or collections of bad debts may be accounted for in some other manner.
- Verify account entries for accuracy. Trace a sufficient number of account entries to the source documents (customer billings, etc.) to verify that revenue is correctly being accounted for.
PUC Gross Receipts Assessment, Tax Type 47
All audits generated in Work Manager will be under Tax Type 47. In the audit cover letter, refer to this as the "PUC Gross Receipts Assessment." An Audit Adjustment Report for non-automated taxes must be completed.
Schedules should be prepared to fit the situation. The auditor should use judgment in determining how the adjustments can be best displayed given the particular circumstance. Always schedule adjustments as an annual filer, covering July 1 through June 30 of each year in which the taxpayer was in business.
Miscellaneous Gross Receipts Tax, Tax Type 23
All audits generated in Work Manager will be under Tax Type 23. In the cover letter, refer to this tax as the “Miscellaneous Gross Receipts Tax.” An Audit Adjustment Report for non-automated taxes must be completed.
Schedules should be prepared to fit the situation. The auditor should use judgment in determining how the adjustments can be best displayed given the particular circumstance. Always use the notations “Quarter Ending” for report periods. If the taxpayer began business during the audit period, the beginning period should be noted as “First Report.”