Does a wastewater/leachate treatment system built at a former fertilizer manufacturing site — that treats storm water dissolving leftover gypsum waste and produces a sellable ammonium sulfate byproduct — qualify for the pollution control or manufacturing sales tax exemption?

Plain-English summary

A large, complex wastewater treatment system — including a Hazelton stripper, air stripping units, a circulation pump, an 11-ton lime silo, a solids settling tank, a recarbonation unit, a clarifier, a breakpoint chlorination unit, and programmable logic controls — was purchased and installed at a former fertilizer manufacturing facility. The taxpayer argued the system should be exempt either as pollution control equipment or as manufacturing equipment.

Pollution control exemption — denied. Tex. Tax Code § 151.318(a)(5) exempts property used or consumed in actual manufacturing/processing/fabrication if that use is necessary and essential to a pollution control process. But the facility was no longer manufacturing fertilizer at the location, and the wastewater/leachate being treated wasn't a byproduct of the old fertilizer manufacturing operation — it came from rain and other water sources dissolving leftover gypsum waste. Because the treated water isn't tied to an active manufacturing process, the system doesn't qualify as pollution control equipment.

Manufacturing exemption — partially available, component by component. The taxpayer separately argued the system qualifies as manufacturing equipment because treating the storm water/leachate produces ammonium sulfate as a sellable byproduct. Even granting that framing, the Comptroller held that only the specific pieces of equipment that directly cause a physical or chemical change to the storm water or leachate can claim the exemption — not the system as a whole, which is otherwise treated as an improvement to realty. On these facts, that means:

• Qualifies: components like air scrubbers, the clarifier, the breakpoint chlorination system, and heat exchangers — the equipment actually producing the chemical change in the gypsum-dissolved water.
• Does NOT qualify: pumps and piping that merely transfer materials between pieces of equipment, and equipment used to store raw materials or finished product (the lime silo, the ammonium sulfate storage tank).
• Qualifies: controls and electrical wiring used exclusively for the exempt manufacturing equipment.

Who claims the exemption depends on the contract structure. If a contractor furnished and installed the system, a lump-sum contract makes the contractor the consumer of the incorporated equipment (the contractor owes tax on it, and its lump-sum charge to the manufacturer isn't taxed). Under a separated contract (equipment charge stated apart from installation labor), the contractor is treated as the seller of the equipment, and the manufacturer may issue — or the contractor may accept — an exemption certificate for the separately stated charges covering the qualifying manufacturing equipment components.

What this means for you

Manufacturers with wastewater/pollution treatment systems, especially at sites where manufacturing has stopped

If your treatment system handles water contamination from a source unconnected to an active manufacturing process (like rainwater dissolving old waste, rather than a direct manufacturing byproduct), don't assume the pollution control exemption applies just because the site once manufactured something. That exemption is tied to an active manufacturing/processing operation.

Manufacturers claiming a byproduct-based manufacturing exemption on treatment equipment

Expect the exemption to be evaluated component by component, not as a whole system. Equipment that directly changes the material (scrubbers, clarifiers, chlorination units, heat exchangers) can qualify; storage tanks/silos and mere transfer pumps/piping cannot, even within the same integrated system.

Contractors installing manufacturing/treatment equipment

Structure your contract (lump-sum vs. separated) deliberately — it determines who owes tax on the equipment and who can use an exemption certificate for the qualifying components.

Common questions

Q: Does a wastewater treatment system at a former manufacturing site qualify for the pollution control exemption?
A: Not if the water being treated isn't a byproduct of an active manufacturing process — here, it failed because the facility had stopped manufacturing and the water came from rain dissolving old waste, not from the manufacturing operation itself.

Q: Can I still get a manufacturing exemption if treating the water produces a sellable byproduct?
A: Possibly, but only for the specific equipment components that directly cause a physical or chemical change to the material — not for storage tanks/silos or for pumps/piping that just move material between equipment.

Q: Do controls and electrical wiring for the equipment qualify too?
A: Yes, if used exclusively for equipment that itself qualifies for the manufacturing exemption.

Q: Who claims the exemption if a contractor installs the system?
A: Depends on the contract. Lump-sum: the contractor owes the tax and its charge to you isn't separately taxed. Separated: you (or the contractor) can use an exemption certificate for the separately stated qualifying-equipment charge.

Q: Can I rely on this letter for my own facility?
A: No. This opinion is based on the facts presented; additional or different facts may change the outcome.

Citations and references

Statutes:

• Tex. Tax Code § 151.318(a)(5) (pollution control equipment exemption — requires necessary/essential use in an active manufacturing/processing/fabrication operation)
• Tex. Tax Code § 151.318 (manufacturing exemption — component-by-component "direct chemical or physical change" test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200004196L

Original ruling text

April 14, 2000

Dear **:

Thank you for your patience in awaiting this reply to your letter concerning
the taxability of a water treatment system.

Information Provided:

The water treatment system, includes a Hazelton stripper, two MaxiStrip
high-energy venturi air stripping units, one circulation pump, piping and
instruments for both the stripper and absorber process.

The stripper unit consists of 12 stainless steel modules. Each stripper module
consists of a stainless steel tank, two MaxiStrip high-energy venturi air
stripping units, one circulation pump, piping and instruments. The absorber
consists of 13 stainless steel modules, two MaxiStrip high-energy venturi air
stripping units, on circulation pump, piping and instruments.

The treatment system also includes an 11-ton lime silo, a solids settling tank,
recarbonation unit, clarifier, breakpoint chlorination unit, associated piping,
electrical wiring and controls. The wastewater treatment system is controlled
by an integrated programmable logic controller and an associated computer data
logger.

The system was purchased and installed at a manufacturing facility.

Response: Texas Tax Code Section 151.318(a)(5) exempts "tangible personal
property used or consumed in the actual manufacturing, processing, or
fabrication of tangible personal property for ultimate sale if the use or
consumption of the property is necessary and essential to a pollution control
process."

You state that your client is no longer manufacturing fertilizers at the
location and that the gypsum was the waste that resulted from the manufacturing
operation. The wastewater and leachate that are being treated are not
by-products of the fertilizer manufacturing operations. Rather, they are
created from rain and water from other sources that dissolve the gypsum. This
equipment does not qualify for exemption as pollution control equipment under
Texas Tax Code Section 151.318.

You contend that the water treatment system qualifies for exemption as
manufacturing equipment because a by-product of treating the storm water and
leachate is ammonium sulfate that is sold off-site. The primary purpose of the
water treatment system appears to be treating the storm water before it is
discharged into the ** Ship Channel.

Even if the production of ammonium sulfate, a by-product of the storm water
treatment, is deemed to be a manufacturing operation, only certain components
of the system qualify for the manufacturing equipment exemption. Only the
pieces of equipment that are used directly in producing a physical or chemical
change in storm water or leachate qualify for exemption.

This system appears to be an improvement to realty. The components that produce
a physical or chemical change to the tangible personal property held for sale
qualifies for exemption if the manufacturer purchased the equipment.

The manufacturer's eligibility for claiming exemption on the equipment is
dependent on the terms of the contract or billing if a contractor furnished and
installed the equipment. Under a lump-sum contract, the contractor is the
consumer of the incorporated equipment and owes sales tax on the equipment. The
contractor's lump-sum charge to the manufacturer is not taxable. If the
contract is separated (charges for equipment installed is separated from the
charge for installation labor), the contractor is the seller of the equipment
installed. Your client may issue an the contractor may accept an exemption
certificate for the separated charges for the manufacturing equipment (i.e.,
air scrubbers, clarifier, breakpoint chlorination system, and heat exchangers)
qualifying for exemption under Texas Tax Code Section 151.318.

The exemption applies only to equipment that directly makes or causes a
chemical or physical change to the gypsum. Pumps and piping that transfer
materials from one piece of manufacturing equipment to another does not qualify
for exemption. The manufacturing equipment exemption does not apply to
equipment used to store raw materials or finished products, e.g., the lime
silo, ammonium sulfate storage tank.

Controls and electrical wiring used exclusively for exempt manufacturing
equipment qualifies for exemption.

The sales tax law exempts equipment that produces the chemical change in the
storm water containing dissolved gypsum, not the pumps and piping used to
transfer the materials between separate pieces of equipment.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825.

Sincerely,

Eddie C. Washington
Tax Policy Division