Can a water/sewer materials supplier split a nonprofit Water Supply Corporation's account into taxable "water" purchases and exempt "sewer" purchases, since the sewer items are used in the wastewater treatment (manufacturing) process?

Plain-English summary

A material supplier of water and sewer products (pipe, fittings, valves, meters) had been told during a Texas tax audit that it should be charging sales tax to all Water Supply Corporations. One large Water Supply Corporation customer pushed back, claiming that its sewer-related purchases (sewer pipe, valves, fittings) were "to be used by the wastewater department in the manufacturing process of treating domestic wastewater" — backed by a Texas Sales and Use Tax Certification form — and requested its account be split into two categories: taxable water purchases and exempt sewer purchases.

The Comptroller rejected that clean split. Nonprofit water supply corporations are not generally exempt from sales tax. It's true that some of their taxable purchases can qualify for a manufacturing exemption, because these corporations process tangible personal property (water, or sold treated sewage) for sale — that's a real manufacturing activity. But the exemption doesn't automatically follow the "sewer" label. Specifically:

• Pipes, valves, and fittings used to transport raw sewage from the collection point to the processing facility are taxable — moving the sewage isn't itself the manufacturing/processing step, even if it's part of the sewer department's overall operation.
• Equipment and chemicals used to actually process the sewage at the processing facility can qualify for the manufacturing exemption — but only if the treated sewage is ultimately sold.

So a supplier can't simply exempt "sewer purchases" as a category based on a customer's self-description or certification form; the analysis has to track the specific function of each item (transport vs. actual treatment) and whether the treated output is sold.

What this means for you

Water and sewer materials suppliers

Don't accept a blanket "all our sewer purchases are exempt" claim from a Water Supply Corporation customer, even with a signed certification form. The manufacturing exemption depends on whether the specific item is used in transporting sewage (taxable) versus actually processing it (potentially exempt, if the output is sold) — you may need item-level detail, not a department-level split.

Water Supply Corporations and wastewater utilities

Your nonprofit status does not exempt your purchases generally. If you want to claim a manufacturing exemption on treatment equipment and chemicals, be prepared to show that the items are used in the actual treatment/processing step (not sewage transport) and that your treated output is sold.

Accountants and tax professionals

This letter is a good example of the Comptroller declining to accept a taxpayer's self-serving functional label ("wastewater department," "manufacturing process") without tracing the actual function of each purchased item — worth citing whenever a client tries to exempt a whole purchase category based on departmental use rather than item-specific function.

Common questions

Q: Are nonprofit Water Supply Corporations exempt from Texas sales tax?
A: No, not generally. Some purchases may separately qualify for a manufacturing exemption because processing water or sold treated sewage is a manufacturing activity, but that's a narrower, item-specific exemption, not a blanket nonprofit exemption.

Q: Are pipes and valves used to move raw sewage to the treatment plant exempt as manufacturing equipment?
A: No — this letter treats sewage transport as taxable, distinct from the actual sewage treatment/processing step.

Q: When can sewage treatment equipment and chemicals qualify for the manufacturing exemption?
A: When they're used to actually process the sewage at the treatment facility, and only if the treated sewage is sold.

Q: Can a supplier rely on a customer's self-certification that items are for "the wastewater manufacturing process"?
A: Not automatically — per this letter, the actual function of each item (transport vs. treatment) governs, not the customer's own characterization.

Q: Can any water/sewer supplier or Water Supply Corporation rely on this exact split?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own items' functions with a tax professional.

Citations and references

No specific statutes or rules were cited by number in the original letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200010794L

Original ruling text

October 13, 2000

From: Gilbert Zamora

To: "**" <**>

Subject: TEXAS STATE SALES TAX

Dear **:

I am responding to your e-mail inquiry submitted through our tax help Internet
address. You explained that your company, COMPANY A, is a material supplier for
water and sewer materials (pipe, fittings, valves, meters, etc.) to various
customer accounts. During a recent Texas tax audit, you were advised that ALL
Water Supply Corporations should be charged sales tax. One customer, a large
Water Supply Corporation, has advised you that part of what they buy from you
(sewer pipe, valves and fittings) is for the sewer part of their operation and
that such items purchased from us are "to be used by the wastewater department
in the manufacturing process of treating domestic wastewater." They have
furnished you with a Texas Sales and Use Tax Certification form which indicates
this.

Your customer has requested that their account be separated into two entities:
Water purchases in which all sales are taxable; and, sewer purchases on which
purchases are exempt from sales tax. You asked that we review this and advise
you as to whether your customer is correct?

Response: Non-profit water supply corporations are not exempt from sales tax.
Some taxable items may qualify for a manufacturing exemption because non-profit
water supply corporations process tangible personal property (i.e. water) for
sale. Similarly, a company performing sewage treatment is not exempt on its
purchases of pipes, valves, and fittings used to transport raw sewage from the
collection point to its processing facility.

Equipment and chemicals used to process the sewage at the processing facility
qualify for a manufacturing exemption if the treated sewage is sold.

Tax Statutes, Rules, and Publications are available at
. The State Tax Automated Research System,
which provides viewing and downloading edited letter rulings, hearings, AG
opinions, etc., may also be accessed through our website at
.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, You may e-mail our tax help section at .
You may also call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts.

Gilbert Zamora

Tax Policy Division

On Wed, 4 Oct 2000 10:50:49 -0400 "**" <**> wrote:

Our company, COMPANY A, is a material supplier for water and sewer materials
(pipe, fittings, valves, meters, etc.) to various customer accounts.

During a recent Texas tax audit, it was determined that we had not properly
charged applicable sales tax to Water Supply Corporations. We were advised
that ALL Water Supply Corporations should be charged sales tax. One customer,
a large Water Supply Corporation, has advised us that part of what they buy
from us is for the sewer part of their operation and that such items purchased
from us are "to be used by the wastewater department in the manufacturing
process of treating domestic wastewater." They have furnished us with a Texas
Sales and Use Tax Certification form which indicates this. They have requested
that their account with us be separated into two entities: Water purchases in
which all sales are taxable; and, Sewer purchases which should be exempt from
sales tax. Could you review this and advise us as to whether our customer is
correct?

Thank you for your assistance in this matter.

Sincerely,

Credit Manager