Is electricity used to treat wastewater from a residential community exempt from Texas sales tax, and does it matter whether a third-party treatment company or the landlord itself buys the electricity?

Plain-English summary

Someone asked the Comptroller about the taxability of electricity used to treat wastewater generated by a residential community, comparing two scenarios: electricity bought by a third-party wastewater treatment company versus electricity bought by the landlord.

The Comptroller first explained the general framework: Texas exempts electricity and natural gas used to power equipment that qualifies for the manufacturing exemption under Tax Code § 151.318, where the equipment produces a physical or chemical change to tangible personal property that will itself be sold as tangible personal property. But that exemption does not cover electricity or gas used by someone performing a taxable or nontaxable service — and treating wastewater is a nontaxable service, not manufacturing a product for sale.

Applying that: if a third party purchases and uses electricity to treat wastewater from a residential community, that electricity is taxable — the third party is providing a nontaxable service and, per Tax Code § 151.317(c)(2), must pay sales tax on the taxable items (including electricity) it uses to perform that service. But if the landlord purchases and uses the electricity to treat wastewater from its own residential community, that electricity is exempt under Tax Code § 151.317(c)(1) and (2) — the residential utility exemption applies because the landlord is providing the utility service in connection with residential property it operates, unlike an outside third-party service provider.

What this means for you

Landlords and residential property operators

If you handle wastewater treatment for your own residential community in-house, the electricity you buy for that purpose can be exempt under the residential utility exemption. Structuring the arrangement so the landlord (rather than a separate contracted treatment company) purchases the electricity can matter for tax purposes.

Third-party wastewater treatment companies

Don't assume electricity used to treat residential wastewater is exempt just because the end use is residential — if you're a separate third party performing that treatment as a service, the exemption tied to residential utility use does not follow through to your own electricity purchases; you owe tax on it as a taxable item consumed in providing a nontaxable service.

Accountants and tax professionals

The key move in this ruling is distinguishing "electricity powering exempt manufacturing equipment" (§ 151.318) from "electricity consumed by someone performing a service" (taxable, per § 151.317(c)(2), unless the residential exemption in (c)(1) independently applies to that purchaser). Wastewater treatment is squarely a service, not manufacturing, so § 151.318 is off the table entirely, and everything turns on who the electricity purchaser is under § 151.317.

Common questions

Q: Does treating wastewater ever qualify as an exempt manufacturing process?
A: No — this ruling classifies wastewater treatment as a nontaxable service, not manufacturing, so the § 151.318 manufacturing exemption for electricity doesn't apply regardless of who does the treating.

Q: Why is the same electricity treated differently depending on who buys it?
A: The residential utility exemption in § 151.317(c)(1)-(2) is tied to the purchaser's own residential-utility role. A landlord buying electricity to treat its own residential community's wastewater fits that role; a separate third-party contractor performing the service does not.

Q: Can a residential landlord rely on this letter for its own wastewater treatment setup?
A: Not directly — it addresses the specific facts presented to the Comptroller. A landlord in a similar situation should confirm its own facts match before relying on this reasoning, and note that STAR letters generally support detrimental reliance only for the original recipient.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318 (Property Used in Manufacturing)
• Tex. Tax Code § 151.317(c)(1) and (2) (Utilities Exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200107371L

Original ruling text

July 16, 2001

Subject: Tax Question

Dear **:

Thank you for your recent email concerning the taxability of electricity used
to treat wastewater generated by a residential community.

The sales tax law exempts electricity and natural gas used to power equipment
that qualifies for exemption under Texas Tax Code Section 151.318 to produce a
physical or chemical change to tangible personal property for sale as tangible
personal property. The sales tax law does not exempt electricity and natural
gas used by persons performing either taxable or nontaxable services. Treating
wastewater is a nontaxable service.

The electricity purchased and used by a third party to treat wastewater from a
residential community is taxable. The third party is providing a nontaxable
service for which it is required to pay sales tax on all taxable items used in
performing the nontaxable service.
See Texas Tax Code Section 151.317(c)(2).

The electricity purchased and used by a landlord to treat residential
wastewater is exempt. See Texas Tax Code Section 151.317(c)(1) and (2).

You may view or down load the sales tax law by clicking on the following URL
http://www.window.state.tx.us/ and then click on the following:

1. Texas Taxes
2. Tax Code under Texas Laws and Rules
3. Tax Code
4. Scroll down to referenced statutory cite

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 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. My
email address is [email protected].

Sincerely,

Eddie C. Washington
Tax Policy Division