Are a smart-farming company's irrigation control components — pump controls, flow meters, soil probes, weather stations, network equipment, and software — taxable tangible personal property, exempt agricultural equipment, or realty improvements when sold to Texas farmers?

Plain-English summary

An out-of-state smart-farming company sells "precision irrigation" hardware and software to help rice and row-crop farmers conserve water and energy: pump controls, flow meters, soil moisture/water level probes, weather monitoring stations, wireless network equipment, and monitoring software. It planned to enter the Texas market and asked a battery of questions about how each product is taxed — as tangible personal property (TPP), an improvement to real property, exempt farm equipment, or exempt water-conservation equipment.

The Comptroller's answer turned on how each component is physically attached, not on what it does. Anything that can be removed "without causing substantial damage" to itself or the property — pump controls clipped onto an existing control panel, flow meters clamped onto a pipe with a saddle, most probes and stations — stays TPP. Anything permanently affixed — an electrical panel bolted onto a utility pole, an antenna tower or PVC conduit concreted or buried into the ground — becomes an improvement to realty instead. That classification then drives everything downstream: TPP components qualify for the farm/ranch equipment exemption under § 151.316(a)(10) (a farmer can use an agricultural exemption certificate), while components incorporated into realty don't — though a contract that separately states labor and materials can still pass the exemption through for the materials portion. Installation labor simply follows the item (exempt if the item is exempt); subsequent repairs to TPP components stay exempt under § 151.3111, but repairs to components that became realty are taxable nonresidential real property repair labor. One request the company didn't get: the broader water-conservation exemption in § 151.355 doesn't apply, because these products control irrigation generally rather than being used solely to reduce or eliminate water use. Software updates fare better — they're exempt under Rule 3.296(h) as long as the software is specifically designed to aid agricultural production.

What this means for you

AgTech and smart-farming equipment sellers

Design your installation method with tax classification in mind. The same functional component can be exempt farm equipment or taxable realty depending purely on whether it's bolted/clipped on (removable) versus concreted/buried in (permanent). If a customer's install will mix both, separately state materials and labor in the contract so the removable-component exemption isn't lost across the whole job.

Farmers and ranchers buying irrigation technology

You can issue an agricultural exemption certificate (Form 01-924) for components that stay TPP, and for materials in a contract that separately states labor from materials — but a lump-sum contract covering permanently-installed components forfeits the exemption on those items. Don't assume "used for water conservation" alone gets you an exemption under § 151.355 — that provision requires the equipment be used solely to reduce or eliminate water use, not just to manage irrigation more precisely.

Accountants and tax professionals

The controlling framework is Rule 3.347(a)-(b) (realty vs. TPP based on removability without substantial damage) layered on top of the § 151.316(a)(10) farm-equipment exemption. Note the asymmetry on repairs: § 151.3111 only ever exempts services on TPP, so once a component crosses into realty, its repairs are taxed under § 151.0101(a)(13) regardless of the item's original exempt status.

Common questions

Q: Is smart irrigation equipment automatically tax-exempt for farmers?
A: Not automatically — it must retain its identity as removable TPP AND be exclusively used on a farm or ranch under § 151.316(a)(10). Components permanently affixed to the land or a structure become taxable realty improvements instead.

Q: Does a broader "water conservation" exemption cover these products?
A: No. Section 151.355(1) only exempts equipment used solely to reduce or eliminate water use (like rainwater harvesting equipment); irrigation-control products that manage water use more precisely don't qualify because water use is not their sole function.

Q: Are repairs to this equipment exempt?
A: Only if the component being repaired is still TPP. Repairs to components that became improvements to realty are taxable nonresidential real property repair labor, even if the original component would have been exempt as TPP.

Q: Can another agtech company rely on this ruling for its own products?
A: No. It binds the Comptroller only for the taxpayer and facts presented; different attachment methods or a different sole-purpose water-use case could be analyzed differently.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (sales tax); § 151.101 (use tax); § 151.010 (taxable item); § 151.009 (tangible personal property)
• Tex. Tax Code § 151.316(a)(7), (a)(10) (agricultural machinery/equipment and TPP exemption)
• Tex. Tax Code § 151.355(1) (water-conservation exemption — sole-use requirement)
• Tex. Tax Code § 151.3111 (exemption for services on exempt TPP); § 151.007(a)(3) (installation part of sales price); § 151.0101(a)(5), (a)(13) (maintenance/real property repair taxable services)
• 34 Tex. Admin. Code § 3.347(a)-(b) (TPP vs. realty improvement test); § 3.296(g)-(h) (agricultural machinery/equipment and software definitions)

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201909034L

Original ruling text

September 25, 2019

RE: Private Letter Ruling No. 20181001091357

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ENDNOTE: (1)] We are responding to your request dated Sep. 26, 2018, and additional information received via e-mail on Oct. 17 and Oct. 24, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether the products ** (Taxpayer) sells are tangible personal property (TPP) or improvements to real property. You also requested guidance on whether Taxpayer’s products meet the qualifications of exempt agricultural machinery and equipment.

Facts Presented

Taxpayer is a Delaware corporation that is headquartered in CITY, Kentucky and conducts product research and development activities in Arkansas. Taxpayer does not currently operate in Texas, but is developing smart farming technology for use in intelligent irrigation and water conservation applications, and plans to register to do business in Texas in the future.

Taxpayer’s smart irrigation control systems will allow Texas farmers to conserve water and energy, improve crop yields, reduce labor, and reduce equipment maintenance costs. Taxpayer’s target customers are rice and furrow-irrigated, row-crop farmers.

Taxpayer’s irrigation control systems include:pump controls that attach onto either electric or diesel engine-powered irrigation pumps, for use in pump monitoring and control;

• flow meters that monitor the flow rate and total water extraction from irrigation wells;

• soil moisture and water level probes that are inserted into the ground to monitor soil moisture or water levels, and communicate the information to the monitoring station via a wired connection;

• weather monitoring stations consisting of components that are either freestanding or minimally attached to the real estate, and used to monitor local weather conditions;

• network equipment including components that are either freestanding or minimally attached to the real property, used for operating a local wireless cellular communication network; and

• software that can be downloaded and installed on computers and mobile devices, used for monitoring and controlling the irrigation systems.

Flow meters are attached to irrigation pump pipes using a saddle wrapped around the pipe. The flow meters are fitted into the saddle and attached through a hole drilled in the pipe.

Taxpayer’s website indicates that some electrical components for the system are installed into an electrical panel box mounted on a utility pole that supplies electricity to the pump. Taxpayer’s website also indicates that soil moisture and water level probes, weather monitoring stations, and network equipment components may be: (1) freestanding; (2) attached to or contained within PVC and conduit; or (3) attached onto a building (e.g. antenna connected to a tower, repeater, or nodes) with bolts and screws in a nonpermanent fashion. The PVC may be concreted into the ground, attached to a T-post hammered into the ground, or the PVC may be put into a hole in the ground held in place with dirt, so that it is freestanding.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our responses and analysis.

Question One: Is the sale and installation of Taxpayer’s products the sale of TPP or improvements to real property?

Ruling One: The method of attachment or installation determines whether the components of Taxpayer’s systems retain their identity as TPP or become improvements to real property.

The sales of products attached to realty that do not lose their identity as a particular piece of machinery and that are readily removable without causing substantial damage to the product or to the realty remain the sales of TPP. The sale of products permanently affixed to the land or to a structure constituting realty are improvements to real property.

Analysis: Texas imposes a sales tax on each sale, storage, use, or consumption of a taxable item, which includes TPP and taxable services, in the state. Sections 151.051 (Sales Tax Imposed), 151.101 (Use Tax Imposed) and 151.010 (Taxable Item). Section 151.009 (“Tangible Personal Property”) defines TPP as personal property that can be weighted, measured, felt, or touched.

The method of attachment or installation determines whether the components of Taxpayer’s systems retain their identity as TPP or become improvements to real property. Property attached to realty without losing its identity as a particular piece of machinery and that is readily removable without causing substantial damage to the unit or to the realty remains TPP. See Rule 3.347(b) (Improvements to Realty). Property permanently affixed to the land or to a structure constituting realty is an improvement to real property. See Rule 3.347(a).

Pump controls attached to the control panels (e.g., the * panel) of electric or diesel engine-powered irrigation pumps remain TPP after installation. However, some electrical components are installed into an electrical panel box mounted on a utility pole that supplies electricity to the pump. The electrical control panel box attached to the utility pole is an improvement to realty. The electrical components installed in the control panel box become improvements to realty.

Flow meters are attached to irrigation pump pipes using a saddle wrapped around the pipe. The flow meters are fitted into the saddle and attached through a hole drilled in the pipe. The saddle and flow meters may be removed with relative ease and the hole in the pipe may be repaired with similar ease. The flow meters remain TPP after installation.

The soil moisture and water level probes, weather monitoring stations, and network equipment components generally remain TPP. For some installations, antenna towers or PVC pipe and conduits housing system components are concreted into or are buried in the ground. System components installed in this manner become improvements to realty.

Question Two: Do Taxpayer’s products meet the definition of machinery and equipment as defined in Rule 3.296(g) (Agriculture, Animal Life, Feed, Seed, Plants, and Fertilizer)?

Ruling for Question Two: Taxpayer’s pump controls and flow meters meet the definition of machinery and equipment as defined in Rule 3.296(g).

Question Three: Are sales of Taxpayer’s products exempt from Texas sales and use tax under Section 151.316(a)(7) (Agricultural Items), if used exclusively on a farm or ranch in the building or maintaining of water facilities?

Ruling for Question Three: Taxpayer’s products qualify for exemption when exclusively used on a farm or ranch as described by Section 151.316(a)(10). A farmer may provide an agricultural exemption certificate (Form 01-924) containing the farmer’s agricultural registration number, for Taxpayer’s products that retain their identity as TPP, and for products that are incorporated into real property under a contract that separately states labor and materials.

Analysis for Questions Two and Three: Rule 3.296(g) is based on Section 151.316(a)(7) for machinery and equipment and subsection (10) for TPP, machinery, or equipment. Section 151.316(a)(10) exempts:

“tangible personal property, including a tire, sold or used to be installed as a component part of a motor vehicle, machinery, or other equipment exclusively used or employed on a farm or ranch in the building or maintaining of roads or water facilities or in the production of:

(A) food for human consumption;

(B) grass;

(C) feed for animal life; or

(D) other agricultural products to be sold in the regular course of business; . . ..”

Taxpayer’s products are intended to allow farmers to precisely control their irrigation systems in order to conserve water and energy, improve crop yields, and reduce labor and equipment maintenance costs. Taxpayer’s products become components of existing and operational irrigation systems. As such, Taxpayer’s components qualify for exemption under Section 151.316(a)(10), provided the items are not installed under a lump-sum contract to improve realty.

A farmer may provide an agricultural exemption certificate containing the farmer’s agricultural registration number, for Taxpayer’s products that retain their identity as TPP, and for products that are incorporated into real property under a contract that separately states labor and materials.

Question Four: Do sales of Taxpayer’s products and services qualify for exemption from Texas sales and use tax under Section 151.355 (Water-Related Exemptions), if the products or services are used solely to reduce or eliminate water usage?

Ruling Four: Taxpayer’s products and services do not qualify for exemption from Texas sales and use tax under Section 151.355. The products and services are not being used solely to reduce or eliminate water usage.

Analysis: Section 151.355(1) provides an exemption from Texas sales and use tax for certain items used for water conservation. These items include rainwater harvesting equipment or supplies; water recycling and reuse equipment or supplies; or other equipment, services, or supplies used solely to reduce or eliminate water use.

Section 151.355(1) requires any exempted equipment or supplies to be “used solely to reduce or eliminate water use.” Taxpayer’s products are used to control irrigation. They are not solely used to reduce or eliminate water use and therefore do not qualify for exemption.

Question Five: Do Taxpayer’s products installed as a component part of machinery or equipment qualify for exemption under Section 151.316 if exclusively used on a farm or ranch in the building or maintaining of water facilities?

Ruling Five: Taxpayer’s products qualify for exemption under Section 151.316(a)(10) when exclusively used on a farm or ranch as long as they are not installed under a lump-sum contract to improve realty. See Rulings Two and Three.

Question Six: Is service and installation labor performed on Taxpayer’s products exempt from Texas sales and use tax under Section 151.3111 (Services on Certain Exempted Personal Property), if the products qualify as tax exempt TPP?

Ruling Six: Installation labor is not covered under Section 151.3111. Section 151.007 (“Sales Price” or “Receipts”) defines installation as part of the sales price of the item sold.

Analysis: Section 151.007(a)(3) defines “sales price” as

“… [t]he total amount for which a taxable item is sold, leased, or rented valued in money, without a deduction for the cost of: . . .

. . . the transportation or installation of tangible personal property.”

Because installation is part of the sales price of an item, if the item sold is exempt and it retains its identity as TPP, the installation is exempt. Likewise, if the item is taxable, the installation labor is taxable.

A farmer may provide an agricultural exemption certificate containing the farmer’s agricultural registration number, for Taxpayer’s products that retain their identity as TPP, and for products that are incorporated into real property under a contract that separately states labor and materials.

Question Seven: Are subsequent repairs of Taxpayer’s products exempt?

Ruling Seven: Subsequent repairs to tax exempt products that retain their identity as TPP are exempt from Texas sales and use tax under Section 151.3111.

Analysis: Section 151.3111 exempts services performed on TPP that “if sold, leased, or rented, at the time of the performance of the service, would be exempted under this chapter because of the nature of the property….” Those products that were exempt under Section 151.316 at the time of purchase will meet the requirement for this exemption when subsequent services are provided on the product, provided the products have not been incorporated into real property.

Section 151.3111 applies only to TPP. Subsequent repairs on products that become improvements to realty do not qualify for the Section 151.3111 exemption because the repair service constitutes the repair of nonresidential real property.

Nonresidential real property repairs are subject to Texas sales and use tax under Section 151.0101(a)(13) (“Taxable Services”). Labor charges for subsequent repairs on Taxpayer’s products that have been incorporated into real property are subject to sales tax. The farmer may issue an agricultural exemption certificate to the service provider for separately stated charges for exempt parts. Lump-sum charges covering labor and parts are taxable.

Question Eight: Are annual software updates for Taxpayer’s software included with its systems exempt from Texas sales and use tax under Rule 3.296(h)?

Ruling Eight: Annual software updates for software that is “…designed specifically to aid in the production, processing, packing, or marketing of agricultural products of the original producer” qualify for exemption from Texas sales and use tax under Rule 3.296(h).

Analysis: Rule 3.296(h) provides an exemption from Texas sales and use tax for “computer software that is designed specifically to aid in the production, processing, packing, or marketing of agricultural products of the original producer.” That same section states: “[c]omputer software used for, but not limited to, household budgeting, payrolls, bookkeeping, educational, or recreational purposes is taxable.”

Charges for updates to software are subject to Texas sales and use tax as maintenance of TPP when performed on the software sold by the person performing the software maintenance. See Section 151.0101(a)(5) and Rule 3.308. However, Section 151.3111 provides an exemption for services performed on TPP that is exempt at the time the service is performed. Software is TPP under Section 151.009. The maintenance update is therefore exempt under Section 151.3111 if the conditions of Rule 3.296(h) are met.

The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20181001091357.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.