Who owed Texas sales tax on corrugated steel pipe used for erosion control on farms and ranches?

Plain-English summary

Corrugated steel pipe used in farm and ranch erosion-control structures did not qualify for the agricultural exemption. The letter treated the pipe-drop structures as part of the real property, not as exempt farm machinery or equipment.

When the landowner contracted for and paid for all the pipe, a later partial reimbursement from the conservation district did not reduce the taxable purchase price: the landowner owed tax on the entire amount. When the district bought one portion and the landowner bought the rest, the exempt district paid no tax on its portion and the landowner owed tax only on its own portion.

Different contractor rules applied if the district sold and installed the pipe. Under a lump-sum contract, the district was the consumer of the materials, could buy them tax-free for its own exempt use, and did not tax the customer charge. Under a separated contract, the district could buy materials with a resale certificate but had to collect tax from the customer on the separately stated materials charge.

Common questions

Did erosion-control use make the pipe agriculturally exempt? No. The pipe-drop structures were treated as real property rather than machinery or equipment.

What if the landowner paid first and the district later reimbursed part? The landowner owed tax on the full pipe purchase price.

What if the district and landowner each bought a portion? The district did not pay tax on its portion; the landowner owed tax only on the portion it bought.

How did installation-contract billing matter? Under a lump-sum contract the exempt district was the materials consumer and the customer charge was nontaxable; under a separated contract the district collected tax on the materials charge.

Citations and references

• Tex. Tax Code Ann. Section 151.316 — agricultural machinery-and-equipment exemption described in the letter.
• Able Irrigation Co. v. Calvert, 495 S.W.2d 270 (Tex. Civ. App.-Austin 1973, no writ) — cited for treating a concrete irrigation ditch as nonexempt real property rather than machinery or equipment.
• 34 Tex. Admin. Code Rules 3.291, 3.285, and 3.287 — contractor, resale-certificate, and exemption-certificate rules identified as enclosures.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8508L0671C01

Original ruling text

August 20, 1985

Dear **:

Thank you for providing additional information about the two types of
transactions involving corrugated steel pipe used for erosion control on farms
and ranches.

Under one program, the landowner contracts for and pays for the pipe. The
district reimburses the landowner for a portion of his costs. The landowner
owes sales tax on the entire purchase price of the pipe.

Under another program, the district purchases a portion of the pipe, and the
landowner purchases the remainder. The district does not pay tax on the amount
it pays for the pipe. The landowner owes sales tax only on the amount he pays
for the pipe.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,

Mona Ezell Shoemate
Tax Policy Section
Tax Administration Division

cc: Senator Ed Howard

July 29, 1985

Senator Ed Howard
Room 122, State Capitol Building
Austin, Texas 78701

Dear **:

This is to follow up our telephone conversation regarding **
(District).

The District would be acting as a contractor improving realty if it sells and
installs the corrugated steel pipe. The sales tax responsibility is determined
by the terms of the contract.

Under a lump sum contract (one price for both materials and labor), the
District is the consumer of all materials. Since the district is an entity
exempt from paying sales tax on personal property for its own use and not for
resale, the materials can be purchased tax free. An exemption certificate must
be issued to the supplier. The charge to the customer would not be taxable.

Under a separated contract (the charge for materials incorporated into the
property is separately stated from the charge for labor), the district can
purchase the materials tax free by a resale certificate. Sales tax must be
collected from the customer on the charge for materials.

I am enclosing Rule 3.291 on contractors for your information along with Rules
3.285 and 3.287 on resale and exemption certificates.

Please feel free to contact me if I can be of further assistance.

Sincerely,

(Mrs.) Jo Ann Dieck
Tax Policy Section
Tax Administration Division

July 18, 1985

Dear **:

Thank you for your letter requesting further clarification on the taxability of
corrugated steel pipe used for erosion control on farms and ranches.

While the sales tax law exempts many items used on a farm or ranch, it does not
exempt everything that is used by a farmer or rancher. Tex. Tax Code Ann.
Section 151.316 exempts machinery and equipment exclusively used on a farm or
ranch in the production of an agricultural product or in the building or
maintaining of roads and water facilities.

The Texas courts have ruled in Able Irrigation Co. v. Calvert, 495 S.W.2d 270
(Tex. Civ. App.-Austin 1973, no writ) that a concrete irrigation ditch is not
machinery or equipment and does not qualify for the agricultural exemption.
Like the concrete irrigation ditch, the pipe drop structures are a part of real
property and are not machinery or equipment. They do not, therefore, qualify
for the agricultural exemption.

I have enclosed a copy of the court case for your review.

Please feel free to contact me if you have additional questions. You may write
me, call toll free 1-800-252-5555 from anywhere in Texas or phone 512/475-1931.

Sincerely,

Mona Ezell Shoemate
Tax Policy
Tax Administration

July 2, 1985

Bob Bullock
Comptroller of Public Accounts
State of Texas
Austin, TX 78774

Dear Mr. Bullock,

Recently we received a copy of Field Operations Response To Taxability Inquiry
No. TR 0978 dated 2/13/85. Of particular interest to us was Question 5 relating
to the sale of pipe to farmers and ranchers.

The ** (DISTRICT) is a sub-division of state government with the
responsibility for developing and implementing soil and water conservation
programs in ** County. The main thrust of our work is geared toward
erosion control. Currently, soil loss exceeds 100 tons per acre on many
gullies.

In order to control this erosion careful planning is required. In most
instances pipe drop structures are needed as well as a new innovation called
aluminum toe walls. Both are designed to eliminate overfalls which helps
protect valuable crop and pasturelands. These are sometimes very costly to
install.

These structures are not for home use and are usually essential for the
production of agricultural products since without them many fields could not be
worked. For example, a deep gully extending through a field prevents plowing
and other normal forming operations. Correcting this gully allows farmers to
build waterways and terraces for additional erosion control and improved
production.

While it is true that many county units of government sale culverts for roadway
use and other on-farm benefits, soil and water conservation districts handle
only erosion control structures for on-farm use. This is done as a service to
the landowner with the money for the pipe being held until time of delivery.
The district, therefore, becomes an agent for the farmer, handling the
necessary paperwork, etc.

We, therefore, do not feel that pipe drop structures sold for agricultural use
should be taxable. They are handled as conservation expense as far as the IRS
is concerned and can be deducted. It appears that there needs to be additional
clarification to distinguish between home use and agricultural use of the
products. Please respond as soon as possible.

Sincerely,

**, Chairman
DISTRICT