Are culverts sold to farmers, ranchers, homeowners, or contractors exempt from Texas sales tax, and is sand, gravel, or crushed rock taxable?

Subject

Culvert/Drain Pipe — Used On Farms Or Ranches

Plain-English summary

A taxpayer asked the Comptroller about the taxability of culverts, sand, gravel, and crushed rock, after apparently receiving conflicting answers on the culvert question. The Comptroller's answer on culverts is a clean no: culverts do not qualify as farm equipment or machinery, so a seller may not accept a farm-use exemption certificate in lieu of tax on culverts sold to farmers or ranchers. That taxable treatment carries over to homeowners and contractors too -- a culvert is taxable regardless of whether the road or driveway it serves leads to a residence.

There is one narrow exception. If a culvert is installed in a private driveway and becomes part of a right-of-way that is dedicated to and accepted by a governmental entity (city, county, or state), the homeowner may issue an exemption certificate stating that the culvert sits in such a right-of-way and will be donated to the governmental entity -- but only if there's a written agreement under which the governmental entity accepts title to the culvert at the time of delivery to the jobsite, before it becomes part of the realty. Contractors get a related, but distinct, path: a contractor may issue a resale certificate on a culvert purchase if the contract with the homeowner separately states labor and materials, but the contractor then must either collect the tax or meet the same two conditions (contract states title transfers to the governmental entity on delivery, and the homeowner has the same written agreement with the governmental entity). If the contractor's deal with the homeowner is a lump-sum contract, the contractor simply owes tax on the culvert, right-of-way or not.

The letter separately answers a question about sand, gravel, and crushed rock. The sale and transportation of unprocessed sand, gravel, or rock is not taxable -- and the ruling clarifies that merely screening, sifting, sorting, sizing, or cleaning the material does not make it "processed." However, once the material is crushed, cut, or mixed with other ingredients (such as combining sand and gravel into a mix), it becomes a taxable processed item.

What this means for you

Farmers and ranchers

Don't expect to buy culverts tax-free with a farm-use exemption certificate -- culverts are not treated as farm equipment or machinery under this ruling, no matter how they're used on the farm or ranch.

Homeowners and contractors installing culverts

A culvert is taxable by default, even for a driveway leading to a home. The only way around that is the specific right-of-way donation scenario described in the letter: the culvert must sit in a right-of-way dedicated to and accepted by a governmental entity, and there must be a written agreement transferring title to that entity at delivery, before the culvert is incorporated into the realty. Contractors billing on a lump-sum basis (rather than separately stating labor and materials) cannot use the resale-certificate path at all and simply owe tax on the culvert.

Sellers of sand, gravel, and crushed rock

Track whether the material has been processed. Screening, sifting, sorting, sizing, or cleaning does not create tax on unprocessed sand, gravel, or rock. But crushing, cutting, or mixing it with other ingredients (like blending sand and gravel) turns it into a taxable processed product.

Common questions

Q: Can a farmer buy a culvert tax-free using a farm-use exemption certificate?
A: No. Culverts do not qualify as farm equipment or machinery, so sellers may not accept a farm exemption certificate on culvert sales to farmers or ranchers.

Q: Is a culvert installed in a residential driveway always taxable?
A: Generally yes, regardless of whether the road serves a residence. The only exception is if the culvert becomes part of a right-of-way dedicated to and accepted by a governmental entity, with a written agreement transferring title to the entity before the culvert is incorporated into the realty.

Q: Can a contractor buy a culvert with a resale certificate instead of paying tax?
A: Only if the contract with the homeowner separately states labor and materials, and the contractor then either collects the tax from the homeowner or meets the right-of-way/title-transfer conditions described in the letter. A lump-sum contract with the homeowner means the contractor owes tax on the culvert outright.

Q: Is sand or gravel taxable?
A: Unprocessed sand, gravel, or rock (even if screened, sifted, sorted, sized, or cleaned) is not taxable. But once it's crushed, cut, or mixed with other ingredients, it's a taxable processed item.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1171G05

Original ruling text

May 21, 1992

Dear ***:

Thank you for your letter of May 11, 1992, regarding the taxability of
culverts, sand, gravel, and crushed rock. I apologize for any conflicting
answers you may have received.

Culverts do not qualify as farm equipment or machinery. You may not accept an
exemption certificate claiming farm use in lieu of tax on culverts sold to
farmers or ranchers.

A culvert sold to a homeowner or contractor is also taxable regardless of
whether the road leads to a residence. Under the following conditions, there is
one exception to this rule. The exception is if the culvert is in a private
driveway and becomes part of a right-of-way dedicated to and accepted by a
governmental entity (e.g. a city, county, or state governmental entity). In
this situation, the homeowner installing the culvert may issue an exemption
certificate stating the culvert is in a right-of-way dedicated to and accepted
by a governmental entity and that the culvert will be donated to the
governmental entity. The homeowner must have a written agreement with the
governmental entity that the governmental entity accepts title to the culvert
at the time of delivery to the jobsite and before it is incorporated into the
realty.

A contractor purchasing a culvert may issue a resale certificate in lieu of
tax, if his contract with the homeowner separately states labor and materials.
The contractor is then responsible for collecting the tax or meeting the
following guidelines in lieu of collecting tax: (1) The separated contract must
state that title to the culvert transfers to a governmental entity upon
delivery to the jobsite; and (2) the homeowner has a written agreement with the
governmental entity stating that the governmental entity accepts title to the
culvert upon delivery to the jobsite and before it is incorporated into the
realty.

A contractor purchasing a culvert owes tax on the culvert if his contract with
the homeowner is for a lump-sum amount, regardless of whether the culvert is in
a right-of-way.

You also asked about the taxability of sand, gravel, and crushed rock. The sale
and transportation of unprocessed sand, gravel, or rock is not taxable. Sand,
gravel, or rock is still unprocessed if it has only been screened, sifted,
sorted, sized, or cleaned. However, the sale and transportation of processed
sand, gravel, or rock is taxable. Sand, gravel, or rock that has been crushed,
cut, or mixed with other ingredients (e.g. a mixture combining sand and gravel)
is taxable as a processed item.

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

If you have any questions or need additional information, you may call toll
free 1-800-252-5555 Ext. 50037 or the regular Austin number is 512-475-0037.
You may also write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division