Is tangible personal property incorporated into an underground drainage system on a farm exempt from Texas sales tax the same way underground irrigation system components are?

Subject

Underground Drainage System Components On Farmland Are Taxable — Only Irrigation Systems Are Exempt Under Senate Bill 82

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1262B12

Plain-English Summary

A taxpayer wrote to the Comptroller asking about the taxability of tangible personal property incorporated into an underground drainage system on farmland. The Comptroller's answer is straightforward: the drainage system components are taxable.

The letter explains that Senate Bill 82 exempts components installed as part of an underground irrigation system on a farm or ranch, but only when that system is used in the production of agricultural products sold in the regular course of business. Critically, the letter states that "the bill was not amended to add an exemption for underground drainage systems." In other words, the legislature created an exemption for irrigation systems specifically, and drainage systems were left out.

The letter is candid that the Comptroller cannot explain the legislature's reasoning, stating: "I cannot explain why the legislature did not amend the bill other than to say it was not the legislature's will or intent to exempt components for underground drainage systems." The letter then reiterates the bottom line: components for underground drainage systems used on farmland are taxable, and the Senate Bill 82 exemption does not extend to them.

What This Means For You

If you sell or install underground systems for farms or ranches: The distinction between an "irrigation system" and a "drainage system" matters for sales tax purposes. Only components installed as part of an underground irrigation system used to produce agricultural products sold in the regular course of business qualify for the Senate Bill 82 exemption described in this letter. Components for underground drainage systems do not qualify, even though both may be installed underground on the same farm or ranch.

If you are a farmer or rancher purchasing these systems: Don't assume that all underground agricultural infrastructure is tax-exempt. Based on this letter, you should expect to pay sales tax on components used in an underground drainage system, while irrigation system components installed for agricultural production may qualify for exemption under Senate Bill 82.

If you're unsure how a mixed system is being classified: Since this letter draws the exemption line specifically at "irrigation" versus "drainage," how a given system or its components are characterized could affect its tax treatment. This letter does not address hybrid systems or how to allocate tax treatment when a system serves both irrigation and drainage functions.

Q&A

Q: Are components of an underground drainage system on farmland exempt from Texas sales tax?
A: No. The letter states plainly: "The components for underground drainage systems used on farmland are taxable."

Q: What does Senate Bill 82 exempt?
A: Per the letter, Senate Bill 82 "exempts components that are installed as part of an underground irrigation system on a farm or ranch for use in the production of agricultural products sold in the regular course of business."

Q: Did the legislature intend to also exempt drainage systems?
A: The letter says no: "The bill was not amended to add an exemption for underground drainage systems," and the Comptroller states it was "not the legislature's will or intent to exempt components for underground drainage systems."

Q: Does this letter apply if the facts are different from what was described?
A: No. The letter notes, "This opinion is based on the facts presented. If there are additional or different facts, the opinion may change."

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

October 8, 1993

Dear *****:

Thank you for your letter of September 22, 1993, concerning the
taxability of tangible personal property that is incorporated into
an-underground drainage system on farmland.

Senate Bill 82 exempts components that are installed as part of an
underground irrigation system on a farm or ranch for use in the
production of agricultural products sold in the regular course of business.
The bill was not amended to add an exemption for underground drainage systems.

I cannot explain why the legislature did not amend the bill other than to
say it was not the legislature's will or intent to exempt components for
underground drainage systems.

The components for underground drainage systems used on farmland are
taxable. The exemption provided in Senate Bill 82 does not exempt
components for an underground drainage system.

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

You may call toll free 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

NOTE: Previous Accession Number 9308103L