Is equipment that a company builds and uses to remediate (clean up) contaminated soil at natural gas pipeline metering sites subject to Texas sales/use tax?

Plain-English summary

The Texas Comptroller's Tax Policy Division responded to a company performing soil remediation services at metering sites along natural gas pipelines, using prototype and commercial equipment it purchased, designed, or fabricated. The company asked whether that equipment was taxable.

The Comptroller explained that soil remediation itself is a nontaxable service, but equipment purchased, designed, or fabricated for use in performing a nontaxable service is taxable. The company also mentioned it hoped to recover mercury from the soil for sale, which raised the question of whether a manufacturing exemption under Rule 3.300 (covering equipment used in processing tangible personal property for sale) might apply instead. The key test is whether the equipment is predominantly used to manufacture items for sale or predominantly used to perform a service.

Based on the facts presented, the Comptroller concluded that the equipment's predominant use was performing the soil remediation service, not manufacturing mercury for sale. As a result, the purchase of the component parts used to build the equipment was taxable. The letter notes this conclusion could change if additional or different facts were presented.

What this means for you

Environmental remediation and cleanup service providers

If your business performs soil, land, or waterway decontamination, remediation, or reclamation services, the service itself is generally not taxable in Texas. However, don't assume that means the equipment you buy or build to perform that service is tax-free — the Comptroller treats equipment purchases as taxable when the equipment is predominantly used to deliver a nontaxable service, even though the service itself escapes tax.

Businesses that also recover or manufacture a product for sale during remediation

If your remediation process also recovers a marketable substance (here, mercury) that you intend to sell, it's worth examining whether your equipment could instead qualify for the manufacturing exemption under Rule 3.300. That exemption turns on whether the equipment is predominantly used to process tangible personal property for sale, rather than predominantly used to perform the service. Without enough facts showing predominant manufacturing use, the Comptroller will treat the equipment as taxable.

Businesses relying on Comptroller guidance generally

This letter is based only on the specific facts the taxpayer presented at the time. The Comptroller expressly noted that additional or different facts could change the outcome, so businesses with similar but not identical facts should not assume the same result applies to them.

Common questions

Q: Is soil remediation a taxable service in Texas?
A: No. This letter states soil remediation is a nontaxable service.

Q: If the service isn't taxable, why would the equipment used to perform it be taxable?
A: Under the Comptroller's reasoning here, equipment purchased, designed, or fabricated for use in performing a nontaxable service is itself taxable, separate from the tax treatment of the service.

Q: Could equipment used in soil remediation ever be exempt?
A: Possibly, if it is predominantly used to manufacture tangible personal property for sale (for example, processing recovered material like mercury for sale) rather than predominantly used to perform the service, under the manufacturing exemption discussed in Rule 3.300. On the facts presented here, the Comptroller found the predominant use was the remediation service, so the exemption did not apply.

Q: Can this taxpayer rely on this letter if its facts change?
A: The letter itself says the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.300 (Manufacturing; Custom Manufacturing; Fabricating; Processing — referenced regarding exemptions for equipment used in processing tangible personal property for sale)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9509503L

Original ruling text

September 19, 1995

Dear *****:

Thank you for your letter of September 12, 1995, concerning the taxability of
prototype and commercial equipment used in soil remediation services.

Your firm is involved performing soil remediation services at metering sites
along natural gas pipelines. Soil remediation is a non taxable service.
Equipment purchased, designed, or fabricated that is used in the performance of
the non taxable services is taxable.

Your firm hopes to recover mercury from the soil for sale. Enclosed Rule 3.300,
concerning manufacturers, does discuss exemptions for equipment used in
processing tangible personal property for sale. The determination that must be
made is whether or not the equipment is predominantly used in the manufacture
of items for sale or predominantly used in the performance of a service.

Without additional information, I must conclude that the predominant use is for
soil remediation services and that the purchase of the component parts used in
building the equipment is taxable.

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 at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division