Are chemicals used to treat water and wastewater exempt from Texas sales tax?

Subject

Chemical — Water Treatment (Chlorine, Lime, Soda Ash)

Plain-English summary

A privately owned water and wastewater (sewage) supplier serving several neighborhoods asked the Comptroller whether the chemicals it used to treat water and wastewater qualified for a sales tax exemption under any pollution-prevention guidelines.

The Comptroller drew a line between two different uses of the chemicals. For water processed and ultimately sold as drinking water, the exemption in Rule 3.300 (Manufacturing, Custom Manufacturing; Fabricating, Processing) applies: sales tax is not due on chemicals that enter into and become part of that water when the chemicals are necessary and essential to producing drinking water. However, materials used only to test the water's quality after it has already been processed are taxable, and chemicals used to treat residential wastewater that is not resold after treatment do not qualify for exemption as either processing materials or pollution control.

The ruling notes the answer is based on the facts presented and that other, similar facts could produce a different result.

What this means for you

Water and wastewater utility operators

If your company processes water that it ultimately sells as drinking water, the chemicals that become part of that water (and are necessary and essential to producing it) are exempt from sales tax under the manufacturing/processing rule. But chemicals used only to treat residential wastewater that you don't resell after treatment don't get that exemption -- and neither do materials you use just to test water quality once processing is complete.

Accountants and tax professionals advising utilities

When sorting out exemption eligibility for a water/wastewater client, separate the chemical purchases by function: chemicals incorporated into water sold for drinking (exempt), water-quality testing materials (taxable), and wastewater-treatment chemicals where the treated wastewater isn't resold (taxable, not eligible as processing or pollution-control materials).

Businesses considering a pollution-control exemption argument

This letter shows the Comptroller rejected a pollution-control exemption theory for wastewater-treatment chemicals in this fact pattern. Don't assume pollution-prevention framing will convert an otherwise taxable wastewater-treatment purchase into an exempt one.

Common questions

Q: Are chemicals used to treat water that will be sold as drinking water taxable?
A: No. Sales tax is not due on chemicals that enter into and become part of water processed for sale, when the chemicals are necessary and essential to provide drinking water, under Rule 3.300.

Q: Are chemicals used to treat residential wastewater exempt?
A: No. Chemicals used to treat residential wastewater that is not resold after treatment do not qualify for exemption as materials used in processing or in pollution control.

Q: What about materials used to test the water after it's processed?
A: Those are taxable. Sales tax is due on materials used to test the quality of the water after it has been processed.

Q: Could a different water/wastewater business get a different answer?
A: Yes. The letter states the opinion is based on the facts presented, and other facts, though similar, may produce a different result.

Citations and references

Rules:

• Rule 3.300, Manufacturing, Custom Manufacturing; Fabricating, Processing

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1441C13

Original ruling text

September 20, 1996

Dear **:

This is in response to your request for a ruling on the taxability of chemicals
used to treat water and wastewater. Your company is a privately owned water and
wastewater (sewage) supplier for various neighborhoods in the ** area. You
are asking if these chemicals would qualify for exemption under any pollution
prevention guidelines.

Response: The sales tax exemptions available to a water treatment plant
processing water for ultimate sale are covered in Rule 3.300, Manufacturing,
Custom Manufacturing; Fabricating, Processing. Sales tax is not due on the cost
of chemicals which enter into and become a part of water processed for sale
when such chemicals are necessary and essential to provide drinking water.
Sales tax is due on materials used to test the quality of the water after it
has been processed.

Chemicals used to treat residential wastewater that is not resold (after
treatment) do not qualify for exemption as materials used in processing or in
pollution control.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9609792L