Is the wastewater treatment system my manufacturing company must install to meet TNRCC environmental requirements exempt from Texas sales and use tax?

Subject

Pollution Control Equipment

Plain-English summary

A manufacturer of metal valves and pipe fittings asked the Comptroller about the tax treatment of a wastewater treatment system it was required to buy to meet TNRCC (Texas Natural Resource Conservation Commission) discharge specifications and regulations.

The outcome is mixed, not a flat exemption. The Comptroller explained that machinery, equipment, replacement parts, and accessories bought by a manufacturer qualify for exemption when they're used in a pollution control process that results from the company's actual manufacturing, processing, fabrication, or repair of tangible personal property for sale -- as long as the item is necessary and essential to that operation. Because the requester's business was classified as a manufacturer of metal valves and pipe fittings, its pollution control equipment qualified. The company could give its supplier an exemption certificate instead of paying tax on that equipment.

However, the exemption is narrower than "the whole wastewater treatment system." It covers only the pollution control equipment itself -- it does not extend to foundations, piping, and other structural components of the system. It also doesn't apply if the equipment is bought under a lump-sum contract to improve real property, or under a lump-sum real property repair or remodeling contract.

What this means for you

Manufacturers required to install pollution control equipment

If you're a manufacturer, processor, fabricator, or repairer of tangible personal property for sale, and you must buy machinery, equipment, replacement parts, or accessories to control pollution resulting from that operation, that equipment can qualify for the Texas manufacturing exemption -- give your supplier a properly completed exemption certificate instead of paying tax.

Businesses installing a full wastewater treatment (or similar) system

Separate out the equipment from the structural components. Foundations, piping, and other structural parts of the system remain taxable even when the core pollution control equipment is exempt. If you buy the whole system as part of a lump-sum contract to improve real property, or under a lump-sum real property repair or remodeling contract, the exemption doesn't apply at all.

Businesses in industries not classified as manufacturers

This letter's exemption analysis turned on the requester's industrial classification as a manufacturer. If your business isn't engaged in manufacturing, processing, fabrication, or repair of tangible personal property for sale, this specific exemption path wouldn't apply the same way.

Common questions

Q: Is a wastewater treatment system exempt from Texas sales and use tax?
A: Only in part. The pollution control equipment portion can be exempt if it's necessary and essential to a manufacturer's production process, but foundations, piping, and other structural components of the system are still taxable.

Q: How does a manufacturer claim this exemption?
A: By giving the supplier a properly completed exemption certificate in place of paying the tax.

Q: Does it matter that the equipment was required by an environmental regulator (TNRCC)?
A: The letter notes the requester had to invest in the system to meet TNRCC specifications and regulations on its water output, but the exemption itself is grounded in the equipment being necessary and essential to the manufacturing/processing/fabrication/repair operation -- not simply in the fact of a regulatory mandate.

Q: Does the exemption apply if the system is installed under a lump-sum construction contract?
A: No. The letter states the exemption does not apply to equipment purchased under a lump-sum contract to improve real property or under a lump-sum real property repair or remodeling contract.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611828L

Original ruling text

November 13, 1996

Dear ***:

Thank you for your letter asking about an exemption on
the wastewater treatment system that you company is required to purchase. You
stated that you must invest in this system in order to meet specifications and
regulations imposed by the TNRCC on your water output.

According to our records, your industrial
classification states your company is primarily engaged in manufacturing metal
valves and pipe fittings. Machinery, equipment, replacement parts, and
accessories purchased by a manufacturer qualify for exemption if used in a
pollution control process resulting from the actual manufacturing, processing,
fabrication, or repair of tangible personal property to be sold, and the use of
the item is necessary and essential to the manufacturing, processing,
fabrication, or repair operation. This exemption does not apply to equipment
purchased under a lump-sum contract to improve real property or under a
lump-sum real property repair or remodeling contract. To claim this
manufacturing exemption you may give an exemption certificate to your supplier
in place of the tax.

This exemption applies to the pollution control equipment. The exemption does
not apply to foundations, piping, and other such structural components of the
system.

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

Sincerely,

Tax Policy Division