A company buys fly ash and bottom ash — leftover residue from a utility burning coal to generate electricity — and spreads it on drilling sites for stability. The utility told the buyer these purchases aren't taxable if used as-is without further processing. Is that right?

Plain-English summary

A company contracted to buy fly ash and bottom ash — the residue left over after a utility burns coal to produce electricity — from a utility company, then spread the ash on drilling sites for ground stability. The utility told the buyer that these purchases weren't taxable, as long as the ash was used in the condition it was bought without further processing. The buyer asked the Comptroller to confirm.

The Comptroller disagreed with the utility's advice: purchases of fly ash and bottom ash are taxable. The reasoning walks through why the coal itself gets special tax treatment that doesn't extend to its byproducts:

• Water is exempt "by its nature" under Tax Code § 151.315 — coal is not.
• Coal is exempt only because of how it's used: § 151.318(a)(2) exempts the utility's purchase of coal because the utility uses it to produce electricity that is then sold.
• That use-based exemption belongs to the utility's coal purchase and use — it does not transfer to a downstream buyer purchasing the byproduct (fly ash/bottom ash) that results from burning the coal.
• There's no separate statutory exemption covering sales of fly ash or bottom ash, so absent one, the general rule (tangible personal property is taxable) applies.

What this means for you

Drilling, construction, and any company buying coal-combustion byproducts (fly ash, bottom ash, pozzolan ash)

Don't rely on a seller's informal assurance that a byproduct purchase is tax-free just because the seller's own raw material (coal) was exempt. Verify independently — as this letter shows, an exemption tied to a specific use by a specific purchaser (the utility burning coal to make electricity) does not automatically pass through to whoever later buys what's left over.

Utility companies and other sellers of production byproducts

Be careful advising customers that a byproduct sale is nontaxable based on your own upstream exemption. This letter is a direct example of the Comptroller rejecting that reasoning, which could expose both the seller (if it under-collects tax) and the buyer (if it under-accrues use tax) to liability.

Accountants and tax professionals

This is a useful illustration of the principle that Texas exemptions are generally use-specific and don't automatically flow through a supply chain — a good reference point whenever a client's exemption theory rests on "my supplier's purchase of the raw material was exempt, so my purchase of the byproduct should be too."

Common questions

Q: Are fly ash and bottom ash purchases taxable in Texas?
A: Yes, according to this letter — there's no specific exemption for these coal-combustion byproducts.

Q: If a utility's coal purchase is tax-exempt, does that exemption extend to fly ash or bottom ash sold from that coal?
A: No. The coal exemption is tied to the utility's own use of coal to produce electricity for sale; it doesn't transfer to a downstream buyer of the byproduct.

Q: Does it matter whether the buyer uses the ash without further processing?
A: Not according to this letter — the Comptroller rejected the idea that using the material "as bought" made the purchase nontaxable.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.315 (exemption for water)
• Tex. Tax Code § 151.318(a)(2) (manufacturing exemption for items used in production)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200007500L

Original ruling text

July 14, 2000

Dear **:

Thank you for your recent letter concerning the taxability of fly ash and
bottom ash.

You company has entered into a contract to buy fly ash and bottom ash from
UTILITY COMPANY. Fly ash and bottom ash are the residues that are left after
coal is burned to produce electricity. Your company spreads the fly ash and
bottom ash on new drilling locations for stability.

You were advised by UTILITY COMPANY that your purchases of these materials are
not taxable if your company use these materials in the condition as bought
without further processing.

The purchases of fly ash and bottom ash by your company are taxable. These
materials are the by-products of coal burned during the production of
electricity that is sold. Water is exempt under the sales tax law by its nature
[Texas Tax Code Section 151.315]; coal is not. Coal is exempt based on its use
when purchased by UTILITY COMPANY for use in producing electricity for sales
[Texas Tax Code Section 151.318(a)(2)].

The exemption that applies to UTILITY COMPANY purchase and use of coal does not
apply to sales of the fly ash and bottom ash to your company. The sales of
these by-products are taxable unless there is a specific provision in the sales
tax law exempting them; I am not aware of any such exemption.

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 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. My email address is
. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825

Sincerely,

Eddie C. Washington
Tax Policy Division