Is a wastewater treatment facility's flat monthly sewer-connection charge to customers taxable, and does a nonprofit water supply corporation owe tax on the chemicals and equipment it buys to run the facility?

Plain-English summary

A taxpayer operating a new wastewater treatment facility asked the Comptroller about two separate things: whether the flat rate it charges customers to cover the facility's costs is taxable, and the tax treatment of the supplies and chemicals it buys to service the facility.

On the customer-facing charge, the answer is simple: there is no sales tax due on flat rate monthly charges to customers who connect their sewer lines to the facility. On the facility's own purchases, the default is the opposite — sales tax is due on the supplies and chemicals used to service the facility, unless the facility issues a properly completed resale or exemption certificate. The letter then addresses a common misconception directly: the general rule regarding taxes is that the SOURCE of funding does not confer special tax status — so a nonprofit water supply corporation receiving state or federal money is not, by itself, made exempt from sales tax. Nonprofit water supply corporations don't qualify for the standard "exempt organization" sales tax exemption at all. But they CAN still claim the manufacturing exemption on qualifying purchases: chemicals that become a component part of the treated water may be bought tax-free, and equipment used to process water for sale, or materials used to filter or purify water for sale, both qualify for exemption under Tax Code § 151.318.

What this means for you

Wastewater treatment facilities and utilities billing customers a flat connection fee

Flat monthly sewer-connection charges to your customers are not subject to sales tax — you don't need to add tax to this recurring fee.

Nonprofit water supply corporations

Don't assume state or federal funding, or nonprofit status generally, exempts your organization from sales tax on its own purchases — it doesn't, and you don't qualify as an "exempt organization" for sales tax purposes on that basis alone. Instead, look to the manufacturing exemption specifically: chemicals that become part of the treated water, and equipment/materials used to process or purify water for sale, can be purchased tax-free under that separate exemption.

Accountants and tax professionals advising nonprofit utility clients

This letter is a clean rebuttal to the common "we're funded by government money so we're exempt" assumption — worth citing directly whenever a nonprofit utility client raises that argument, paired with the correct alternative path (the manufacturing exemption) for the purchases that actually can be tax-free.

Common questions

Q: Is a flat monthly sewer connection charge to customers taxable?
A: No — there is no sales tax due on flat rate monthly charges to customers connecting sewer lines to a wastewater treatment facility.

Q: Are the facility's own supply and chemical purchases taxable?
A: Yes, by default, unless the facility issues a properly completed resale or exemption certificate.

Q: Does receiving state or federal funding make a nonprofit water corporation exempt from sales tax?
A: No — funding source alone does not confer special tax status, and nonprofit water supply corporations don't qualify as exempt organizations for sales tax purposes on that basis.

Q: Can a nonprofit water supply corporation get any sales tax relief on its purchases?
A: Yes — via the manufacturing exemption: chemicals that become a component of the treated water, and equipment/materials used to process or purify water for sale, qualify under Tax Code § 151.318.

Q: Can other water/wastewater utilities rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Statutes:

• Tex. Tax Code § 151.318 (manufacturing exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200008598L

Original ruling text

August 17, 2000

From: Emilio Lerma

To: **

Subject: **

Dear **:

I am responding to your e-mail regarding the taxability of the flat rate
charged to customers to cover the expenses of a new waste water treatment
facility and the supplies and chemicals purchased to service the facility.

There is no sales tax due on flat rate monthly charges to customers who connect
sewer lines to a wastewater treatment facility. Sales tax is due on the
purchase of taxable items (supplies and chemicals) to service the wastewater
treatment facility unless the facility issues a properly completed resale or
exemption certificate.

It is the general law regarding taxes that the source of funding does not
confer a special status. Therefore, the fact that a non profit water supply
corporation receives state or federal money does not of itself make the
corporation exempt for sales tax purposes.

Although nonprofit water supply corporations do not qualify for exemption from
sales tax as exempt organizations, they may claim the manufacturing exemptions
when buying qualifying equipment. All chemicals that become a component part of
the water may be purchased tax-free. Equipment to process water for sale and
materials used to filter or otherwise purify water for sale qualify for
exemption from sales tax under Texas Tax Code 151.318.

To view the tax code, please go to our web site address at
and scroll to the
specific code section.

This opinion is rendered based on the facts presented. Other facts though
similar, may yield different results.

If you have any questions or require additional information, you may submit
inquiries to our tax help Internet address at , call
1-800-531-5441, extension 6-5809 or write to Tax Policy Division, Post Office
Box 13825, Austin, Texas 78711-3825.

Sincerely

Emilio S. Lerma
Tax Policy Division