Does incinerating waste into ash for disposal count as tax-exempt manufacturing/processing under Texas law?

Plain-English summary

Company A owns a Texas waste disposal plant, including an incineration unit it leases (under a long-term operating lease) to a limited partnership ("LP") in which Company A is itself a partner. Under a sales agreement, LP takes waste material from Company A, incinerates it into ash, and sells the ash back to Company A — but the actual sale happens outside Texas, since LP ships the ash out of state where Company A takes possession. LP also delivers (without selling) hazardous water from the process, which Company A injects into on-site deep wells.

The taxpayer asked the Comptroller to bless five favorable positions, all resting on treating LP's incineration as tax-exempt "processing" under Tax Code § 151.318: (1) LP could lease the incineration equipment tax-free; (2) LP could buy replacement parts, repair services, lubricants, and chemicals for the incineration process tax-free; (3) LP could buy additional incineration equipment tax-free; (4) if a utility study showed predominant use of gas/electricity for incineration, LP could buy that tax-free under § 151.317; and (5) since the ash ships out of Texas, the LP-to-Company A sales would be exempt as export sales under § 151.330.

The Comptroller rejected the entire framework. The key finding: Company A ultimately buries the ash in Louisiana — meaning LP's incineration doesn't add any marketable value to the waste; it's simply providing Company A's own waste disposal service back to Company A. The letter draws on the Comptroller's own precedent that shredding operations performed purely for disposal (tire shredding/slicing, document shredding — STAR Letter Rulings 9008L1037E13, 9403L1293C14, 9801114L) are not taxable "processing" either, because they don't create marketable products. It contrasts this with Hearing 34,221, where a taxpayer recovering marketable metal products from a waste stream (to sell to smelters) was held to be a genuine processor — the dividing line is whether the end product becomes more marketable, not merely whether its physical form changes.

Since converting the waste into ash here doesn't make it more marketable — both the raw waste and the resulting ash end up buried in the same way — the Comptroller concluded the incineration is not processing, and none of the five requested exemptions apply.

What this means for you

Waste disposal and incineration companies

Changing the physical form of waste (shredding, incinerating, compacting) is not automatically exempt "processing" for sales tax purposes. The test is whether the resulting product is more marketable than what you started with — if both ends of the process get disposed of the same way (landfill, burial), you're providing a disposal service, not manufacturing/processing, no matter how sophisticated the equipment.

Related-party service arrangements (partnerships, affiliated LPs)

Routing a waste-disposal function through a related-party limited partnership, and structuring the "sale" of the resulting byproduct to happen outside Texas, doesn't convert a disposal service into exempt processing or an exempt export sale — the Comptroller looked through the corporate/partnership structure to the economic substance (Company A's own waste, ultimately disposed of by Company A).

Accountants and tax professionals

This letter is a clean articulation of the marketability test that distinguishes exempt "processing" (Hearing 34,221's metal-recovery example) from nontaxable-but-not-exempt waste disposal (the tire/document shredding line of letter rulings). Apply it to any waste-treatment fact pattern before claiming the manufacturing exemption on equipment, utilities, or materials.

Common questions

Q: Is incinerating waste into ash tax-exempt processing in Texas?
A: Not if the incineration is purely for disposal purposes and doesn't make the resulting ash any more marketable than the original waste — as was the case here, where both were ultimately buried the same way.

Q: What distinguishes exempt processing from nontaxable disposal services?
A: Whether the end product is genuinely more marketable than the input. Recovering marketable metal from a waste stream to sell to smelters (Hearing 34,221) is processing; incinerating, shredding, or otherwise altering waste purely to prepare it for disposal is not.

Q: Does shipping the byproduct out of state make the transaction export-exempt?
A: Not on its own — the Comptroller rejected the export-sale argument here because the underlying transaction was disposal services, not a genuine sale of a processed product.

Q: Can a waste management company rely on this specific ruling?
A: Not directly. 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 whether your own waste-treatment process creates a more marketable product with a tax professional.

Citations and references

Statutes, rules, and prior rulings:

• Tex. Tax Code § 151.318 (manufacturing/processing exemption)
• Tex. Tax Code § 151.317 (gas and electricity exemption for processing)
• Tex. Tax Code § 151.330 (interstate/export sales exemption)
• STAR Letter Ruling No. 9008L1037E13 (tire shredding/slicing not taxable processing)
• STAR Letter Ruling No. 9403L1293C14 (document shredding not taxable processing)
• STAR Letter Ruling No. 9801114L (shredding for disposal not taxable processing)
• Comptroller's Decision (Hearing) No. 34,221 (marketable metal recovery held to be 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/200102052L

Original ruling text

February 15, 2001

RE: Request for Administrative Ruling

Dear **:

Your letter to Tom Soto has been referred to me for response. You are
requesting an administrative ruling on behalf of your client, Company A.

YOUR FACT SITUATION

Company A owns a Texas waste disposal plant, the surrounding real property, and
tangible personal property at this site. Along with the waste disposal plant,
the real property includes a lab, Company A's corporate headquarters, and the
surrounding land where deep-wells have been dug to store hazardous water.
Within the waste disposal plant, there is an incineration unit, which Company A
does not operate. Instead, Company A leases it under an operating lease, which
has a lease term of more than a year, to a limited partnership ("LP") in which
Company A is a partner.

Pursuant to a sales agreement between Company A and LP, LP processes waste
material provided by Company A into ash and then sells the ash to Company A.
The sales of the ash do not take place in Texas, however. LP ships the
processed ash outside of Texas by a third party carrier where Company A takes
possession of the ash. LP additionally does not sell but delivers the hazardous
water to Company A, who then injects the hazardous water into the deep-wells.

You state that:

1. LP may issue an exemption certificate under Tax Code SECTION 151.318 for the
   lease of tangible personal property used or consumed in the processing
   operation described above.

2. LP may purchase tax-free replacement parts, accessories, equipment, repair
   services, lubricants, and chemicals used or consumed in the processing
   operation.

3. LP may issue an exemption certificate for the purchase of additional
   incineration equipment.

4. If a utility study shows that the predominant use of the gas and electricity
   consumed by LP is for the incineration process, LP may issue an exemption
   certificate under Tax Code 151.317 for the purchase of gas and electricity to
   be used with the incineration unit.

5. Because LP ships the incinerated ash to points outside of Texas, the sales
   between LP and Company A are exempt from tax under Tax Code SECTION 151.330.

RESPONSE: I have to disagree with the above conclusions for the reasons stated
below:

I understand that Company A buries the ash received from LP in Louisiana. It
appears that LP is not adding any marketable value to the ash produced and is
merely assisting Company A in its waste disposal service that is complete when
Company A disposes of the ash and hazardous water. We have issued prior letter
rulings (#9008L1037E13, #9403L1293C14, #9801114L) to the effect that tire
shredding and slicing and document shredding for the purpose of disposal, were
not taxable processing.

Hearing 34,221 addressed a similar situation involving waste/feed materials
where the taxpayer recovered marketable metal products from the waste stream
and was held to be a processor; the ALJ stated in his conclusion that:

Petitioner provides a waste disposal service to its customers under its service
agreements for which it is paid, and the receipts from which make up the
substantial part of its revenue. That waste disposal service transaction ends
upon the delivery and acceptance of the customer's waste at Petitioner's
facility. Petitioner is also processing the waste/feed materials to produce the
metal product that it then sells to the smelters, particularly ABC.

In conclusion, LP's incineration service, while changing the character of the
waste product, does not make the ash resulting from the incineration any more
marketable than when Company A performed this process. In both scenarios the
resulting ash is disposed of in the same manner, i.e., buried in Louisiana.
Under these facts the incineration is not processing.

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

I hope this information answers your questions. If you need additional
information, you may e-mail our tax help section at .
You may also 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.

Sincerely,

Gilbert Zamora
Tax Policy Division

cc: Tom Soto