Does selling recovered salts and minerals as a byproduct disqualify a water desalination company's equipment purchases from the Texas desalination sales tax exemption?

Plain-English summary

A company operates a water treatment facility that desalinates two water sources under contract with a client — concentrated waste discharge from a desalination plant, and raw brackish water supplied by the client when needed. The company removes salts and minerals (as coherent, solid blocks, without further processing them) and returns over 99% of the water as potable drinking water to its client at a subsidized rate — a rate it can only offer because it sells the leftover salt/mineral byproducts rather than discarding them. Without that byproduct revenue, the cost of returning the treated water would be roughly five times higher. The company asked whether its desalination equipment, services, and supplies still qualify for the Texas sales tax exemption for water conservation given that it profits from selling the byproducts.

The Comptroller ruled the exemption still applies. Tax Code § 151.355(2) exempts "equipment, services, or supplies used solely for desalination of surface water or groundwater" — and Comptroller guidance interprets "solely" strictly (its own published example: a water-saving dam in a toilet tank qualifies because it does nothing else, but even a low-water-use toilet doesn't qualify because it also serves a waste-removal function). Here, the company's desalination equipment does exactly one thing — remove salts and minerals from the water as coherent blocks — and doesn't process the byproducts at all. Because the equipment's use remains solely desalination, the fact that the company later sells (rather than discards) the byproduct doesn't disqualify it. The sale is a separate downstream transaction that doesn't change what the equipment itself was used for.

What this means for you

Water treatment and desalination companies

The exemption tracks what your equipment DOES, not what happens to the material it removes afterward. If the equipment's sole function is desalination — no further processing of the extracted salts/minerals — you can still sell that byproduct commercially without jeopardizing the exemption on the equipment that produced it.

Businesses evaluating "sole purpose" exemptions generally

This ruling reinforces a narrow but important point about "solely" exemptions: courts and the Comptroller look at what the equipment is used FOR, not what economic benefit the taxpayer ultimately derives from the process. Don't assume that monetizing a byproduct automatically taints an otherwise qualifying sole-purpose exemption — but also don't assume it never does; here it worked because the equipment did no additional processing of the byproduct itself.

Companies relying on the "sole purpose" standard for other water-conservation equipment

Remember the Comptroller's own illustrative distinction: a device that ONLY conserves water (a tank dam) qualifies, but one that also serves another function (a low-water-use toilet, which also removes waste) does not — the exemption fails the moment the equipment serves any purpose beyond the exempt one.

Common questions

Q: Does selling a byproduct recovered during an exempt process disqualify the exemption on the equipment used?
A: Not necessarily — per this ruling, if the equipment itself is used solely for the exempt purpose (here, desalination) and doesn't further process the byproduct, selling that byproduct afterward doesn't disqualify the exemption.

Q: What does "solely" mean for Texas's water conservation/desalination equipment exemption?
A: Per this ruling and cited Comptroller guidance, "solely" means the equipment is used EXCLUSIVELY for the exempt purpose — equipment that also serves any other function (even incidentally) fails the test.

Q: Does the desalination exemption require the water to end up 100% potable with nothing left over?
A: No — per this ruling, returning "over ninety-nine percent" of the water as potable water, with the remainder recovered as marketable byproduct, was consistent with the equipment being used solely for desalination.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.355(2) (Water-Related Exemptions — equipment, services, or supplies used solely for desalination of surface water or groundwater)
• 34 Tex. Admin. Code Rule 3.318(a)(2) (Desalination defined — removal of salts to produce useable freshwater/drinking water)
• 34 Tex. Admin. Code Rule 3.318(b)(2) (Water-Related Exemptions)

Cited prior guidance:

• Tax Policy News, June 2011 issue — "solely" means exclusive use for the exempt reason (toilet-tank dam vs. low-water-use toilet example)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201702008L

Original ruling text

February 10, 2017

Re: Private Letter Request No. 160830246

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated March 23, 2016. Detrimental reliance relief is provided under Rule 3.10, Taxpayer Bill of Rights.

You request guidance regarding the taxability of equipment, supplies, and services used in desalinating water.

Facts Presented

We derived the facts below from the documentation you submitted, as well as information you provided in meetings, telephone calls, and e-mail correspondence. You confirmed the accuracy of our summary of the facts.

COMPANY A is a subsidiary of COMPANY B. COMPANY A entered into an agreement with COMPANY C to construct and operate a water treatment facility to provide water treatment services and return potable water to COMPANY C (the Agreement). COMPANY A removes salts and other minerals from two water sources: concentrated waste stream discharges from the DESALINATION PLANT and raw brackish well or surface water (brine water).

The Agreement requires COMPANY A to desalinate concentrate that it receives from the DESALINATION PLANT . In the event DESALINATION PLANT is unable to provide a sufficient volume of concentrate, COMPANY C furnishes additional brine water to maintain the minimum volume required by the Agreement. COMPANY A desalinates the concentrate and the brine water and returns over ninety-nine percent of the total concentrate and brine water to COMPANY C as potable water.

COMPANY C holds legal title to both the concentrate and the brine water that it releases to COMPANY A and all byproducts (salts and other minerals) contained within the concentrate and the brine water.

COMPANY A recovers salts and other minerals as byproducts of desalination. These byproducts are the result of various desalination methods, including, but not limited to, ionic exchange, which removes calcium and magnesium, and electric dialysis, which removes salt. The desalination methods remove the salts and other minerals as coherent, homogenous blocks. COMPANY A does not process these byproducts during the desalination processes. When COMPANY A removes the byproducts from the concentrate and brine water, title to those byproducts transfers pursuant to the terms of the Agreement from COMPANY C to COMPANY A at the time of removal. COMPANY A sells the byproducts without further processing.

By selling the byproducts, COMPANY A is able to return potable water to COMPANY C at the rate of $2 per one thousand gallons of water. Without the revenue from the sale of the byproducts, the cost of returning potable water to COMPANY C would likely exceed $10 per one thousand gallons of water.

Requested Ruling, Response, and Analysis

Our restatement of the ruling you requested is shown below, followed by the response and analysis.

Requested Ruling: COMPANY A’s purchases of equipment, services, and supplies are exempt from Texas sales and use tax under Section 151.355(2) (Water-Related Exemptions) and Rule 3.318(b)(2) (Water-Related Exemptions).

Ruling: COMPANY A’s purchases of equipment, services, and supplies used in the desalination processes are exempt from Texas sales and use tax under Section 151.355(2) and Rule 3.318(b)(2).

Analysis: Section 151.355(2) exempts “equipment, services, or supplies used solely for desalination of surface water or groundwater.” Rule 3.318(a)(2) defines the term “desalination” to mean, “The removal of salts from non-potable or brackish surface water or groundwater so that the water is useable freshwater or high-quality drinking water.”

The June 2011 issue of Tax Policy News states that under Section 151.355, “ ‘solely’ means the equipment, services or supplies are used exclusively for the reason stated.” As an example, the TPN article states, “A water dam in a toilet tank is used only to save water; therefore it qualifies for the exemption. But, the purchase of a toilet, even if it is a low-water use toilet, does not qualify since the item is not solely used to reduce or eliminate water use.” In other words, the purchase of a low-water use toilet does not qualify because, although the toilet reduces water use, it also removes waste.

COMPANY A’s desalination processes remove salts and other minerals from the concentrate and brine water as coherent, homogenous blocks. After the desalination processes, COMPANY A returns potable water to COMPANY C . COMPANY A does not process the byproducts during or after the desalination processes.

Based on the facts presented, the equipment, supplies, and services that COMPANY A purchases and uses in the desalination processes are solely for desalination. The equipment, supplies, and services used in the desalination processes are therefore exempt under Section 151.355(2). The fact that COMPANY A subsequently sells some byproducts of the desalination processes, rather than discarding them, does not change our determination that the desalination equipment is used solely for desalination.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have any questions about this private letter ruling, please email us through our website at https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #160830246.

Regards,

Tax Policy Division, Indirect Tax Section

Comptroller of Public Accounts

ENDNOTE

1.Unless otherwise indicated, all references herein to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.