If mined sand is unprocessed, can the mining company still claim a tax exemption on the electricity used to move it, even without the manufacturing-equipment exemption?

Plain-English summary

This ruling goes further than the other same-batch sand-mining rulings by walking through what happens to related tax exemptions once sand is classified as unprocessed. The taxpayer operates a Texas sand mine using a track-mounted backhoe, a water-slurry transport system, wet screening, hydroclones for secondary sizing and clay removal, scalp screens, sizing screens, multi-day decanting, and natural-gas-fired rotary dryers — a more elaborate process than a basic wash-and-sort, but the Comptroller still found the sand's particle size is never changed and different sizes are never remixed after initial separation.

Because the sand is unprocessed, the Comptroller worked through a cascade of related exemption questions and gave a mixed answer:

• Sale of the sand itself: not taxable (it's unprocessed).
• Manufacturing-equipment exemption (§ 151.318) on the hydroclones and other mining equipment: denied — this exemption only applies to equipment used in an exempt manufacturing/processing operation, and since the sand isn't "processed," there's no processing operation for the equipment to belong to.
• Natural gas exemption for drying the sand: denied for the same reason.
• Electricity exemption (§ 151.317(a)(4)) for power predominantly used to TRANSPORT the extracted sand (e.g., conveyor belts): granted, because this is a separate, independent exemption for electricity used in transporting material extracted from the earth — it doesn't depend on the material being "processed," only on a valid predominant-use study under Rule 3.295.

This ruling was also requested anonymously, meaning it carries no detrimental reliance relief for the requester under Rule 3.1(c)(1)(A) — the same procedural quirk seen in the companion ruling 201902003L.

What this means for you

Sand and aggregate mining operations

Don't assume that because your extraction process is unprocessed (and therefore the sale is tax-exempt), ALL your related equipment and utility purchases are also exempt. The manufacturing-equipment exemption and the natural-gas exemption both require an actual exempt "processing" operation to attach to — if your material stays unprocessed, those exemptions aren't available. But the electricity-for-transport exemption is a SEPARATE, independent exemption that applies regardless of whether the material is processed, as long as you have a valid predominant-use study.

Utility tax planning for extraction/mining businesses

This ruling is a useful roadmap for untangling overlapping exemption categories: material sale taxability, manufacturing equipment exemption, natural gas exemption, and electricity exemption are each governed by separate statutory tests that don't automatically travel together. Get a predominant-use study done specifically for equipment used to transport (as opposed to process) extracted material.

Anyone considering an anonymous ruling request

As with the companion sand ruling (201902003L), this is a second example of a taxpayer choosing not to disclose its identity, which strips out the detrimental reliance protection that's the main practical value of most PLRs — confirm this tradeoff is intentional before going that route.

Common questions

Q: If my mined material is unprocessed, does that automatically mean all my equipment purchases are tax-exempt too?
A: No. The manufacturing-equipment exemption and natural-gas exemption both require the material to be "processed" — unprocessed material sale exemption doesn't extend those other exemptions.

Q: Can I still get an electricity tax exemption if my mined product doesn't qualify as processed?
A: Yes, for power predominantly used to transport (not process) the extracted material — that's a separate exemption under § 151.317(a)(4), independent of the processed/unprocessed question, if you complete a valid predominant-use study.

Q: Why doesn't this ruling protect the requesting company from an audit?
A: The request was submitted anonymously; Rule 3.1(c)(1)(A) withholds detrimental reliance relief in that situation, even for the requester.

Q: Can another sand mining company rely on this ruling?
A: No. It binds the Comptroller only as to the taxpayer and facts in this specific request — and here, no taxpayer was ever named at all.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (sales tax imposed)
• Tex. Tax Code § 151.010 (taxable item)
• Tex. Tax Code § 151.009 (tangible personal property)
• Tex. Tax Code § 151.317(a)(2), (a)(4) (natural gas and electricity exemptions)
• Tex. Tax Code § 151.318 (property used in manufacturing)
• 34 Tex. Admin. Code Rule 3.295 (predominant use study)
• 34 Tex. Admin. Code Rule 3.1(c)(1)(A) (anonymous requests)
• Comptroller Decision No. 27,940 (1992); Nos. 29,862 (1994), 44,432 (2005)
• STAR Accession Nos. 8810L0904F07 (1988), 9212L1233B12 (1992), 8911T0965G11 (1989), 9105L1113G06 (1991)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201901046L

Original ruling text

January 25, 2019

RE: Private Letter Ruling No. 20180918163203

Anonymous Taxpayer

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters,[1] in response to your request dated Sept. 14, 2018, the additional information provided Oct. 2, 2018 and Jan. 18, 2019. The identity of the entity to which this request relates was not disclosed. As noted in Rule 3.1(c)(1)(A), detrimental reliance relief is not provided if the identity of the entity to which the request relates is not revealed.

You requested guidance on whether Taxpayer’s sand products are processed or non- processed.

Facts Presented

Taxpayer operates a sand mining plant in Texas. A track-mounted backhoe scoops sand out of the ground where a dozer then transfers the sand into a hopper from the backhoe. The addition of water to the sand creates a slurry mix necessary for transportation. Next, the initial wet screen sizes the sand but at no time are any chemicals used in the washing process. After washing, the sand then goes through a series of hydroclones for secondary sizing and separation of clays. The size of the sand particles are not reduced or otherwise changed. Scalp screens eliminate twigs and trash but allow sand to pass through to the next step where a sizing screen separates the sand into fine sand and course sand. A conveyor transfers the fine sand to one of two storage piles. Another conveyor transfers the coarse sand to a single storage pile. Remixing of the different sizes of sand never occurs after the initial separation.

The three lines (two fine sand and one course sand) operate in parallel and are essentially identical. The sand is gravity fed beneath the storage piles to a conveyor serving each pile where it takes four days to decant. Sand from each pile then travels to additional conveyors and a storage tank prior to entering a rotary dryer. A natural gas-fired rotary sand dryer is dedicated to an individual storage pile. Dried sand moves to final screens controlled by a baghouse dust collector. A storage tank in the load-out area holds the screened and separated sand and reject sand is hauled back to the mine. Sand is then gravity-fed from each storage tank through a spout to load trucks for transfer off-site.

Questions, Rulings, and Analysis

Our restatement of your questions are shown below, followed by our responses and analysis.

Question One: Based on the description of the Taxpayer’s process, is the sand processed material and taxable or unprocessed material and not taxable?

Ruling One: Based on the description of the Taxpayer’s process, the sand is unprocessed material and is not taxable.

Question Two: If the sand is considered processed, may Taxpayer claim exemptions on qualifying personal property including equipment used from the hydroclones through the end?

Ruling Two: No, Taxpayer may not claim the exemptions provided by Section 151.318 (Property Used in Manufacturing) on equipment, including hydroclones, used in the sand mining process. The sand is not processed. See Ruling One.

Question Three: If the sand is not considered processed, may Taxpayer claim an exemption on electricity that is predominantly used to transport the sand provided Taxpayer has a valid predominant use study as required under 34 TAC Sec. 3.295?

Ruling Three: Yes, Taxpayer may claim the exemption provided by Section 151.317(a)(4) (Gas and Electricity) on electricity that is predominantly used to transport the sand provided all requirements of Rule 3.295 (Natural Gas and Electricity) are met.

Question Four: If the sand is considered processed, may Taxpayer claim exemption on natural gas used to dry the sand?

Ruling Four: No, Taxpayer may not claim an exemption under Section 151.317 for natural gas used to dry the sand. The sand is not processed. See Ruling One.

Question Five: If the sand is considered processed, may Taxpayer claim exemption on electricity predominantly used in processing equipment and/or equipment that transports the sand if the Taxpayer obtains a valid predominant use study?

Ruling Five: No, Taxpayer may not claim an exemption under Section 151.317 for electricity used to power equipment used in the mining process. The sand is not processed. See Ruling One. Taxpayer may claim an exemption for electricity used to transport unprocessed sand as described in Ruling Three.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). The term “tangible personal property” means personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner and includes a computer program and a telephone prepaid calling card. Section 151.009 (Tangible Personal Property).

The sale of unprocessed sand, gravel, and similar materials is not taxable. However, the sale and transportation of processed materials is taxable. See Comptroller Decision No. 27,940 (1992); STAR Accession No. 8810L0904F07 (Oct. 4, 1988). The Comptroller has provided examples of processing. Processed materials are materials that are crushed, mixed, or subject to any other process other than basic washing and sorting. Comptroller Decision Nos. 29,862 (1994) and 44,432 (2005).

The Comptroller has also given guidance of what is not processing. “The washing, drying, screening for size, and sorting of sand, gravel and similar materials is not processing.” STAR Accession No. 9212L1233B12 (Dec. 7, 1992). In Comptroller Decision No. 29,862 (1994), the ALJ affirmed that the mere washing and sorting of sand is not processing. Taxpayer only washes and sorts sand without ever remixing the sand after separation.

Electricity is exempt when sold for use directly in transporting a material extracted from the earth. Section 151.317(a)(4). Electricity used to operate conveyors to transport materials extracted from the earth are exempt provided that material does not contain any substances that do not exist in nature. See STAR Accession Nos. 8911T0965G11 (September 5, 1989) & 9105L1113G06 (May 31, 1991). Taxpayer’s sand is not processed. Taxpayer may therefore claim an exemption for electricity that is predominantly used to transport the sand provided that Taxpayer has a valid predominant use study as required in Rule 3.295.

Taxpayer is not processing sand. Taxpayer may therefore not claim the exemptions provided for property used in manufacturing provided by Section 151.318 or the exemption for natural gas and electricity used to power exempt manufacturing equipment provided by Section 151.317(a)(2).

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 questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20180918163203.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

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