Does Texas's sales tax exemption for equipment used to recycle fracturing wastewater cover a company's water-treatment plant that treats wastewater for resale — including water it eventually disposes of in a saltwater well?

Plain-English summary

A water-infrastructure company treats oil-and-gas wastewater through a multi-stage filtration process (desanders, gun-barrel tanks, gravity filtration, polishers, plus clarifier/biocide/oxidizer chemicals and a corrosion inhibitor) and sells the treated water to oil and gas operators; some untreatable water goes to a saltwater disposal well instead. It asked whether its treatment equipment and chemicals qualify for the sales tax exemption specifically written for equipment "used to process, reuse, or recycle wastewater that will be used in fracturing work" (Tex. Tax Code § 151.355(7)).

The Comptroller said no, for that specific exemption — because § 151.355(7) is about how the treated wastewater is used (must go back into fracturing), not where it came from, and this company mostly sells its treated water to customers or disposes of it, rather than itself using it in fracturing. In doing so, the Comptroller also formally superseded its own 2012 guidance (STAR Accession No. 201206480L) that had incorrectly suggested equipment qualified based merely on treating fracturing-derived wastewater, regardless of end use.

But that wasn't the end of the story: the Comptroller went further (beyond what was asked) and found most of the equipment and chemicals do qualify for the broader manufacturing exemption (§ 151.318), because the company is manufacturing water — an exempt product under § 151.315 — for sale. Equipment that causes a direct chemical or physical change to the water (desanders, gun-barrel tanks, water tanks, polishers, and the process chemicals) qualifies under § 151.318(a)(2); the corrosion inhibitor protecting that exempt equipment qualifies too, under § 151.318(a)(6). The one exception: pipelines that merely move wastewater through the plant are excluded as "intraplant transportation equipment" under § 151.318(c)(1), so they don't qualify for either exemption.

What this means for you

Oil-and-gas wastewater treatment and recycling operators

Don't assume every fracturing-derived wastewater business automatically qualifies for § 151.355(7) — that exemption is about the water's destination (back into fracturing work), not its origin. If you're treating water mainly for resale (an exempt product in its own right under § 151.315), look to the broader manufacturing exemption in § 151.318 instead, which reaches equipment/chemicals causing a direct chemical or physical change to the product.

Businesses evaluating the manufacturing exemption generally

This is a useful real-world illustration of § 151.318(c)'s exclusions: equipment that merely transports material within the plant (here, pipelines) doesn't qualify even when the surrounding processing equipment does. Storage equipment is separately excluded under § 151.318(c)(4).

Accountants and tax professionals

Note the Comptroller answered a broader question than asked, formally superseding STAR Accession No. 201206480L's inaccurate reading of § 151.355(7), and volunteered the § 151.318 manufacturing-exemption analysis and the § 151.315 water-sales conclusion even though the taxpayer hadn't requested a ruling on the taxability of its water sales.

Common questions

Q: If my company processes fracturing wastewater, does my equipment automatically qualify for a sales tax exemption?
A: Not automatically, and not necessarily under § 151.355(7) specifically — that exemption depends on the treated water being used in fracturing work, not merely derived from it. Check whether the broader manufacturing exemption (§ 151.318) fits your situation if you're producing water (or another product) for sale instead.

Q: Are pipelines that move wastewater through a treatment plant exempt?
A: No — pipelines used only to move the wastewater/product within the plant are specifically excluded as "intraplant transportation equipment" under § 151.318(c)(1), even when the processing equipment around them qualifies.

Q: Can another wastewater treatment company rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer and facts in the request. A company that actually reuses its treated wastewater in fracturing work (rather than reselling it) could qualify under § 151.355(7) directly.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.010 (Taxable Item); § 151.009 (Tangible Personal Property)
• Tex. Tax Code § 151.355(7) (fracturing-wastewater-recycling exemption)
• Tex. Tax Code § 151.318(a)(2), (a)(6) (manufacturing exemption — direct change; equipment-maintenance chemicals); § 151.318(c)(1)-(4) (exclusions)
• Tex. Tax Code § 151.315 (water exemption)
• 34 Tex. Admin. Code § 3.324(b)(2)(A) (defining "fracturing")

Cited/superseded prior guidance:

• STAR Accession No. 201206480L (Tax Policy News, June 1, 2012) — SUPERSEDED by this ruling's § 151.355(7) analysis

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202505005L

Original ruling text

May 1, 2025

RE: Private Letter Ruling No. 20220628101134

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. We are responding to your request received Aug. 1, 2022, and supplemental information received on March 27, 2024, Feb. 18, 2025, and March 10, 2025. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the sales tax exemption for equipment, supplies, and other tangible personal property used to process, reuse, and recycle wastewater that will be used in fracturing work.

Facts Presented

** (Taxpayer) designs, builds, and operates water infrastructure and provides services to the oil and gas industry. Taxpayer disposes of and treats different types of water/liquids and also sells treated water to oil and gas operators.

Taxpayer has three types of transactions: wastewater removal service, the sale of treated water, and the sale of hydrocarbon byproducts. Taxpayer seeks guidance related to Taxpayer’s purchases of equipment and supplies used for the treatment of wastewater that it sells.

Taxpayer’s water treatment plant consists of pipelines, desanders, gun barrel tanks, water tanks (gravity filtration), and polishers. In addition, Taxpayer uses a variety of chemicals for processing wastewater which include water clarifiers, biocides, and oxidizers. Taxpayer uses a corrosion inhibitor to prevent the equipment used in processing from rapidly developing corrosion due to the nature of the contaminants in wastewater.

The corrosion inhibitor is injected at the inlet of the facility where Taxpayer takes title and possession of wastewater from drilling and fracking operations. Taxpayer then processes the wastewater through a four-stage filtration process.

First, the wastewater enters a desander which uses mechanical filtration to filter large solid particles such as sand, sediment, and other solid particles. Next, Taxpayer’s system runs the wastewater through a gun barrel which removes embedded hydrocarbon materials. The system then runs the wastewater through water tanks which employ a gravity system through filters to remove additional particulates. Finally, the system takes the wastewater through a polisher which filters out any remaining particulate matter, bringing the wastewater to its cleanest form.

Taxpayer uses the following chemicals during this process: water clarifiers, biocides, and oxidizers. Clarifiers assist with and enhance the separation of oil from wastewater. Biocides kill any bacteria in the wastewater. Oxidizers treat organic material including bacteria and other solid organic molecules to facilitate the removal of these contaminants.

On occasion, Taxpayer injects treated water that cannot be sold into a saltwater disposal well. Taxpayer contends this is a tertiary form of recycling wastewater because the injection of the processed water into a formation enhances the production of wells within that formation without the need to pump new fresh water into the formation.

Taxpayer states all of its equipment and supplies, including piping, are specifically used in processing and recycling of wastewater for reuse in fracturing work performed at an oil or gas well. Therefore, Taxpayer asserts all equipment and supplies are exempt under Section 151.355(7) (Water-Related Exemptions). Taxpayer references STAR Accession No. 201206480L (Tax Policy News, June 1, 2012) as support that the exemption applies to its purchases of equipment and supplies.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Are Taxpayer’s equipment and supplies used to recycle wastewater exempt under Section 151.355(7)?

Ruling: Taxpayer’s equipment and chemicals are not specifically used to process, reuse, or recycle wastewater that will be used in fracturing work and do not qualify for exemption under Section 151.355(7). However, certain equipment and chemicals can qualify for a manufacturing exemption under Section 151.318 (Property Used in Manufacturing).

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). Section 151.010 (Taxable Item) defines a taxable item to include tangible personal property and taxable services. Section 151.009 (Tangible Personal Property) defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any manner. Tangible personal property includes equipment and supplies used to treat wastewater.

The statute provides certain tangible personal property is exempt from sales and use tax. For example, Section 151.355(7) exempts tangible personal property that is specifically used to process, reuse, or recycle wastewater that will be used in fracturing work performed at an oil or gas well.

Regarding STAR Accession No. 201206480L referenced by Taxpayer, it states “[e]quipment and supplies specifically used to process, reuse or recycle the wastewater resulting from the fracturing at an oil or gas well qualify for sales tax exemption.” However, this statement is not consistent with the statute.

Section 151.355(7) requires that wastewater “be used in fracturing work performed at an oil or gas well.” The exemption is based on how the wastewater is used and not where it is derived. STAR Accession No. 201206480L, as it relates to Section 151.355(7), is not an accurate statement of policy and will be superseded.

Taxpayer treats wastewater that it sells to oil and gas customers. Taxpayer’s information also shows that Taxpayer disposes of some of its treated water into disposal wells. Disposal of water is not fracturing work as required by Section 151.355(7). See Rule 3.324(b)(2)(A) (Oil, Gas, and Related Well Service) (defining fracturing). Therefore, Taxpayer’s equipment and supplies are not specifically used to process, reuse, or recycle wastewater that will be used in fracturing work and are not exempt under Section 151.355(7).

However, Taxpayer is processing wastewater for sale and can claim an exemption on certain equipment and chemicals under Section 151.318 (Property Used in Manufacturing). For example, Section 151.318(a)(2) provides a sales and use tax exemption for tangible personal property directly used in the manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use of the property is necessary or essential to the manufacturing, processing, or fabrication and directly makes or causes a chemical or physical change to the product being manufactured, processed, or fabricated for ultimate sale.

The manufacturing exemptions also include chemicals that are used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if their use or consumption is necessary and essential to prevent the decline, failure, lapse, or deterioration of exempt processing equipment. Section 151.318(a)(6).

Items specifically excluded from the exemptions under Section 151.318 include intraplant transportation equipment, hand tools, maintenance supplies, and equipment used in transportation activities. Section 151.318(c)(1)-(3). In addition, Section 151.318(c)(4) excludes machinery, equipment, or supplies that maintain or store tangible personal property.

Taxpayer’s desanders, gun barrel tanks, water tanks, and polishers that remove solid particles and hydrocarbons are directly used in the processing of wastewater and cause a chemical or physical change to the treated water that Taxpayer sells. Taxpayer’s biocides, water clarifiers, and oxidizers are also used during processing and cause a chemical or physical change to the treated wastewater. Taxpayer may claim an exemption under Section 151.318(a)(2) when purchasing these items.

The exemptions under Section 151.318 do not include intraplant transportation equipment including equipment used to move a product or raw material in connection with the manufacturing process. Section 151.318(c)(1). Taxpayer’s pipelines move wastewater after it enters Taxpayer’s inlet from the customer’s tank battery. Therefore, Taxpayer’s pipelines do not qualify for the manufacturing exemption as they are specifically excluded under Section 151.318(c).

Taxpayer may also claim an exemption under Section 151.318(a)(6) for corrosion inhibitors purchased to prevent the decline or deterioration of Taxpayer’s exempt processing equipment. Taxpayer may not claim an exemption for corrosion inhibitors used for taxable equipment such as pipelines and storage tanks.

Although Taxpayer did not request a ruling on the taxability of its sales of treated water, we have determined that Taxpayer is manufacturing treated water and selling it to its customers. Water is exempt under Section 151.315 (Water). Therefore, Taxpayer’s sales of treated water are not subject to Texas sales and use tax.

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. 20220628101134.

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.