Could farmers claim Texas's agricultural exemption for installed underground irrigation pipe, tanks, or water-well casing?

Plain-English summary

This letter corrected a February 24, 1989 letter about underground pipe sold to farmers. Texas said a seller that installs pipe underground is a contractor making a permanent improvement to real property and may not accept an agricultural exemption certificate, whether the contract is lump-sum or separated.

Portable irrigation systems, above-ground pipe, and above-ground tanks used exclusively on a farm or ranch to water crops or livestock could qualify as exempt machinery or equipment. Underground pipe, underground tanks, and water-well casing were permanent improvements rather than machinery or equipment and were taxable when sold under a separated contract.

What this means for you

The key distinction was whether the irrigation component remained qualifying machinery or became a permanent part of the realty. The letter expressly corrected earlier guidance, and STAR adds a later warning that agricultural-exemption documentation changed effective in 2012.

Common questions

Could a contractor accept a farm exemption certificate for installed underground pipe? No.

Did contract format change that exemption result? No. The letter denied the agricultural certificate for both lump-sum and separated contracts.

Which irrigation items could qualify? Portable irrigation systems, above-ground pipe, and above-ground tanks used exclusively for watering crops or livestock on a farm or ranch.

Which items were treated as taxable permanent improvements? Underground pipe, underground tanks, and water-well casing.

How did contractor tax mechanics differ? The attached letter said a lump-sum contractor paid tax on materials and charged no customer tax, while a separated contractor bought pipe for resale and collected tax on its selling price.

Citations and references

The letter did not cite a numbered statute or rule. STAR's alert references H.B. 268, 82nd Regular Legislative Session (2011), and a January 1, 2012 registration-number requirement for certain agricultural and timber exemptions.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9103L1099D13

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller March 25, 1991

Dear ** :

This letter is to correct a letter that I wrote to you on February
24, 1989, concerning sales of underground pipe to farmers. I have
attached a copy of the letter for your reference.

If one of your clients sells and installs pipe underground, the
client is considered a contractor making a permanent improvement
to real property. Your client may not accept an agricultural
exemption certificate from a farmer, regardless of whether the
contract is lump-sum or separated between materials and labor.

Farmers may claim an exemption from sales or use tax on machinery
or equipment used exclusively on a farm or ranch for watering
crops or livestock. This includes portable irrigation systems,
above-ground pipes and above-ground tanks. Permanent improvements
to realty, such as underground pipe, underground tanks, and water
well casing are not machinery or equipment and, therefore, are
taxable when sold to a farmer or rancher under the terms of a
separated contract.

Please accept my apology for any inconvenience this change may
cause you or your clients.

Please feel free to contact me if you have any additional
questions. You may write me, call toll free 1-800-252-5555 from
anywhere in the United States or phone 512/463-4600.

Sincerely,
Julie Pesl
Tax Administration Division

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller March 25, 1991

Ron Langley, manager of the Amarillo Audit office, asked that I
write to you concerning sales of underground pipe to farmers.

Persons who sell pipe and install it underground are considered
contractors making permanent improvements to real property. A
contractor must handle his tax obligations in one of two ways.

1. If the contract is lump-sum (the labor is not separately
   stated from material), the contractor must pay tax on
   the material at the time of purchase. No tax is due
   from the customer. A lump-sum contractor is the
   consumer of the material and may not claim an agricul-
   tural exemption or accept an agricultural exemption
   certificate from his customer.

2. If the contract is separated between material and labor,
   the contractor may buy the pipe tax free with a resale
   certificate. The contractor must then collect tax on
   the selling price of the material to his customer. An
   agricultural exemption certificate may not be accepted
   from his customer.

Farmers may not claim an agricultural exemption on permanent
improvements to realty, such as underground pipe, underground
tanks, and water well casing. These items are not machinery or
equipment and, therefore, are taxable when sold to a farmer or
rancher.

Farmers may claim an exemption from sales or use tax on machinery
or equipment used exclusively on a farm or ranch for watering
crops or livestock. This includes portable irrigation systems,
above-ground pipes and above-ground tanks.

Please feel free to contact me if you have any additional
questions. You may write me, call toll free 1-800-252-5555 from
anywhere in the United States or phone 512/463-4600.

Sincerely,
Julie Pesl
Tax Administration Division