Were sales of microbial odor neutralizers for municipal, industrial, and agricultural wastewater uses subject to Texas sales tax?

Plain-English summary

The requester sold a microbial odor neutralizer that customers applied themselves in municipal and industrial wastewater lagoons. Customers included refineries, paper mills, feedlots, municipal utility districts, and municipal wastewater-treatment plants.

The Comptroller said sales of the microorganisms were generally taxable. The seller had to collect tax unless a customer provided a valid, properly completed resale or exemption certificate.

Cities and municipal utility districts were exempt on purchases related to their exempt governmental functions under Rule 3.322(f). Manufacturers, processors, and fabricators producing tangible personal property for sale could claim the Rule 3.300(d)(B) manufacturing exemption described in the letter, but their certificate had to cite the specific public-health or pollution-control law or regulation requiring the microorganism purchase.

Feedlots did not qualify for the manufacturing exemption. Although Rule 3.296 classified them as farms or ranches for agricultural-exemption purposes, the letter said farmers and ranchers had to pay sales or use tax on odor-control microorganisms.

What this means for you

The product's environmental use did not create an automatic exemption. The tax result depended on the purchaser's status, exempt function, manufacturing activity, and documentation.

For manufacturers, the letter required a specific legal mandate for the purchase to be identified on the exemption certificate. Feedlots could not use either the manufacturing classification or the agricultural rules described in the letter to avoid tax on this product.

Common questions

Were microorganism sales generally taxable? Yes.

Could cities and municipal utility districts buy them tax-free? Yes, when the purchase related to the entity's exempt function and was supported by a valid exemption certificate.

Could a manufacturer claim an exemption? Potentially, under the manufacturing rule described in the letter, if the certificate cited the specific pollution-control or public-health requirement for the purchase.

Could a feedlot claim the manufacturing exemption? No.

Did the agricultural classification exempt feedlot purchases? No. The letter said farmers and ranchers had to pay tax on odor-control microorganisms.

Citations and references

• 34 Tex. Admin. Code Rule 3.322(f) — exempt governmental functions.
• 34 Tex. Admin. Code Rule 3.300(d)(B) — manufacturing exemption described in the letter.
• 34 Tex. Admin. Code Rule 3.296 — agricultural exemptions and the farm-or-ranch classification for feedlots.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1124G01

Original ruling text

August 5, 1991

Dear ***:

Thank you for your letter concerning sales of a "microbial odor
neutralizer" to various entities "for use in municipal and
industrial wastewater lagoons."

You indicated in our July 29 telephone conversation that you sell
the product to customers who apply it to the wastewater them-
selves. Typical customers include refineries, paper mills, feed
lots, and municipal utility district or municipal wastewater
treatment plants.

Sales of these microorganisms are subject to Texas sales tax. You
must collect the tax unless your customer issues a valid, properly
completed resale or exemption certificate to you in lieu of the
tax. Governmental entities, such as cities and municipal utility
districts, are exempt from payment of sales tax on purchases
related to the exempt function of the entity. See section (f) of
the enclosed Rule 3.322-Exempt Organizations.

Manufacturers, processors, and fabricators of tangible personal
property that is to be sold in the regular course of business may
also claim an exemption under section (d)(B) of Rule 3.300 on
manufacturing. Please note that the manufacturer, when completing
the exemption certificate, should cite the specific section of the
specific public health or pollution control law or regulation that
requires purchase of the microorganisms.

Feedlots do not qualify for Manufacturing exemptions. Feedlots
are included in the definition of a farm or ranch given in Rule
3.296 on agricultural exemptions. Farmers and ranchers must pay
sales or use tax on the purchase of odor control microorganisms.

In addition to the sales tax rules referred to in the preceding
paragraphs, I've enclosed an application for a sales and use tax
permit and other rules that outline your responsibilities for
collection and remittance of the tax.

This opinion is based on the facts that you presented. If there
are additional or different facts, this opinion may change.

Please feel free to contact me if you have any additional
questions. You may write me, call toll free 1-800-252-5555, ext.
34685, from anywhere in the United States or phone 512/463-4685.

Sincerely,

Julie Pesl
Tax Administration Division