Was electricity used to excavate a large drainage tunnel exempt as electricity used in mining or transporting material extracted from the earth?

Plain-English summary

The Comptroller denied an exemption for electricity used by machinery excavating a 24-foot-diameter drainage tunnel. The work was contracting, not mining or transportation of material extracted from the earth.

Electricity was a consumable supply for the contractor. The letter said such a supply qualified for exemption only for contracts improving realty for school districts and nonprofit hospitals. This was a federal project, and the federal-sales exemption extended only to materials actually incorporated into the improved property.

The Comptroller explained that the mining-related utility exemption covered extraction for sale in the ordinary course of business, such as quarrying. It did not extend to contractors digging holes, ditches, wells, tunnels, or foundation sites.

What this means for you

Excavation and tunneling contractors

Removing earth during a construction project does not become mining merely because material is extracted. The commercial purpose of the excavation mattered.

Government contractors

Do not assume every project input is exempt because the customer is federal. The letter limited the stated federal exemption to incorporated materials and treated electricity as a taxable consumable.

Common questions

Was the drainage-tunnel work mining? No.

Was the electricity exempt? No.

Why did the quarrying comparison matter? The Comptroller had extended mining treatment to material extracted for sale, but not to earth removed simply to build a tunnel or other improvement.

Did the federal nature of the job exempt the electricity? No. The letter said only incorporated materials received the federal-sales exemption.

Citations and references

• 34 Tex. Admin. Code Rule 3.295 (utility exemption)
• 34 Tex. Admin. Code Rule 3.291 (contractors)
• Texas Tax Code § 151.317(c)(2)(ii) (utilities used in extraction activities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1151B10

Original ruling text

January 24 1992

Dear Mr. **:

Wanda Hutcheson has asked me to review and respond to the information you
provided on September 30th and November 25th regarding the electricity used on
the CITY drainage project.

It is your opinion that the electricity to operate the machines used in the
excavation should be exempt from sales tax under Rule 3.295 and Section 151.317
of the Texas Tax Code as either mining or the transportation of materials
extracted from the earth.

Your reliance on Rule 3.295 is misplaced. The activities performed to construct
a below-ground tunnel 24 feet in diameter are those of a contractor. You should
be referring to Rule 3.291 covering contractors. Electricity is a consumable
supply item for a contractor and would qualify for exemption only if the contractor
has a contract to improve realty for school districts and non-profit hospitals. Our
records show that the drainage protect is a federal job. The only sales exemptions
available for federal sales are for the materials actually incorporated into
the property being improved.

Regarding the exemption in Section 151.317(c)(2)(ii) on which Rule 3.295 is
based, exploring for, or producing and transporting, a material extracted from
the earth," in 1961, when the sales tax was enacted, the exemption was for
utilities used in "industrial, manufacturing, mining, agricultural, ..........
" Between the 1961 and 1963 legislative sessions, a commission was formed to
review the Sales Tax Act with a view to making recommendations for clarifying
the language for certain provisions of the Act. The Texas Commission on State
and Local Tax Policy stated, "It is recommended that the Limited Sales Tax
Statute be amended to make it clear that gas and electric utility service is
exempt when sold for use in manufacturing, mining and agriculture as those
terms are generally understood and used and that all other business and
professional use and all residential use is taxable." The Commission further
stated that there would be no revenue loss resulting from the clarifying
amendments. In 1963, the legislature adopted the Commission's recommendation
and the language "exploration for or production and transportation of a
material extracted from the earth" was substituted for the word "mining."

While the Comptroller has extended the meaning of "mining" to include the
excavation of all materials extracted from the earth for the purpose of selling
the materials in the regular course of business, such as quarrying, the
exemption has not been extended to contractors digging holes, ditches, wells,
tunnels, or the excavation of foundation sites.

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

If you have any additional questions or need more information, you may call me
toll free at 1-800-252-5555, extension 3-4680. The regular number is
512-463-4680. You may also write to the Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division