Does a Texas laboratory that tests soil, water, wastewater, and materials samples and sells the results as a report have to charge sales tax on that service?

Subject

Analysis And Testing Of Water/Wastewater/Soil Samples

Plain-English summary

A Texas testing laboratory (called "COMPANY" in the ruling) asked the Comptroller whether the fees it charges customers are taxable. The lab analyzes soil and core samples, concrete, and other construction materials to determine their physical and chemical properties; tests metals used in manufactured products, including radioactive "radiographic testing"; and runs environmental air, water, and soil-contamination tests. It also does environmental consulting. The results of all this work are delivered to customers, mostly engineering, architectural, and contracting firms, as a written report.

The Comptroller ruled that these testing and analysis services are not taxable, relying on 34 Tex. Admin. Code § 3.342 (the "Information Services" rule). The key reasoning: COMPANY isn't really selling the report — the report is just the medium used to convey test results. What COMPANY is actually doing is performing tests on samples its customers supply, and that underlying service falls outside the taxable information-services category under the cited subsections of the rule.

However, that exemption only covers what COMPANY charges its customers. On the input side, COMPANY still has to pay sales tax on taxable items it buys to run its business, including natural gas and electricity. The ruling specifically rejects COMPANY's apparent hope of claiming a manufacturing/processing exemption on its utilities: that exemption is only available when the utility (like natural gas or electricity) is used to process tangible personal property that is then sold. Since COMPANY isn't selling tangible personal property (it's selling a nontaxable testing service, with the report merely reflecting the results), its utility purchases don't qualify. The Comptroller also noted that even if COMPANY wanted to explore exemption eligibility across its multiple locations, a predominant-use study would be required for each site — which COMPANY itself acknowledged.

What this means for you

Testing and analytical laboratories

If your lab's business model is running tests on customer-supplied samples (soil, water, wastewater, concrete, metals, or similar) and delivering the results in a report, your charges for that testing service are not subject to Texas sales tax, following the same reasoning as this ruling. But don't assume that flows through to your own purchases — you still owe sales tax on equipment, supplies, and utilities you use to operate the lab, unless a different exemption specifically applies to those purchases.

Utility and processing exemption claims

This ruling is a useful cautionary example: the manufacturing/processing utility exemption is tied to whether you are selling tangible personal property that the utility helped process. A service business that merely documents or reports on tangible property (rather than transforming it into a product it sells) generally will not qualify for that exemption, even if its work involves lab equipment, chemical processes, or specialized testing methods.

Multi-location businesses

If you operate the same type of business at several locations and want a utility tax exemption, expect that each location will need its own predominant-use study — a favorable ruling for the business generally, or for one location, does not automatically extend to every other location.

Common questions

Q: Is COMPANY's lab-testing service taxable in Texas?
A: No. The Comptroller found the testing and analysis services (soil, water, wastewater, concrete, metals, environmental testing) are not taxable under the information services rule, 34 Tex. Admin. Code § 3.342(d)(1)-(2).

Q: Why isn't selling a "report" treated as selling tangible personal property?
A: Because the Comptroller viewed the report as merely the delivery mechanism for test results, not the product itself. The substance of the transaction is the testing service performed on the customer's sample.

Q: Can COMPANY buy its electricity and natural gas tax-free?
A: No. COMPANY must pay sales tax when it purchases natural gas, electricity, and other taxable items used to provide its testing services. The processing/manufacturing exemption for utilities only applies when the utility is used to process tangible personal property that is then sold, which doesn't describe COMPANY's business.

Q: Does this ruling automatically apply to every location of the company?
A: Not fully — the ruling addresses the taxability of the testing service generally, but the Comptroller noted that a predominant-usage study would still be required at each individual location for utility exemption purposes.

Q: Can other taxpayers rely on this 1992 letter today?
A: Only the original requester could rely on it directly, and only as of when it was issued. STAR letters like this one may no longer reflect current Comptroller policy, so anyone else should confirm current guidance (or request their own ruling) before relying on this result.

Citations and references

Rules:

• 34 Tex. Admin. Code § 3.342, Information Services — subsections (d)(1) and (2), cited as the basis for treating the testing and analysis services as nontaxable

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9208286L

Original ruling text

August 6, 1992

Dear **:

Thank you for your letter regarding the taxability of services performed by
** (COMPANY).

COMPANY contends that they process laboratory data and produce and sell a
report from such data. Their specific type of work is as follows:

COMPANY performs analysis of soil or core samples, concrete samples, as well as
the testing of various construction materials of the purpose of determining
their physical and/or chemical properties. COMPANY also performs tests on
various metals that go into products for manufacturing. COMPANY has an
analytical laboratory that does environmental air and water tests. They do soil
contamination tests. The methods used in their procedures vary depending upon
the material being tested. Some require chemical application, others x-ray or
ultrasonic. In some cases, where metals are being tested, radioactive materials
are used for the purpose of what they call "radiographic testing". In addition,
COMPANY does environmental consulting.

All of the above services translate into final written reports that are sold to
their customers, which are primarily composed of engineering, architectural and
contracting firms. They have informed me that COMPANY has several locations
throughout the State, all of which provide the same services, and they wish to
become tax exempt on their utilities in each of them if possible.

Of course COMPANY understands that a predominant usage study to determine their
eligibility would still be required for each location.

RESPONSE:

The testing and analysis services provided by COMPANY are not taxable. See
section (d)(l) and (2) of the enclosed Rule 3.342, Information Services.
COMPANY must pay sales tax at the time of purchase on all taxable items used in
providing this service, including the purchase of natural gas and electricity.

COMPANY is not selling reports, the essence of its business is conducting tests
on customer supplied samples. The reports are just the medium on which test
results are conveyed to the customer. The processing exemption on natural gas
and electricity is allowed only when the utility customer uses the natural gas
or electricity to process tangible personal property which is sold.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

If you have other questions or need more information, you may call me at
1-800-252-5555, extension 3-4502. The regular number is 512/463-4600. You may
also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division