Does a Texas company that reclaims land after strip mining (dirt work, fertilizing, planting, and hay production) owe sales or use tax on its equipment, and can the agricultural exemption or resale certificates apply?

Subject

Mining — Reclamation Activities After Strip Mining — Improvement To Realty

Plain-English summary

A taxpayer's client performed land reclamation services for several utility companies — the kind of work required to restore land after strip mining. The work included dirt work, spreading fertilizer and lime, and planting seeds and trees. On some reclamation plots, the client also planted, cared for, cut, and baled hay: the utility company paid for baling the hay it needed for its own reclamation use, and required the client to buy the rest of the bales at a low price, which the client then resold to farmers.

The Comptroller answered four questions:

1. Machinery and equipment used in reclamation — Taxable. The company performing the reclamation owes sales or use tax on the machinery and equipment it uses to do the work.
2. Agricultural exemption for equipment used only on the hay land — Does not apply. The Comptroller reasoned that reclamation after strip mining is legally required under the Texas Surface Mining and Reclamation Act (§§ 131.102 and 131.263), which conditions a mining permit on reclaiming the land and allows the permit to be revoked if reclamation isn't done. Because an activity required by law to carry out a specific function is treated as part of that function, the reclamation (including the hay-growing) is considered part of the strip-mining process itself, not agriculture — so machinery used exclusively on that restored hay land does not qualify for the agricultural exemption.
3. Is reclamation a taxable service if materials and labor are billed separately? — Reclamation of land after strip mining is not a taxable real property service and not nonresidential repair/remodeling; it's an improvement to realty. The company performing the (nontaxable) service owes tax on its own equipment and supplies. But if the contract separately states the charge for materials permanently incorporated into the land, the contractor can buy those materials tax-free with a resale certificate and instead collect tax from the utility company on that separately stated materials price. If the contract is a lump sum for the whole reclamation job, the contractor must pay tax on the incorporated materials when it buys them.
4. Soil testing, mowing, and maintenance after planting — Separately stated soil testing charges are not taxed. Lawn and yard maintenance (mowing, trimming, fertilizing, watering, and similar treatment) is taxable when done on private or commercial yards and lawns, but mowing and baling hay is not treated as lawn and yard maintenance and is not taxable as a real property service.

What this means for you

Reclamation and mining-services contractors

If you do land reclamation work — after strip mining or similar regulated land-disturbing activity — you owe sales/use tax on the machinery and equipment you use, and you cannot claim the agricultural exemption for equipment used only on land you're restoring, even if you're growing and harvesting hay there. The Comptroller treats reclamation as part of the mining process, not farming, because it's legally mandated by the mining permit.

Structuring your reclamation contracts

Reclamation is an improvement to realty rather than a taxable service. How you bill affects your tax treatment of materials: separately state the price of materials that get permanently incorporated into the land (fertilizer, lime, seed, etc. that stay in place) and you can buy those tax-free on a resale certificate, then collect tax from your customer only on that separately stated line. Bill a lump sum instead, and you pay tax on those materials yourself when you buy them, with no ability to pass it through as a separately stated tax charge.

Follow-on services like soil testing and mowing

Keep soil-testing charges separately stated if you want them nontaxable. Ordinary lawn and yard maintenance on private or commercial property is taxable, but mowing and baling hay is specifically carved out as not taxable — so if your post-reclamation maintenance is really hay operations, it's different from taxable lawn care.

Common questions

Q: Does the agricultural exemption ever apply to reclamation-related equipment?
A: Not under the facts in this ruling. Even though hay was planted, cared for, cut, and baled on the reclamation land, the Comptroller treated that activity as part of the legally required strip-mining reclamation process rather than as agriculture, so the exemption did not apply to equipment used exclusively on that land.

Q: How do I avoid paying tax twice on materials incorporated into reclaimed land?
A: Separately state the price of the materials permanently incorporated into the land in your contract. That lets you buy them tax-free with a resale certificate and collect tax from your customer only on that stated materials charge, instead of paying tax yourself on a lump-sum job.

Q: Is reclamation of land after strip mining a taxable real property service?
A: No. The Comptroller specifically states it is not a real property service or nonresidential repair/remodeling service — it's an improvement to realty. The equipment and supplies used to perform it are still taxable to the person performing the work, though.

Q: Is mowing and baling hay taxable as lawn and yard maintenance?
A: No. The ruling distinguishes mowing/baling hay from taxable lawn and yard maintenance (mowing, trimming, fertilizing, watering, etc.) performed on private or commercial yards and lawns.

Q: Can I rely on this letter for my own reclamation business?
A: Only the original requester can rely on this specific letter, and only for the facts described. Under 34 Tex. Admin. Code Rules 3.1 and 3.10, other taxpayers can't claim detrimental reliance on someone else's letter ruling, and STAR documents can become outdated even without being marked superseded. If your facts differ, consult a Texas tax professional or request your own ruling.

Citations and references

• Texas Surface Mining and Reclamation Act § 131.102 — permit conditions requiring land reclamation
• Texas Surface Mining and Reclamation Act § 131.263 — permit may be revoked if reclamation is not performed
• 34 Tex. Admin. Code Rules 3.1 and 3.10 (referenced in the standard STAR disclaimer regarding detrimental reliance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9208L1190D12

Original ruling text

August 13, 1992

Dear ***:

I am responding to your letter regarding your client's sales or use tax
responsibilities. You stated that your client performs reclamation services
for several utility companies. The services include dirt work, the spreading
of fertilizer and lime, and the planting of seeds and trees. On specific plots
of reclamation land, hay is planted. Your client plants the hay, cares for it,
cuts and bales it. The utility company determines how many bales of hay it
needs for use in reclamation and pays for the bailing of this hay only. The
utility company requires your client to purchase the remaining bales from the
utility company at a very minimal price. Your client then sells the hay to
farmers.

Based upon the above circumstances, you requested that the following questions
be answered:

1. Does machinery and equipment used in the reclamation of land qualify for
   exemption from sales tax?

Response: No. The person performing the reclamation services owes tax on the
machinery and equipment used in the reclamation services.

2. Does the machinery and equipment used exclusively on the land where hay is
   planted, cut, baled and sold qualify for the agricultural exemption?

Response: Although you did not specify the use of the land by the utility
company, I presume it was for surface/strip mining or other such activity which
damages the land. These activities are normally regulated and part of that
regulation usually requires the restoration of the land.

For strip mining, the Surface Mining and Reclamation Act includes two specific
subsections 131.102 and 131.263 which require the reclamation of the land and
provide that a permit granted to a company to perform surface mining may be
revoked if the reclamation is not performed. Based upon these sections of
Texas law and court cases which conclude that an activity required by federal
or state law in order to carry out a specific function should be included as
part of that specific function, reclamation is considered an activity in the
completion of the strip mining process. Therefore, machinery and equipment
used exclusively on the restored land where hay is planted, cut, baled and sold
does not qualify for the agricultural exemption.

3. Is the reclamation of land a taxable service if materials and labor are
   billed separately?

Response: The reclamation of land after strip mining is not a real property
service nor nonresidential repair or remodeling service, but it is considered
an improvement to realty. The entity performing the reclamation service owes
tax on all equipment and other items used to perform the nontaxable service.
However, if the charge for materials permanently incorporated into the land as
part of the reclamation service are separately stated in the contract, the
company performing the reclamation may issue resale certificates on the
tangible personal property incorporated and collect tax from the utility
company on the separately stated sales price of these incorporated materials.
If the contract bills a lump-sum amount for the total reclamation service, the
company performing the reclamation must also pay tax at the time of purchase on
the materials to be incorporated.

4. Once the land has been fertilized and planted, is the soil testing, mowing
   and maintenance of the land taxable?

Response: The charge for testing the soil is not taxed as long as it is
separately stated from charges that may be taxable. Lawn and yard maintenance
(mowing, trimming, fertilizing, watering and any other treatment or service) is
taxable when performed on private or commercial yards or lawns. However,
mowing and baling hay is not considered lawn and yard maintenance and is not
taxable as a real property service.

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

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division