Is the electricity my sand-mining client uses to dredge, wash, sort, and convey sand exempt from Texas sales tax?

Plain-English summary

This December 7, 1992 letter answers a tax professional's question about whether electricity used at a client's sand plant is exempt from Texas sales tax. The client dredges sand from a deposit, pumps it to a plant, screens out clay and oversized rock, hydraulically sorts the remaining sand by grain size into vats, washes and agitates it with screw conveyors, and conveys or pumps the finished concrete/masonry/asphalt sand to storage — most of it sold to the State of Texas.

The Comptroller's office separated the question into two layers. First, it addressed whether the sand itself is taxable: washing, drying, screening for size, and sorting sand, gravel, and similar materials is not "processing," so selling merely washed/sorted (unprocessed) sand is a nontaxable service. But crushing, blasting sand out of the ground, or mixing different materials or grain sizes together (e.g., combining sand and gravel, or blending crushed with uncrushed material) is processing, which makes the sand taxable when sold — except that sales to the State of Texas are exempt regardless, evidenced by the purchase order or voucher.

Second, and central to the letter, it addressed the electricity exemption. Electricity used to run the conveyors and pumps that move sand into the plant, to the stacker conveyors, and out to storage is exempt as "transportation of a material extracted from the earth" — this exemption applies no matter whether the sand ends up blasted, crushed, mixed, or left unprocessed. Electricity for washing and mixing equipment is exempt only if that washing/mixing actually constitutes "processing" (citing Hearing 27,940, which found that intense hydraulic washing can liberate sand grains from clumps and release bound impurities, which counts as processing). Electricity used purely to sort/screen sand by size is not exempt, unless processing is also occurring during that screening. Where a single electric meter serves both exempt and nonexempt equipment, the taxpayer must perform a predominant-use study (per Rule 3.295) to establish what percentage qualifies for exemption, and a refund can be claimed for up to four years from when the tax was due, using a completed exemption certificate and refund request to the utility supplier.

What this means for sand, gravel, and aggregate businesses

Sand, gravel, and aggregate producers

Your electricity bill isn't all-or-nothing. Power for transporting/conveying extracted material (dredging, pumping, conveying to and from the plant) is exempt regardless of whether the material is processed. Power for washing or mixing is exempt only if those steps rise to the level of "processing" under the Comptroller's case law (Hearing 27,940), and power used only to sort by size is taxable. If a meter mixes exempt and taxable uses, you need a predominant-use study to support any exemption certificate or refund claim.

Accountants and tax professionals advising extraction/aggregate clients

This letter is a useful illustration of how the Comptroller parses "processing" (crushing, blasting, mixing different materials) from non-processing (washing, drying, screening, sorting) for sales-of-goods purposes, and separately how it applies the natural-resource-extraction electricity exemption on a use-by-use basis rather than an all-or-nothing basis. Note that this letter predates current guidance — it is a fact-specific 1992 opinion and may not reflect current Comptroller policy.

Sellers to government entities

Sales of taxable (processed) sand to the State of Texas remain exempt from tax; a state purchase order or purchase voucher serves as proof of the exempt sale.

Common questions

Q: Is electricity used to pump/convey sand around the plant always exempt?
A: Yes, according to this letter — electricity used to transport a material extracted from the earth (dredging in, moving to stacker conveyors, moving to storage) is exempt "whether or not the sand is blasted, crushed, or mixed or is not processed."

Q: Is electricity used to wash sand exempt?
A: Only if the washing counts as "processing." The letter cites Hearing 27,940, which held that intense hydraulic washing that liberates sand grains from clumps or releases bound impurities (like iron oxide and silica) can itself be processing, even though mere washing to remove clay and silt is not.

Q: Is electricity used to sort/screen sand by size exempt?
A: No — "the electricity to sort the sand is not exempt" — unless processing is also occurring during that screening step (e.g., if the hydraulic screening is actually downsizing the sand).

Q: What if one electric meter powers both exempt and taxable equipment?
A: The predominant use of the meter controls. The taxpayer must perform a study of electricity uses to determine predominant use before claiming an exemption certificate or refund.

Q: How far back can a sales tax refund on qualifying electricity be claimed?
A: The statute of limitations is four years from the date the tax was due and payable to the Comptroller's office.

Citations and references

Rules and other authority cited:

• 34 Tex. Admin. Code Rule 3.295 (exemption for natural gas and electricity; predominant use study; exemption claim procedure) — enclosed with the letter
• Hearing 27,940 (Comptroller administrative hearing decision on whether hydraulic washing of sand constitutes "processing")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9212L1233B12

Original ruling text

December 7, 1992

Dear ****:

Thank you for your letter regarding a sales tax exemption on electricity

used by your client, ***** Company, in its sand business.

You stated that your client is in the business of selling concrete sand,

masonry sand, and asphalt sand, primarily to the State of Texas. The

state will only buy "processed" sand (sand that has been washed and sized

to contract specifications).

You explained that the plant dredges sand from the deposit and pumps it

to the plant. At the plant, the following activities occur:

1. Clay, foreign particles, and rock larger that 5/16 inch is separated

out;

2. The remaining sand mixture is separated according to grain size using

hydraulic screening;

3. The various grain sizes are dropped into one of three vats according

to the production requirements;

4. All three vats wash the sand and two of the vats have screw conveyors

that:

a) agitate the sand for thorough washing;

b) remix the sized particles; and

c) transport the sand to the stacker conveyors

5. The three sand products are either conveyed or pumped away from the

plant to the storage area.

The washing, drying, screening for size, and sorting of sand, gravel and

similar materials is not processing. The sale and delivery of these

unprocessed materials is a nontaxable service.

Crushing or mixing is processing. For example, combining several

materials such as sand and gravel or rock to produce a material for

making concrete is processing as well as the mixing as you described

above. Crushing the materials or crushing a small percentage of materials

and blending with the same kind of uncrushed is considered processing.

Sand is also considered to be processed when it is blasted out of the

ground.

While it appears that your client is selling processed sand by the mixing

of several sorted sizes, you need to be sure that the hydraulic screening

is not, in fact, "crushing" or "downsizing" the sand. You also need to

consider the decision in Hearing 27,940 to determine if the sand is

processed during the washing procedure. The decision in that hearing

states in part, "While it is true that the mere washing of dirt, gravel,

and sand to remove clay and silt would not be considered processing, the

facts show that characteristics of the sand are also being changed or

modified during washing. For example, during the hydraulic wash process,

where several high-powered streams of water spray the sand pile, further

downsizing occurs when individual sand grains are liberated or freed (as

a result of the intense water pressure) from small clumps or combinations

of sand grains. In addition, impurities bound to the sand grains

(such as iron oxide and silica) are released during this process."

If your client does sell some sand that is not processed, the charge your

client makes to its customers is not subject to tax. The sand is subject

to tax if it is processed. However, the sale of the sand to the State

of Texas would not be taxable. The purchase order or purchase voucher

from the state would be acceptable as proof that the sale was to an

exempt entity.

Now to discuss the electricity exemption. The electricity to operate the

conveyors or pumps to transport the sand to the plant, to the stacker

conveyors, and away from the plant to the storage area is exempt as long

as the sand does not contain any products that do not exist in nature.

The electricity is exempt as transportation of a material extracted from

the earth, and applies whether or not the sand is blasted, crushed, or

mixed or is not processed.

If the washing is processing (as discussed in the above hearing), the

electricity to operate the washing equipment and the mixing equipment is

exempt. The electricity to sort the sand is not exempt. However, if

processing does occur during the screening (as discussed above, the

electricity for this use would be exempt).

When there are both exempt and nonexempt uses of electricity on a single

meter, the predominant use applies. A study of the electricity uses must be

performed to determine predominant use. If the electricity qualifies for

exemption, a completed exemption certificate and letter requesting a tax

refund may be issued to the utility supplier. The statute of limitation

is four years from the date on which the tax was due and payable to this

office.

Sales tax refund can be claimed for the period of time within the statute

that the electricity qualified for exemption.

I am enclosing Rule 3.295 that explains the exemption for natural gas and

electricity, the predominant use study, and procedure for claiming tax

exemption.

This opinion is based on the facts presented. If there are additional or

different facts, the opinion may change.

If you have any questions or need additional information, you may call me

toll free at 1-800-531-5441, extension 3-4666. You may write to Tax

Administration Division.

Sincerely,

Jo Ann Dieck

Tax Administration Division