Is a microbe air scrubber system (and the microbes used in it) exempt from Texas sales tax, and is monitoring/maintenance of the system taxable?

Subject

Microbe Air Scrubber System — Manufacturers Exemption For Equipment, Taxable Microbes And Maintenance

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1263A06

Plain-English Summary

A company asked the Comptroller about the taxability of a new microbe air scrubber system, which it used to clean paint and solvent fumes from the air in its plant — both to clean the inside air and to reduce plant emissions. The company understood the system was required by the Texas Air Control Board and the EPA. It also had a contract for monthly monitoring and maintenance of the microbes and asked whether that would be taxable.

The Comptroller's response draws a clear line between the scrubber system itself and the microbes used in it. The purchase of the microbe air scrubber system qualifies for the manufacturers' phased-in exemption in Tax Code Section 151.318. If the microbes are included in that same sale, they are covered by the exemption too. But if the microbes are sold separately from the air scrubber, that sale is subject to tax, because the letter states microbes are not machinery or equipment and so do not qualify for the exemption on their own.

On the monitoring and maintenance contract, the letter explains that if the system retains its character after installation, the company may buy the labor to maintain the system tax-free, but only if the maintenance is required by the EPA or the Texas Air Control Board. Otherwise, maintenance of tangible personal property is normally subject to tax. The letter also notes that the sale of additional microbes is subject to tax, and that monitoring the microbes would be treated as a service in connection with the sale if additional microbes are needed to maintain the system.

What This Means For You

If you're buying pollution-control equipment like an air scrubber system: The equipment purchase itself can qualify for the manufacturers' phased-in exemption under Section 151.318. Consider whether components sold as part of that same transaction (like the microbes here) are included in the same sale, since that affects whether they ride along with the exemption.

If you buy consumables (like microbes) separately from the equipment: Expect those separate purchases to be taxable. The letter is explicit that microbes on their own are not machinery or equipment and don't qualify for the exemption just because they're used inside exempt equipment.

If you have a maintenance or monitoring contract for exempt equipment: Whether labor can be bought tax-free hinges on (1) the system retaining its character after installation, and (2) the maintenance being required by a regulator such as the EPA or the Texas Air Control Board. Absent those facts, maintenance labor on tangible personal property is normally taxable, and monitoring tied to supplying additional (taxable) microbes is treated as part of that taxable service.

Q&A

Q: Is the purchase of the microbe air scrubber system taxable?
A: No. The letter states the purchase of the microbe air scrubber system qualifies for the manufacturers' phased-in exemption in Tax Code Section 151.318.

Q: Are the microbes used in the system taxable?
A: It depends on how they're purchased. If the microbes are included in the sale of the system, they are covered by the same phased-in exemption. If the microbes are sold separately from the air scrubber, that sale is subject to tax because microbes are not machinery or equipment.

Q: Is the monthly monitoring and maintenance contract for the microbes taxable?
A: The letter says that if the system retains its character after installation, the company may buy the maintenance labor tax-free if the maintenance is required by the EPA or the Texas Air Control Board. Otherwise, maintenance of tangible personal property is normally subject to tax.

Q: Is monitoring the microbes taxable?
A: The letter states monitoring the microbes would be a service in connection with the sale if additional microbes are needed to maintain the system, and the sale of those additional microbes is subject to tax.

Q: What facts did the Comptroller rely on in reaching this response?
A: The letter notes the taxpayer confirmed the microbe air scrubber system had a useful life in excess of six months, and states the opinion is rendered based on the facts submitted — other facts, though similar, may yield different results.

Original ruling text

October 13, 1993

Dear *****:

Thank you for your recent letter which is restated in part with
response below.

We would like a determination on the taxability of the purchase of
microbes for our new microbe air scrubber system. This system cleans
paint and solvent fumes from the air of our plant to clean both inside
air and reduce emissions from the plant. It is our understanding that
this system is required by the Texas Air Control Board and the EPA.
Would we be taxable for the initial start up of the microbes?

In our phone conversation of October 13, 1993, you said that the
microbe air scrubber system had a useful life in excess of six months,
but, that you did not know if Company A purchased the system with the
microbes included or bought them separately.

Response: The purchase of the microbe air scrubber system qualifies
for the manufacturers phased in exemption in Tax Code Section 151.318.
If the sale includes the microbes, they are also covered by the phased
in exemption. The sale of the microbes separate from the sale of the
air scrubber is subject to tax. The microbes are not machinery or
equipment and so do not qualify for the exemption.

We also have a contract for monthly monitoring and maintenance for
these microbes. Would this be considered taxable?

Response: If the system retains its character after installation,
Company A may buy the labor to maintain the system tax free if the
maintenance is required by the EPA or the Texas Air Control Board.
Maintenance of tangible personal property is normally subject to tax.
The sale of additional microbes is subject to tax. Monitoring the
microbes would be a service in connection with the sale if additional
microbes are needed to maintain the system.

This opinion is rendered based on the facts you submitted. Other
facts, though similar, may yield different results.

If you have questions or need more information, please call or write.
You may reach me by calling toll free, (800) 531-5441 (ext. 34680). My
direct line number is (512) 463-4680. The number for FAX transmissions
is (512) 475-0900. You may write to me in care of Tax Administration
Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9308124L.3 and/or 9308124L