For a new manufacturing plant, are dust-control enclosures built around conveyors exempt from Texas sales tax as pollution control equipment, and how does a separated vs. lump-sum construction contract affect tax on materials?

Plain-English summary

A company planning a new oriented strand board (OSB) plant wrote to the Comptroller's office to confirm how sales tax would apply to the equipment listed on its process flow diagram, and attached its own understanding of which items would be exempt versus taxed. The Comptroller's Assistant Director of Tax Administration, Wade Anderson, responded after a meeting with the taxpayer, correcting one assumption and confirming most of the taxpayer's proposed treatment.

On the contract structure, the letter clarifies that if the construction contract for the plant is separated (materials billed apart from labor), the purchaser (the company) pays sales tax on the material costs. If the contract is lump sum, the vendor is the one who owes the tax on the materials instead. However, if a separated contract shows the materials at the vendor's actual acquisition cost, the tax owed ends up the same either way. The letter goes on to confirm that "all of the equipment listed and shown on the process flow diagram would be considered exempt," with only a few carve-outs: conveyors on which no processing takes place, the fresh air exchanger, and the pipes and duct work remain taxable.

The letter specifically resolves two disputed line items from the taxpayer's list. First, road surfacing and road sweepers — required under the plant's air permit's Best Available Control Technology requirements for fugitive emission control (hard-surfacing roadways instead of gravel, and sweeping them with mechanical sweepers) — do not qualify for the manufacturing exemption; these are treated as general site/infrastructure costs rather than manufacturing process equipment. Second, enclosures built around the conveyors to keep wood dust from being discharged into the atmosphere do qualify as exempt pollution control equipment used in manufacturing, distinct from the general manufacturing-equipment exemption. The taxpayer's own attached breakdown (log processing, flaking, drying, forming and pressing, finishing, heat energy, and controls & power systems) illustrates the scope of what the Comptroller was confirming as exempt manufacturing process equipment, including items like the dust collection baghouse, RTO for air emissions control, and environmental monitoring equipment.

What this means for you

Manufacturers building or expanding a production facility

If your plant construction includes pollution-control add-ons that are physically part of your process equipment — such as enclosures that prevent a manufacturing process (like conveying wood chips or flakes) from discharging particulates into the air — those items can qualify as exempt pollution control equipment, separate from and in addition to the general manufacturing exemption. But general site infrastructure required by an environmental permit, like hard-surfaced roads and road-sweeping equipment used to control fugitive dust from vehicle traffic, is not treated as manufacturing or pollution control equipment and remains taxable.

Contractors and vendors on plant construction projects

Whether you or your customer owes sales tax on materials depends on how the contract is structured. A lump-sum contract puts the tax burden on you, the vendor, for the materials portion. A separated contract (materials billed apart from labor) shifts that tax liability to the purchaser. If you use a separated contract and bill materials at your actual acquisition cost, the total tax collected works out the same as under a lump-sum contract — so the choice mainly affects who is legally responsible for remitting the tax, not the total amount, when costs are shown accurately.

Businesses seeking a comparable ruling today

This is a 1994 taxpayer-specific letter based on a specific process flow diagram and specific permit conditions; it does not itself list a current statute number for the manufacturing or pollution control exemption. Because it predates the Comptroller's later practice of citing 34 Tex. Admin. Code Rule 3.300 (manufacturing exemption) and Rule 3.411 (pollution control equipment) by number, businesses should not rely on it as binding for their own facts — the STAR disclaimer (34 Tex. Admin. Code Rules 3.1 and 3.10) applies — but it remains a useful illustration of how the agency draws the line between exempt in-process pollution control equipment and non-exempt general site infrastructure.

Common questions

Q: Are enclosures placed around conveyors to control dust exempt from Texas sales tax?
A: Yes, according to this letter — enclosures on conveyors installed to prevent wood dust from discharging into the atmosphere were held to qualify as exempt pollution control equipment used in manufacturing.

Q: Is road paving or road-sweeping equipment required by an air permit exempt as pollution control equipment?
A: No. The letter specifically found that road surfacing and road sweepers used to control fugitive dust from vehicle traffic do not qualify for the manufacturing exemption.

Q: Who pays sales tax on construction materials for a new manufacturing plant — the contractor or the plant owner?
A: It depends on the contract type. Under a separated contract, the purchaser pays tax on the material costs. Under a lump-sum contract, the vendor pays the tax on materials instead. If a separated contract shows materials at the vendor's actual acquisition cost, the total tax is the same either way.

Q: Does this letter cover all the equipment on our plant's process flow diagram automatically?
A: This particular letter confirmed the taxpayer's own submitted equipment list and diagram as largely exempt, with limited exceptions (non-processing conveyors, the fresh air exchanger, and pipes/ductwork remaining taxable). It is fact-specific to that taxpayer's diagram and cannot be relied on by other taxpayers for their own equipment lists.

Citations and references

• 34 Tex. Admin. Code Rule 3.1 (STAR detrimental reliance / letter ruling policy, cited in disclaimer)
• 34 Tex. Admin. Code Rule 3.10 (STAR detrimental reliance / letter ruling policy, cited in disclaimer)

Note: the original 1994 letter itself does not cite a specific Tax Code section or Comptroller rule number for the manufacturing exemption or the pollution control equipment exemption; it applies those exemptions by reference to the taxpayer's process flow diagram and permit conditions without a statutory citation in the body text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9405L1301D11

Original ruling text

May 16, 1994

Dear *****:

Recently, you wrote me concerning equipment that would be used in a proposed
strand board plant in *****, Texas. In your assumptions on the first
page, there was one point that needed to be corrected. In your third bullet,
you stated the vendor would pay sales tax on the material costs. If the
contract is separated, the purchaser would pay tax on the material costs. The
vendor would only pay tax if the contract was lump sum. If the contract is
separated and the vendor shows the materials at acquisition cost, there will be
no difference in tax between a lump sum contract and a separated contract.

All of the equipment listed and shown on the process flow diagram would be
considered exempt. Essentially, tax would only be owed on the conveyors on
which no processing takes place, the fresh air exchanger, and the pipes and
duct work.

At our meeting, we discussed the two items list on page three of your letter:

1. the road surfacing and road sweepers, and 2. the enclosures on the conveyors
   to prevent air pollution. We have determined that the road surfacing and road
   sweepers do not qualify for the manufacturing exemption. On the other hand, we
   have concluded the enclosures on the conveyors qualify as exempt pollution
   control equipment used in manufacturing.

I hope this satisfactorily answers your inquiry. Feel free to write me or call
me at I-800-531-5441, extension 3-4004 if you have any further questions.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

April 29, 1994

Mr. Wade Anderson
Assistant Director
Tax Administration

LBJ State Office Building
Austin, TX 78774

Dear Mr. Anderson:

The COMPANY A group greatly appreciated the time, discussions and suggestions
provided by you and your staff at our meeting in Austin on April 22. I have
attached our understanding of the exempted and the taxed items based on the
sales tax rules and regulations. Your review of this listing to verify the
accuracy or to provide correction would be much appreciated.

Ultimately, I would expect that an agreement would be reached between the State
and COMPANY A concerning the sales tax exempted items in the proposed oriented
strand board plant.

• Sales tax is due when title passes to COMPANY A for the item.

• Sales tax exemption goes to 100% on January 1, 1995 for all manufacturing
  process equipment.

• If COMPANY A purchases improvement to realty items in a separated contract
  where the vendor identifies the vendors actual material costs for that item and
  takes responsibility for installation (directly or through another contractor)
  then will pay sales tax only on the material cost. It is COMPANY A's intention
  to follow this practice:

• Exemptions:

Log Processing Equipment:

Log chop saws, debarkers, log step feeders (prepare the log bundle for
flaking), metal detectors, log, singulators, log scanners (to provide
information to chop saw controls).

Flaking System

Batch feeders to flakers, flakers, green flake vibrating screen section of
green flake conveyors, green flake live bottom metering bins.

Drying System

Rotary dryers including air valving, air-flake separators, dryer insulations,
heat traced duct work, internal dryer safety systems, fire dumps and any
environmental monitoring equipment. Dry flake screens, dry flake live bottom
material bins, dry flake weigh belt equipment. Blenders including resin and wax
dispersing heads and metering equipment and heat traced piping system to
prevent wax solidification.

Forming and Pressing System

Complete forming and pressing system from discharge of former infeed conveyor
to press discharge conveyor. Press enclosure, fans, ducting and RTO for air
emissions control.

Finishing System

All equipment except product conveyors from press discharge conveyor through
edge sealing and strapping equipment.

Heat Energy System

Rotary gasifiers including fuel preparation hog and metering equipment (since
COMPANY A will be selling synthetic natural gas to third party owner of syn-gas
combustion system), plus ash discharge system. Secondary combustion system will
be exempt for third party buying syn-gas and selling heat energy to COMPANY A.
Dust collection baghouse including temperature control system to protect
baghouse and emission monitoring equipment. Variable speed fans and stack for
rotary gasifier airflow control and emissions discharge.

Controls & Power

Electrical, hydraulic and pneumatic controls and power supply materials from
motor control centers to and including drive motors are exempt for all of the
manufacturing process equipment.

• Other

All dust collection baghouses and monitoring equipment.

Spare parts for exempt equipment.

In addition, we discussed the air permit Best Available Control Technology for
fugitive emission control requires that we hard surface rather than provide
gravel roadways on the plant site. Additionally, we are required to sweep these
surfaces as needed and have included four mechanical sweepers for this purpose.
Some sales tax relief for the costs of this requirement is requested under the
pollution abatement exemption.

Extra costs are also incurred due to the permit requirements to completely
enclosed conveyors so that no wood dust is discharged to the atmosphere. We
request exemption for these extra costs if our vendors clearly identify them.

I have enclosed the updated process flow diagram that incorporates the gasifier
heat energy process and have identified the third party ownership portion. If
you have any questions, please call me at *****.

Sincerely,

NOTE: Previous Accession Number 9405350L