Is a waste collection service that picks up used oil and oil filters taxable, and can the service provider buy the collection containers tax-free?

Plain-English summary

Two named recipients wrote to the Texas Comptroller's office asking how tax applies to a waste collection service that picks up used oil and oil filters from customers, and whether the service provider can buy the collection containers (95-gallon drums) tax-free.

The Comptroller explained that waste collection services are generally taxable, but Chapter 26 of the Texas Water Code excludes certain waste — including used oil and oil filters — from the definition of "garbage" or "other solid waste." A customer can give the waste collection provider certification or other documentation stating that its waste qualifies for this exclusion. Until the customer provides that documentation, the service remains taxable, as previously explained in TR# 1311 (microfiche 9209T1193G01).

This documentation requirement also affects how the provider (referred to in the letter as "Oil") can purchase its own equipment tax-free. Under Tax Code § 151.302(b), a business may buy tangible personal property tax-free (i.e., under the resale exemption) if the property's care, custody, and control passes to the customer as part of a taxable service. So the 95-gallon drum containers can be bought tax-free as long as the waste collection service using them remains taxable — that is, until a customer documents that its waste is excluded under Chapter 26.

Once a customer provides that documentation and the service becomes nontaxable, Tax Code § 151.154(a) requires the provider to pay tax on the containers used in that nontaxable service, even though they were bought with a resale certificate. The provider can pay tax based on either the fair market rental value of the containers for the period they were used in the nontaxable service, or the original purchase price of the containers.

The Comptroller suggested that providers proactively notify customers about the Chapter 26 exclusion, collect the documentation, and pay tax on the containers at the time of purchase — that way the provider can factor the tax cost into its pricing up front. Importantly, the provider cannot be denied the resale exemption on containers merely because it is required to collect tax on the service (when customers haven't certified the exclusion); conversely, once the service becomes nontaxable because a customer does document the exclusion, the provider must then pay tax on the containers.

What this means for you

Waste collection service providers

If you collect used oil, oil filters, or other waste that may qualify for the Chapter 26 Water Code exclusion, your service is taxable by default. It only becomes nontaxable for a given customer once that customer gives you certification or other documentation that its waste is excluded from the definition of garbage or solid waste. Track which customers have provided this documentation, since it determines both whether you charge tax on the service and how you must treat your own container purchases.

Businesses that generate excluded waste (e.g., used oil, oil filters)

If your waste qualifies for the Chapter 26 exclusion, you can reduce or eliminate the sales tax charged on your waste collection service by providing your provider with certification or other documentation of that exclusion.

Accountants and tax professionals

This letter illustrates the interaction between the taxable-service resale exemption (§ 151.302(b)) and the tax on TPP used in nontaxable services (§ 151.154(a)): a provider's ability to buy equipment tax-free under a resale certificate depends on whether the underlying service is taxable, and that status can change mid-stream once a customer supplies exclusion documentation. When that happens, the provider owes tax on the equipment going forward — either on the original purchase price or on the fair market rental value for the period of nontaxable use.

Common questions

Q: Is a waste collection service that picks up used oil and oil filters automatically tax-exempt?
A: No. The service is taxable until the customer gives the provider certification or other documentation that the waste is excluded from the definition of garbage or solid waste under Chapter 26 of the Texas Water Code.

Q: Can a waste collection provider buy its collection containers tax-free?
A: Yes, under the resale exemption in Tax Code § 151.302(b), as long as the containers are used to perform a taxable service (i.e., before a customer documents that its waste is excluded).

Q: What happens once a customer documents that its waste is excluded from tax?
A: The service becomes nontaxable for that customer, and under Tax Code § 151.154(a) the provider must then pay tax on the containers used — based on either the fair market rental value for the period of nontaxable use or the original purchase price.

Q: Can the provider be denied the resale exemption if it has to collect tax on the service?
A: No. The provider cannot be denied the resale exemption on containers simply because it is required to collect tax on the service when customers have not certified or documented that their waste is excluded.

Citations and references

• Tex. Tax Code § 151.302(b) — exemption for tangible personal property used to perform a taxable service if care, custody, and control transfers to the purchaser of the service.
• Tex. Tax Code § 151.154(a) — requires a purchaser to pay tax on tangible personal property used to provide nontaxable services, even if purchased with a valid resale certificate.
• Chapter 26, Texas Water Code — excludes certain waste (such as used oil and oil filters) from the definition of garbage or other solid waste.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9501L1329C04

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

DATE: January 4, 1995
TO: Robert Muh and Jill Rodgers, *
FROM: David Somerville, Tax Administration
SUBJECT: Waste Collection Services Excluded Under Chapter 26 of the Texas
Water Code
REF: * (Metals) and ** (Oil)

Any customer who has used oil and oil filters removed by a waste collection
service provider may provide certification or other documentation that states
the waste is excluded from the definition of garbage or other solid waste
because of Chapter 26 of the Texas Water Code. The waste collection service is
taxable until the customer provides certification or other documentation to the
service provider that the waste is excluded from the definition of garbage or
other solid waste. The requirement to collect tax on the service until the
customer provides documentation that the waste is excluded is explained in TR#
1311 (microfiche 9209T1193G01).

Texas Tax Code Sec. 151.302(b) allows an exemption for tangible personal
property used to perform a taxable service if the care, custody, and control of
the tangible personal property is transferred to the purchaser of the service.
The 95 gallon drum containers provided by Oil to customers may be purchased
tax-free if used in performing a taxable service. Oil is providing a taxable
service until the customer gives certification or other documentation to Oil
that the waste is excluded because of Chapter 26 of the Water Code.

Texas Tax Code Sec. 151.154(a) requires a purchaser to pay tax on tangible
personal property that is used to provide nontaxable services even if purchased
with a valid resale certificate. If the customer provides documentation that
the waste is excluded from the definition of garbage or other solid waste, Oil
must pay tax based on the fair market rental value of the containers during the
period the containers are used in providing nontaxable services. Oil may choose
to pay tax on the original purchase price of the containers instead of the fair
market rental value for the period used in providing nontaxable services.

It would be best if waste collection service providers that collect used oil
and oil filters from customers notify their customers about the exclusion in
Chapter 26 in the Water Code, get the documentation from their customers and
pay tax on containers at the time of purchase. That way, the service provider
may take the cost of the tax on the containers into account when deciding the
price to charge for the service. However, Oil cannot be denied the resale
exemption on containers if Oil is required to collect tax on the service
because the customers do not certify or document the waste is excluded. On the
other hand, Oil must pay tax on the containers once the service is nontaxable
because the customer provides certification or other documentation the waste is
excluded.

NOTE: Previous Accession Number 9501797L