Is cleaning out debris from an existing farm irrigation canal a taxable service in Texas, and does the agricultural exemption cover it?

Plain-English summary

A company wrote to the Texas Comptroller's Tax Policy Division asking about the taxability of cleaning debris out of an existing irrigation canal on a farm. The company had charged its customer, a farmer, sales tax on the work. The farmer had called the Comptroller's office and was told the "Agriculture Act" exempted the work because the farmer was raising food.

The Comptroller's letter confirms the company was right to charge tax. While Tex. Tax Code § 151.316 provides many exemptions for farmers and ranchers, none of those exemptions extend to taxable services — only to certain items of tangible personal property. An irrigation canal is a nonresidential improvement to real property, and cleaning debris out of an existing canal to restore it as near as possible to its original working order is nonresidential restoration, which is taxable under 34 Tex. Admin. Code § 3.357. The letter notes that the same "lack of exemption" applies to repair, restoration, or remodeling of an agricultural road, agricultural well, or underground irrigation system — and that this gap was specifically flagged to the legislature when the exemption for components of underground irrigation systems was added, but no exemption for agricultural use of taxable services has been added since.

The letter also draws a contrast: some services performed on a farm or ranch simply don't meet the definition of a taxable service in the first place, so they're not taxable regardless of the agricultural exemption question. The examples given are new construction (such as building a brand-new canal) and mowing a hay field.

What this means for you

Farmers and ranchers

Don't assume agricultural exemptions cover services performed on your farm. Tex. Tax Code § 151.316's agricultural exemptions apply to qualifying property, not to taxable services like nonresidential repair and restoration. Cleaning an existing irrigation canal, repairing an agricultural road, or restoring an agricultural well or underground irrigation system is taxable even though it's agricultural work.

Contractors and service providers working on farms

If you're restoring or repairing an existing nonresidential real property improvement on a farm — an irrigation canal, agricultural road, well, or underground irrigation system — charge sales tax on that work as nonresidential repair/remodeling under 34 Tex. Admin. Code § 3.357. But services that fall outside the definition of a taxable service, such as new construction (building a brand-new canal) or mowing a hay field, are not taxable.

Accountants and tax professionals

Advise agricultural clients that the § 151.316 exemptions are property-based, not service-based, and that verbal guidance from a general Comptroller's office phone line (as happened here, with a farmer being told the "Agriculture Act" applied) is not a substitute for a written determination — the Comptroller here disagreed with what the farmer had been told.

Common questions

Q: Does the Texas agricultural exemption cover repair services performed on a farm?
A: No. The exemptions in Tex. Tax Code § 151.316 have not been extended to taxable services, so services like restoring an irrigation canal are still taxable even when performed for a farmer or rancher.

Q: Is cleaning debris out of an existing irrigation canal taxable?
A: Yes. It's treated as nonresidential restoration of real property under 34 Tex. Admin. Code § 3.357, restoring the canal as near as possible to its original working order.

Q: What about repairing an agricultural road, well, or underground irrigation system?
A: The letter states the same taxable treatment applies — repair, restoration, or remodeling of these is taxable as nonresidential repair or remodeling, with no agricultural exemption available.

Q: Is mowing a hay field taxable?
A: No. The letter lists mowing a hay field as an example of a service that doesn't meet the definition of a taxable service, so it is not taxable.

Q: Is building a brand-new irrigation canal taxable?
A: No. New construction, such as building a new canal, is given as an example of a nontaxable service (as distinguished from restoring an existing canal, which is taxable).

Citations and references

Statutes and regulations:

• Tex. Tax Code § 151.316 (agricultural exemptions)
• 34 Tex. Admin. Code § 3.357 (nonresidential repair, remodeling, and restoration)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9508L1364G11

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

August 16, 1995

Dear **:

Thank you for your letter regarding the taxability of cleaning an irrigation
canal on a farm.

You explained that your company taxed the work. The farmer called the
Comptroller's office for an opinion and was told that under the "Agriculture
Act" they were exempt because they were raising food. There are many
exemptions available to farmers or ranchers under the Sales Tax Statute
Section 151.316; however, an exemption for taxable services has not been added
to this section.

An irrigation canal is a structure that is a nonresidential improvement to
realty. Cleaning the debris out of an existing canal is restoring the canal
as near as can be to its original working order. This is nonresidential
restoration and taxable under Texas Administrative Code Section 3.357.

Likewise, the repair, restoration, or remodeling of an agricultural road,
or an agricultural well, underground irrigation system, etc. is taxable as
nonresidential repair or remodeling. This "lack of exemption" was
specifically pointed out to the legislative body when the exemption for
components of underground irrigation systems was added. To date no action has
been taken to add an exemption for agricultural use of taxable services.

Because some services performed on a farm or ranch do not meet the definitions
of taxable services, they are not taxable. Nontaxable services include
services such as new construction (building a new canal), mowing a hay field,
etc.

You are correct in taxing the amount charged for cleaning out an existing
irrigation canal on a farm. I apologize to you and your customer for the
confusion.

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

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

Sincerely,

Tax Policy Division

NOTE: Previous Accession Number 9508378L