Are culverts or drain pipes used on a farm or ranch exempt from Texas sales tax, and does it matter whether they're part of an irrigation system, a drainage system, or a road?

Plain-English summary

This letter is the Texas Comptroller's Tax Policy Division following up with a taxpayer who disagreed with an earlier answer about culverts and drain pipes used on farms or ranches. The Division held its ground and explained the distinction in more detail.

The key line the Division draws is between an underground irrigation system and everything else. Culverts or drain pipes — whether made of metal, clay, or other material — are exempt from sales tax when they're installed as components of an underground irrigation system, even if that system sits in a field or pasture or crosses a road. But if those same kinds of culverts or drain pipes instead become components of a road, they are taxable "building materials," not exempt irrigation components.

The letter explains why: the exemption for "machinery and equipment used or employed ... in the building or maintaining of roads or water facilities" covers the tools and devices used to perform the work of building a road — not the physical materials (like culverts) that end up incorporated into the road itself. A separate exemption, under 34 Tex. Admin. Code Section 3.296, does let building materials go untaxed, but only when used to build, construct, or fabricate specific things like fences, pens, gates, certain storage facilities, and certain buildings or structures that are essentially equipment. Road-building materials aren't on that list, so they stay taxable unless they qualify some other way (such as being part of an underground irrigation system).

The letter also notes that Texas exemptions must be interpreted strictly because they shift tax burden from one party to another, and that this can produce results that "may not make sense" — for example, the components of underground irrigation systems are exempt, but the labor to repair those already-installed components is not (they're treated as nonresidential realty). The letter further states that a legislative amendment was proposed, as part of the same bill, to add an exemption for underground drainage system components — but that amendment was never adopted. In other words, drainage systems (as opposed to irrigation systems) don't get the same treatment.

What this means for you

Farmers and ranchers installing underground systems

Whether your culverts or drain pipes are tax-exempt depends on what they're part of, not just where they're located. If they're incorporated into an underground irrigation system, they're exempt even where that system crosses a road or runs through a field or pasture. If the same materials instead become part of a road, or of a drainage system that isn't classified as irrigation, they're taxable building materials.

Businesses that build or maintain farm/ranch roads

The exemption for machinery and equipment used in building or maintaining roads or water facilities covers your tools and equipment — not the culverts, pipe, or other materials that get built into the finished road. Those materials are taxable unless a separate exemption (like the irrigation-system exemption, or Rule 3.296's list of specific structures) applies.

Accountants and tax professionals

Note the strict-construction principle the Division invokes: exemptions are read narrowly because they shift tax burden. Also note that the Division confirms no exemption exists for underground drainage system components specifically — a proposed amendment to add one was never enacted, so don't assume drainage-system components get the same exemption as irrigation-system components just because they look similar.

Common questions

Q: Are culverts or drain pipes always exempt on a farm or ranch?
A: No. They're exempt only when they're components of an underground irrigation system. If they become components of a road instead, they're taxable building materials.

Q: Does it matter if the irrigation system crosses a road or runs through a field or pasture?
A: No — the letter says the components remain exempt even if the underground irrigation system is in a field, pasture, or crosses a road.

Q: Is there a separate exemption for drainage systems, as opposed to irrigation systems?
A: According to this letter, no. An amendment to add an exemption for underground drainage system components was proposed as part of the same legislative bill that exempted irrigation components, but that amendment was never added.

Q: What exemption covers "machinery and equipment" used to build roads — does it cover the culverts and pipe themselves?
A: No. That exemption covers implements and devices used to perform the work of building or maintaining roads or water facilities. It does not cover the material components, like culverts or pipe, that become part of the finished road.

Q: Can any building materials on a farm or ranch be exempt?
A: Yes, but only in specific circumstances. 34 Tex. Admin. Code Section 3.296 allows an exemption for building materials used to build, construct, or fabricate items such as fences, pens, gates, certain storage facilities, and certain buildings or structures that are essentially equipment. Otherwise, building materials are taxable.

Q: Can I rely on this letter for my own situation?
A: The letter states its opinion is based on the facts presented, and that the opinion may change if there are different or additional facts. STAR letters generally can be relied on only by the taxpayer to whom they were directly issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Section 3.296 (agricultural exemptions sales tax rule — exemption for building materials used to build, construct, or fabricate fences, pens, gates, certain storage facilities, and certain buildings or structures that are essentially equipment)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9509685L

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.

September 5, 1995

Dear *****:

I am writing in response to your facsimile transmission of August 22, 1995.
You explained your disagreement with my response to your initial question
concerning culverts or drain pipes used on farms or ranches.

First, culverts or drain pipes whether made of metal, clay, or other material
are exempt when used or installed as components of an underground irrigation
system. If this system is in a field, pasture, or crosses a road, the
components remain exempt.

Culverts or drain pipes whether made of metal, clay, or other material that
become components of a road are building materials (elements or substances of
which something is composed or can be made). The exemption for "machinery and
equipment used or employed ... in the building or maintaining of roads or water
facilities" includes implements used in an operation or activity (building
roads) or devices used in the performance of a task (building roads) and does
not include the material components (building materials) of those roads or
water facilities. The exemption for the material component must come from
another section, as mentioned above for components of underground irrigation
systems.

Texas Administrative Code Section 3.296 (sales tax rule for agricultural
exemptions) allows an exemption for building materials only when used to
"...build, construct, or fabricate..." fences, pens, gates, certain storage
facilities, and certain buildings or structures that are essentially equipment.
Otherwise, building materials are taxable. I have enclosed edited copies of
letters and other documents addressing this issue.

The intent of the statute is to provide an exemption for certain items used in
qualifying manners, and the courts have held exemptions must be strictly
construed because they shift the tax burden from one entity to another. It's
true that exempting some items and taxing others may not make sense. For
example, legislative actions exempted the components of underground irrigation
systems, but did not give an exemption for the labor to repair those items once
installed as underground irrigation systems (nonresidential realty).
Additionally and part of the same bill, an amendment was proposed to add an
exemption for underground drainage components, but this amendment was never
added. Please see the letter dated October 8, 1993.

This opinion is based upon the facts presented. If there are different or
additional facts, this opinion may change. You may also write to Tax Policy
Division, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division