Is a soil/groundwater remediation system (like an Air Sparge/Soil Vapor Extraction System) required by the Texas Natural Resource Conservation Commission exempt from Texas sales and use tax as pollution-control equipment?

Plain-English summary

The Texas Comptroller's Tax Policy Division responded to a taxpayer asking about the construction, installation, and operation of a "Remediation System" — specifically an Air Sparge/Soil Vapor Extraction System (AS/SVES) installed in October 1995 to clean up volatile organic compounds released from an underground storage tank. The system was required by the Texas Natural Resource Conservation Commission (TNRCC) as part of its Voluntary Clean-up Program, and the contract covered remediation equipment (blowers, gauges, piping, etc.), a building with a concrete foundation and driveway, vertical and horizontal wells, underground piping and surface man-ways, and installation of the equipment.

The taxpayer asked whether there's an exemption for remediation systems required by TNRCC or other regulatory agencies, and if so, whether it covers the whole construction project. The Comptroller's answer was no. There is an exemption under Rule 3.300 (the manufacturing rule) for materials — other than machinery or equipment — used in manufacturing to comply with public health or pollution-control laws, but that exemption is tied to manufacturing. Because this system was remediating soil and groundwater around an underground storage tank rather than being used in a manufacturing process, the manufacturing exemption did not apply.

Instead, the letter treats the Remediation System as becoming an improvement to real property once constructed, which means it's new construction subject to Texas's contractor rules (Rule 3.291). Under a lump-sum contract, the contractor owes tax on all materials bought, leased, or rented for the job. Under a separated contract, the contractor can buy materials tax-free with a resale certificate if they'll be incorporated into the customer's real property, but must then collect tax on the agreed contract price for those incorporated materials — and still owes tax on all other materials and equipment used to perform the contract. The letter also notes that repairing or remodeling a Remediation System that's an improvement to realty is a taxable service (Rule 3.357), and that repair, maintenance, or remodeling of tangible personal property within a well is also taxable (Rule 3.292).

What this means for you

Environmental remediation contractors

If you build or install a soil/groundwater remediation system (such as an AS/SVES) required by TNRCC or another regulatory agency, don't assume it qualifies for a pollution-control or manufacturing tax exemption. This letter says that exemption applies to manufacturing, not remediation. Instead, expect to be taxed under the general contractor rules that apply to any improvement to real property — meaning your tax treatment depends on whether your contract is lump-sum or separated.

Property owners or businesses ordering remediation work

Because the remediation system becomes part of the real property once installed, how much tax gets paid — and who pays it — depends on the contract structure. A lump-sum contract means the contractor owes tax on all materials it buys, leases, or rents for the job. A separated contract lets the contractor buy materials tax-free for resale but requires the contractor to charge you tax on the contract price for the materials that get incorporated into your property.

Anyone repairing or maintaining an existing remediation system

Once the system is built, repairing or remodeling it (as an improvement to real property) is a taxable service under Rule 3.357, and repairing, maintaining, or remodeling tangible personal property located within a well is also taxable under Rule 3.292.

Common questions

Q: Is a remediation system exempt from Texas sales tax just because a regulatory agency like TNRCC requires it?
A: No. This letter says requiring the system for regulatory compliance doesn't by itself create an exemption; the manufacturing-related pollution-control exemption under Rule 3.300 doesn't apply here because the work is remediation, not manufacturing.

Q: How is the construction of a remediation system taxed instead?
A: As new construction of an improvement to real property. Under a lump-sum contract the contractor owes tax on all materials used for the job; under a separated contract the contractor can buy materials tax-free for resale but must collect tax on the incorporated materials at the contract price, per Rule 3.291.

Q: Is repairing or remodeling an existing remediation system taxable?
A: Yes. Repair or remodeling of a Remediation System that is an improvement to real property is a taxable service under Rule 3.357, and repair, maintenance, or remodeling of tangible personal property within a well is taxable under Rule 3.292.

Q: Can other taxpayers rely on this letter for their own remediation projects?
A: Not directly. The letter states the opinion is based on the facts presented and that other facts, though similar, may produce a different result.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.300 (manufacturing exemption for pollution-control materials — held not applicable)
• 34 Tex. Admin. Code Rule 3.291 (Contractors — lump-sum vs. separated contracts)
• 34 Tex. Admin. Code Rule 3.357 (repair/remodeling of improvements to real property)
• 34 Tex. Admin. Code Rule 3.292 (repair, maintenance, or remodeling of tangible personal property within a well)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9511672L

Original ruling text

November 10, 1995

Dear ** :

This is in response to your request for a ruling on the construction,
installation and operation of a Remediation System in the state of Texas. Your
facts are restated below:

1. an Air Sparge/Soil Vapor Extraction System (AS/SVES) was installed in
   October 1995 to remediate the release of volatile organic compounds from
   an underground storage tank.

2. the AS/SVES is required to remediate subsurface soil and ground water to
   levels established by the Texas Natural Resource Conservation commission
   (TNRCC). The project is part of the TNRCC Voluntary Clean-up Program.

3. the contract consists of the purchase of the following:

a.various remediation equipment, i.e., AS/SVES blowers, pressure
gauges, variable frequency modulator, knock-out drum, manifold,
piping, etc.
b. building with a concrete foundation and driveway
c. a vertical AS/SVES wells
d. horizontal SVE well
e. underground piping and surface man-ways
f. installation of remediation equipment

4. a portion of the Remediation Equipment will be housed in the building and
   a portion will be installed underground

Questions:

Is there, an exemption for Remediation Systems that are used to clean-up
contaminated soil and groundwater required by the TNRCC or other regulatory
agencies?

If yes, does the exemption include the total construction project and/or cost?

Response: No. There is an exemption, under Rule 3.300, concerning
manufacturing,
for materials, other than machinery or equipment, used in manufacturing to
satisfy or comply with requirements of law or regulations for public health or
pollution control purposes. However, because the system that you installed is
for the remediation of soil/water around an underground storage tank, the
exemption available under the manufacturing rule would not apply.

I presume that the Remediation System becomes an improvement to real property
when constructed. If this is the case, then the new installation of a
Remediation System constitutes new construction of an improvement to real
property. Under a lump-sum contract, the contractor owes tax on all materials
bought, leased, or rented for use on the job. Under a separated contract, the
contractor may issue a resale certificate to purchase, tax free, materials that
will be incorporated into the customer's real property. The contractor must
collect tax on the agreed contract price for the incorporated materials. The
contractor owes tax on all other materials and equipment bought, leased, or
rented for use in performing the contract. See Rule 3.291 regarding
Contractors.

Repair or remodeling of an Remediation System that is an improvement to realty
is a taxable service. See Rule 3.357. Repair, maintenance, or remodeling of
tangible personal property within a well is also a taxable service. See Rule
3.292.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,
Gilbert Zamora
Tax Policy Division