If a company hires contractors to clean up PCB contamination at its facility, does it owe sales tax on the site inspection, soil removal, decontamination cleaning, and waste-hauling charges?

Subject

Hazardous Waste (Defined By Epa Or Other Agencies) — Hauling — Also Exemption Certificate And Evidence Requirements (Manifest, Official Documents)

Plain-English summary

A taxpayer asked the Comptroller's Tax Policy Division whether environmental clean-up expenses were taxable. The clean-up involved compressor stations that had been contaminated by lubricants containing PCBs, and various service providers were hired to inspect the sites, remove and replace contaminated soil, and flush the contaminated air compressor systems. No maintenance or installation work was involved, and the work would not extend the life of the equipment.

The Comptroller broke the answer into several pieces:

• Site inspection and removal/replacement of contaminated soil are nontaxable services. The service providers pay tax on the materials and equipment they use to perform this work, but they do not collect sales tax from the customer on the services themselves.
• Cleaning (decontaminating) the compressor stations is a taxable real property service under subsection (a)(7) of Rule 3.356. The letter notes that a clean-up at an oil or gas well site would not be taxable, but clean-up of real property at a plant or other location away from a well site is taxable.
• Hauling away the PCB-contaminated waste, if billed as a separate charge, is not taxable — this falls under the hazardous-waste hauling exclusion in subsection (a)(3)(D) of Rule 3.356. To get that treatment, the customer needs to certify to the service provider that the waste being hauled is hazardous waste (for example, an exemption certificate stating the waste contains PCBs, which is a hazardous waste).
• Cleaning tangible personal property (rather than real property) is generally a taxable service, but Texas Tax Code Sec. 151.338 exempts services involved in the repair, remodeling, maintenance, or restoration of tangible personal property when the service is required by statute, ordinance, order, rule, or regulation of a court or governmental entity to protect the environment or conserve energy. That exemption doesn't help with the real-property clean-up described above, but it could apply to decontamination of equipment that counts as tangible personal property.

The Comptroller closed by noting the opinion was based on the facts submitted, and that other facts, even if similar, could yield different results.

What this means for you

Businesses paying for environmental clean-up services

If you're paying contractors to inspect, remediate, or decontaminate a site, expect the tax treatment to vary by the specific task: inspection and soil removal/replacement are not taxed as services, but cleaning/decontaminating real property (like a building, plant, or equipment fixed to real property) away from a well site is a taxable real property service.

Businesses hauling away hazardous waste

If a separate charge is billed for hauling away hazardous waste (such as PCB-contaminated materials), that hauling charge is not taxable — but you need to give the hauler an exemption certificate certifying the waste is hazardous waste to support that exemption.

Businesses decontaminating equipment or other tangible personal property

Cleaning tangible personal property is generally a taxable service. However, if the specific cleaning, repair, remodeling, maintenance, or restoration is required by a statute, ordinance, court order, or government rule/regulation to protect the environment or conserve energy, Tax Code Sec. 151.338 may exempt it — you can provide an exemption certificate to the service provider for that portion of the work.

Common questions

Q: Is a site inspection for environmental contamination taxable?
A: No. Site inspection services are treated as nontaxable services in this letter.

Q: Is removing and replacing contaminated soil taxable?
A: No, that's also treated as a nontaxable service. The contractor still pays tax on the materials and equipment it uses to do the work.

Q: Is cleaning/decontaminating a contaminated building or plant taxable?
A: Yes, if it's away from an oil or gas well site. It's treated as a taxable real property service under Rule 3.356(a)(7). Clean-up at an oil or gas well site itself would not be taxable.

Q: Is a separate charge to haul away hazardous waste taxable?
A: No, as long as it's billed as a separate hauling charge and the customer certifies to the hauler (with an exemption certificate) that the waste is hazardous waste.

Q: Is cleaning contaminated equipment (tangible personal property) always taxable?
A: Cleaning tangible personal property is generally taxable, but Tax Code Sec. 151.338 exempts such services when they are required by a statute, ordinance, court order, or government rule/regulation to protect the environment or conserve energy.

Q: Can another taxpayer rely on this letter?
A: No. This letter was issued to a specific redacted taxpayer based on the facts it submitted, and STAR letters generally can support a detrimental reliance claim only for the taxpayer to whom they were directly issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.356 (Real Property Service) — subsection (a)(7) (taxable decontamination/cleaning of real property) and subsection (a)(3)(D) (exclusion for hauling away hazardous waste)
• Texas Tax Code Sec. 151.338 (exemption for repair, remodeling, maintenance, or restoration of tangible personal property required by law to protect the environment or conserve energy)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9512771L

Original ruling text

December 13, 1995

Dear *:

Thank you for your letter requesting a determination of whether environmental
clean-up expenses paid by ***** are taxable.

The environmental clean-up expenditures would be for services performed by
various service providers in cleaning some of *****'s compressor stations
that had been contaminated by the usage of lubricants containing PCBs. The work
to be performed by these service providers will be for site inspections,
removal and replacement of contaminated soil, and the flushing of the air
compressor systems contaminated by PCBs. There will be no maintenance or
installation services performed and the life of the assets will not be
lengthened by the work performed.

Response: The site inspection and the removal and replacement of contaminated
soil are nontaxable services. The service providers would pay tax on all
materials and equipment used in providing site inspection and soil remediation
services, but would not collect sales tax on their services.

The cleaning of the compressor stations (decontamination) would involve a
taxable real property service as explained in subsection (a)(7) of enclosed
Rule 3.356. While a clean-up operation at a oil or gas well site would not be a
taxable, the clean-up of real property at a plant or at another location away
from a well site is a taxable service. However, if there is a separate charge
to haul away the PCB contaminated materials, this waste hauling charge is not
taxable. See the exclusion in (a)(3)(D) of the rule for the hauling away of
hazardous waste. You would need to certify to the service provider that the
waste they haul away is hazardous waste. This can be done by giving the service
provider an exemption certificate stating the waste contains PCBs which is a
hazardous waste.

You may have other situations in which tangible personal property rather than
real property is decontaminated. Cleaning tangible personal property is a
taxable service. However, Texas Tax Code Sec. 151.338 provides an exemption for
services involved in the repair, remodeling, maintenance, or restoration of
tangible personal property if the service is required by statute, ordinance,
order, rule or regulation by a court or governmental entity to protect the
environment or to conserve energy. While this exemption will not help you in
the clean-up of real property, you may give an exemption certificate to a
service provider providing services to tangible personal property exempted by
Sec. 151.338.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division