Do we have to charge sales tax on commercial wastewater treatment services, and on the hauling charges when we pick up the water ourselves?

Subject

Wastewater — Restoring/Treating Customer'S Water To Be Discharged Via Sewer Lines Is Not A Taxable Service

Plain-English summary

A company permitted by the Texas Natural Resources Conservation Commission (TNRCC) to accept and treat Class I and Class II nonhazardous industrial wastewater -- generated by machine shops or underground storage tank (UST) remediation work -- asked the Comptroller three questions about how sales tax applies to its business. The wastewater arrives at the company's facility either on the company's own trucks (about 50% of the volume, annually), on the customer's own vehicles, or via a paid contract carrier. Once at the facility, the water is stored and run through an ultrafilter process that removes oil and other contaminants; the cleaned water is then discharged to a municipal wastewater treatment plant through sewer lines, and the separated oil is sold to recyclers.

The Comptroller held that the treatment/restoration service itself is not taxable. The reasoning: water is tangible personal property, and repairing or restoring tangible personal property is normally taxable -- but water is specifically exempted from sales tax under Tex. Tax Code § 151.315, and § 151.3111(a) extends that exemption to services performed on exempt property. So restoring the customer's water is a nontaxable service regardless of whether the customer, a contract carrier hired by the customer, or the company's own trucks delivered the water to the facility.

Hauling is treated differently. If the company uses its own vehicles to pick up the waste from a customer's location, that pickup/removal charge can be a taxable "garbage collection service" -- unless the waste being removed is an industrial discharge regulated under a permit issued under Texas Water Code, Chapter 26 (the letter notes the company's TNRCC permit for Class I/II nonhazardous waste). If the wastewater picked up falls within that regulatory permit scheme, the hauling charge is also not taxable; if it falls outside it, the hauling charge is taxable. Where a taxable hauling charge is not separately stated and exceeds 5% of the total bill to the customer, the entire charge becomes taxable -- though the company can avoid that by separately stating the taxable hauling portion from the nontaxable treatment charge and taxing only the hauling piece. Finally, when hauling is taxable, local (city/county/special purpose district) and MTA transit taxes are sourced to the customer's pickup location, not to the location of the treatment facility.

What this means for you

Wastewater treatment / environmental services companies

The treatment/restoration process you perform on a customer's water is not taxable, no matter who transports the water to your facility. But if you use your own fleet to pick up waste, evaluate whether that specific waste stream is covered by a Chapter 26 industrial-discharge permit -- if it isn't, your pickup charge is taxable as a garbage collection service, and you should separately state it on the invoice to avoid taxing the whole bill.

Accountants and tax professionals

This letter illustrates the interaction between the general repair/restoration tax (on tangible personal property) and the specific water exemption chain: § 151.315 exempts water, and § 151.3111(a) exempts services performed on exempt property. It also shows the 5% "de minimis" style rule for separately stating taxable versus nontaxable charges on a single invoice, and confirms local/MTA tax sourcing rules follow the point of pickup for taxable garbage/hauling services.

Businesses generating industrial or UST-remediation wastewater

If you pay a vendor to treat wastewater for you, the treatment charge should not carry sales tax. If that same vendor also hauls the water away using its own trucks, ask whether the hauling charge is separately stated and whether it reflects permitted industrial discharge -- this affects whether tax (state and any local/MTA tax tied to your location) applies to that portion of the bill.

Common questions

Q: Is a wastewater treatment/restoration charge taxable in Texas?
A: No. Water is exempt property under Tex. Tax Code § 151.315, and services performed on exempt property are also exempt under § 151.3111(a).

Q: Does it matter who transports the wastewater to the treatment facility?
A: Not for the treatment charge itself -- it's nontaxable whether the wastewater is delivered by the customer, a contract carrier the customer pays, or the treatment company's own trucks.

Q: When is a hauling/pickup charge taxable?
A: When the treatment company uses its own vehicles to remove the waste from the customer's site, the charge can be a taxable garbage collection service -- unless the waste falls under an industrial discharge permit issued under Texas Water Code, Chapter 26.

Q: What happens if the taxable hauling charge isn't separately stated?
A: If it's not separately stated and is more than 5% of the total charge, the entire charge to the customer becomes taxable. Separately stating the hauling charge limits tax to just that portion.

Q: Whose location determines local/MTA tax on a taxable hauling charge?
A: The customer's location where the waste is picked up, not the location of the treatment facility.

Citations and references

Statutes:

• Tex. Tax Code § 151.315 (water exemption)
• Tex. Tax Code § 151.3111(a) (services performed on exempt personal property)
• Tex. Water Code, Chapter 26 (regulation of industrial discharges)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9604125L

Original ruling text

April 16, 1996

Dear **:

I am responding to your letter asking about taxes due on commercial waste water
treatment services. You have received conflicting information from customers
and request our agency to confirm your responsibilities.

You explained that your company is permitted by the Texas Natural Resources
Conservation Commission (TNRCC) to accept and treat Class I and Class II
nonhazardous waste water from industry. The waste water you process is
generated by machine shops or underground storage tanks (USTs) undergoing
remediation work.

The waste water is transported to your facilities by one of three methods:

1. Your company's own transport fleet (You go to your customer and get the
   water.)

2. Your customers' own vehicles (Your customer brings the water to your
   facility.)

3. Contract carriers (A third party is paid to transport the water from
   customer to you.)

On an annual basis, approximately 50% of the water is transported by your
vehicles and the remaining 50% is transported by methods 2 or 3. Upon arrival
the waste water is transferred to storage tanks located at your facilities. The
waste water is then processed and treated utilizing your ultrafilter treatment
process. This process removes oil and other contaminants from the water.
Treated waste water is discharged to a municipal waste water treatment works
via sewer lines. The separated oil is tanked and sold for recycling to oil
recycling facilities.

Your customers may be located from Houston to Odessa. However, most are in the
DFW Metroplex, and a few are in surrounding communities such as Denton,
Gainsville, and Ennis. You asked the following questions to which I have
provided a response.

1. Does our company have to collect state and city sales taxes for the services
   we provide as described above?

Water is tangible personal property. The repair or restoration of tangible
personal property is taxable. The service that you perform is the restoration
or repair of water belonging to your customers. However, water is exempted by
the sales tax statute 151.315, and 151.3111(a) exempts services performed on
exempted personal property. Therefore, your charge for the service to restore
the water is not taxable.

2. Does our company have to collect state and city sales taxes on waste water
   treatment services wherein waste water is picked up and hauled by our own
   transport fleet, by the customer's fleet or by contract carrier?

The services performed on waste water transported to your facility by your
customer or by a contract carrier that your customer hires/pays is not taxable.
(See Response to #1.)

The charge to your customer for the use of your vehicles to remove waste from a
customer's location may be a charge for garbage collection service. However,
the removal of industrial discharges subject to regulation by permit issued
pursuant to the Texas Water Code, Chapter 26 are not taxable. You referred to a
permit from TNRCC to accept and treat Class I and Class II nonhazardous waste
water from industry. If the waste water that is picked up and hauled by your
company falls within these industrial discharges regulations, the hauling
charge is not taxable. If the waste water that is picked up and hauled by your
company does not fall within these regulations, the hauling charge is taxable.

If the hauling charge is taxable and is more that 5% of the overall charge to
your customer, the total amount must be taxed. You may separately state the
taxable hauling charge from the nontaxable service and only collect tax on the
hauling charge.

3. Must our company collect MTA taxes from customers whose facilities are
   located in a particular MTA zone or is the MTA tax restricted to the location
   of our facility?

If the hauling charges are taxable, local taxes are determined from the point
of the garbage collection, i.e., your customer's location. For example, if your
customer is in a taxing city, county, special purpose district, and/or a taxing
MTA, then that city's, county's, special purpose district's and/or MTA's tax is
due.

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

Sincerely

Tax Policy Division