When a manufacturing plant's waste haul-off is 95% or more industrial solid waste (nontaxable) mixed with a small amount of taxable garbage like office trash, does the Comptroller's "five percent rule" exempt the whole haul-off charge from sales tax?

Plain-English summary

A manufacturer asked whether Texas's "five percent rule" would exempt an entire waste haul-off charge from sales tax if 95% or more of the material being removed is industrial solid waste generated by the actual manufacturing process (leaving only a small amount of ordinary taxable garbage, like office trash, mixed in). The Comptroller said no -- that's the wrong rule for this situation. Rule 3.356(a)(3)(E) excludes industrial solid waste from the definition of taxable "garbage or other solid waste" in the first place, and Rule 3.356(h) specifically addresses what happens when that excluded waste is commingled with taxable waste: the customer must accrue and remit tax on the PORTION of the charge that represents the taxable waste, based on a reasonable allocation the customer can support with its own books and records (documented via the exemption certificate). The five percent rule in Rule 3.356(i)(2) is a different, narrower concept -- it only lets an incidental, genuinely UNRELATED service sold for one combined charge escape tax if that service isn't part of the taxable service, is commonly sold on a stand-alone basis, and is distinct and identifiable. Mixed industrial/taxable waste hauled together in the same load doesn't fit that framework, so the manufacturer must remit tax on whatever share of the load is taxable waste, no matter how small that share is.

What this means for you

Manufacturers and industrial facilities using waste-hauling services

Don't assume that being 95%+ industrial solid waste exempts your entire haul-off charge. If any taxable garbage (like office trash) is mixed in, you must accrue and remit tax on a reasonable, documented allocation of the charge representing that taxable portion -- keep records supporting the split.

Waste hauling companies serving industrial customers

Structure exemption certificates to reflect the actual mix: fully exempt if the customer's waste is entirely excluded (industrial solid waste), or apportioned if the customer has a mix of taxable and excluded waste, with the customer responsible for accruing tax on the taxable share.

Accountants and tax professionals

Keep Rule 3.356(h) (commingled excluded/taxable waste, apportioned by reasonable allocation) distinct from Rule 3.356(i)(2) (the five percent rule for unrelated stand-alone services bundled into one charge) -- this letter is a clear example of a taxpayer trying to apply the wrong rule to get full exemption, and the Comptroller redirecting to the correct, apportionment-based rule instead.

Common questions

Q: If 95% or more of hauled-off waste is industrial solid waste, is the whole charge exempt under the five percent rule?
A: No, per this letter -- the five percent rule doesn't apply to this situation; Rule 3.356(h) governs commingled excluded and taxable waste instead.

Q: What must the manufacturer do about tax on mixed industrial/taxable waste?
A: Per this letter, remit tax on the portion of the charge representing the taxable (non-industrial) waste, based on a reasonable allocation supported by its own books and records.

Q: When does the five percent rule actually apply?
A: Per this letter, only to genuinely unrelated services sold for a single charge -- services not part of the taxable service, commonly sold stand-alone, and distinct/identifiable -- not to commingled waste of different types hauled in the same load.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.356(a)(3)(E) (industrial solid waste excluded from taxable garbage)
• 34 Tex. Admin. Code Rule 3.356(h) (commingled excluded/taxable waste)
• 34 Tex. Admin. Code Rule 3.356(i)(2) (five percent rule for unrelated services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9703447L

Original ruling text

March 14, 1997

Dear ***:

Thank you for your letter concerning the five percent rule as it relates to
industrial solid waste.

Questions: Does the five percent rule apply to industrial solid waste being
hauled off from a manufacturing plant? If ninety-five percent or greater of
the waste being removed is industrial solid waste resulting from the actual
manufacturing process, would this exempt from tax all waste being removed?

Response: Rule 3.356(a)(3) defines garbage or other solid waste.
Industrial solid waste is excluded in subsection (a)(3)(E) of that rule. Rule
3.356(h) discusses how excluded waste, such as industrial solid waste, is
handled. If the waste is totally excluded, the exemption certificate should
state this. If the customer has both taxable and nontaxable waste, then the
exemption certificate should state that the customer will be responsible for
accruing tax on that portion of the charge which represents taxable services.
This must be a reasonable allocation supported by the customer's books and
records. In the situation you described, the manufacturer must remit tax on
that portion of the waste hauled off that is not industrial solid waste.
Although Rule 3.356(i)(2) does explain the five percent rule, the treatment of
excluded waste is specifically addressed in subsection (h).

The five percent rule applies only to unrelated services and taxable
services sold for a single charge. Please note that the language regarding
unrelated services in (i)(2)(B) and (C) states that "it is not provided as a
part of the taxable service and is of a type which is commonly provided on a
stand-alone basis; and the performance of the unrelated service is distinct and
identifiable." Therefore, manufacturer must remit tax on that portion
of the waste hauled off that is not industrial solid waste as required by
subsection (h).

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