Is a natural gas line that fuels an underground farm irrigation system exempt from Texas sales tax as agricultural equipment?

Plain-English summary

A farmer/rancher asked about the taxability of a natural gas line used as a component of an underground irrigation system, wanting to issue an Agricultural Exemption Certificate instead of paying tax on the gas line's purchase. The gas line's only purpose was to fuel the pump that ran the irrigation system — without it, no water would flow through the irrigation pipe.

The Comptroller confirmed the materials qualify for exemption: effective September 1, 1993, tangible personal property installed as a component of an underground irrigation system used exclusively on a farm or ranch to produce agricultural products for sale qualifies for exemption, including components incorporated into the system or used to repair an existing one. The gas line, since it exclusively powers the irrigation system, is exempt as a component part. The letter also draws a labor distinction: labor to install a brand-new underground irrigation system is nontaxable new construction, while labor to repair or remodel an existing one is taxable real property repair and remodeling. The Comptroller separately apologized for a conflicting 1992 letter the taxpayer had previously received, explaining it predated the 1993 law change and had escaped an internal database screening.

Currency note: STAR itself flags this document with an ALERT that Texas Tax Code was later amended by H.B. 268 (82nd Legislature, Regular Session, 2011), effective January 1, 2012, which requires anyone claiming this agricultural or timber sales tax exemption to first apply for and hold a Comptroller-issued registration number. This 1997 letter predates that requirement entirely and does not address it.

What this means for you

Farmers and ranchers installing or repairing irrigation systems

Materials for a gas line (or other component) that exclusively powers a qualifying underground irrigation system on your farm or ranch are exempt from sales tax, and labor to install a brand-new system is nontaxable new construction — but labor to repair or remodel an existing system is taxable. And since 2012, you must also hold a Comptroller-issued agricultural/timber exemption registration number to claim the underlying materials exemption at all.

Accountants and tax professionals

When citing this or similarly aged agricultural-exemption letters, always layer in the post-2011 registration-number requirement (H.B. 268) — a client can meet every substantive test in a pre-2012 letter and still lose the exemption if they never registered.

Common questions

Q: Is a gas line that fuels a farm irrigation system exempt from Texas sales tax?
A: Yes, if it exclusively provides fuel/power to a qualifying underground irrigation system used on a farm or ranch to produce agricultural products for sale.

Q: Is labor to install or repair the irrigation system taxable?
A: Installing a brand-new system is nontaxable new construction; repairing or remodeling an existing system is taxable real property repair and remodeling.

Q: Has anything changed since this 1997 letter?
A: Yes — effective January 1, 2012, H.B. 268 (82nd Legislature, 2011) added a requirement that anyone claiming this agricultural/timber exemption first apply for and hold a Comptroller-issued registration number. This letter does not address that requirement.

Q: Can another farmer or rancher rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts, and your registration status, with a tax professional.

Citations and references

Subsequent law (post-dates this letter):

• H.B. 268, 82nd Texas Legislature, Regular Session (2011), effective 01/01/2012 (agricultural/timber exemption registration-number requirement)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9710814L

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.

October 20, 1997

Dear ****:

Thank you for your letter of October 15, 1997, concerning the taxability of a
natural gas line used as a component part of an underground irrigation system.

Your client is engaged exclusively in the business of farming and ranching and
wants to issue an Agricultural Exemption Certificate in lieu of tax on the
purchase of a natural gas line. The natural gas line is exclusively used to
provide fuel to operate an underground irrigation system. Without the gas
line, no water will flow through the irrigation pipe.

Response. Effective September 1, 1993, tangible personal property to be
installed as a component of an underground irrigation system for use
exclusively on a farm or ranch in the production of agricultural products sold
in the regular course of business is exempt. This includes all components
incorporated into the underground irrigation system or in the repair of an
existing irrigation system. Labor to install a new underground irrigation
system is not taxable because this is new construction. The labor to repair or
remodel an existing underground irrigation system is taxable real property
repair and remodeling.

The materials for a natural gas line exclusively used to provide power to the
qualifying underground irrigation system will qualify for exemption as a
component part of the underground irrigation system.

I apologize for the "conflicting answers" that you received. Our office
maintains a large database of letters, hearings, court cases, and law which
allows our tax specialists to answer questions. A single document (written in
1992 and correct at the time it was written) escaped detection when screening
for changes mandated by the 1993 law changes. Thank you for your help in
correcting this situation.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division