Can a city split its taxable Solid Waste fee into a separate, untaxed 'Environmental Fee' covering community cleanup and environmental services?

Plain-English summary

A city's Solid Waste fee was already being charged sales tax in full. The city proposed splitting that single fee into two line items — a "Waste Fee" and a new "Solid Waste Environmental Fee" — with the Environmental Fee funding community-wide environmental services like citywide cleanup days, neighborhood sweeps, illegal-dumping enforcement, dead-animal pickup, closed-landfill maintenance, storm cleanup, vacant-lot abatement, anti-graffiti enforcement, ozone monitoring, and toxic-substance testing. The city asked whether the new, separately-labeled Environmental Fee could now be tax-exempt.

The Comptroller said no — the entire fee remains taxable. Rule 3.356 governs taxable real property services, including garbage/solid waste collection, and its subsection (i) explains when a bundled service can be treated as "unrelated" and thus excluded from tax: the service must not itself be taxable, must not be provided as part of the taxable service, must be commonly offered on a stand-alone basis, and must be distinct/identifiable from the taxable service. Critically, subsection (i)(2) says that once related taxable services make up more than 5% of a single combined charge, the Comptroller presumes the entire charge is taxable.

Here, most of the listed Environmental Fee services — off-schedule garbage pickup, landfill maintenance, addressing landfills as pollution sites, mowing vacant lots, and running a service-restitution program — were related to the taxable waste-collection service and, together, clearly exceeded 5% of the fee. So the whole Environmental Fee stayed taxable. The letter separately notes Rule 3.356(f) specifically bars breaking out landfill charges connected to garbage collection as an "unrelated" service, regardless of how a city labels the line item. A taxpayer wanting to exclude genuinely unrelated charges must keep books supporting the cost-based (or comparable-stand-alone-price) apportionment between exempt and nonexempt activities.

What this means for you

Municipalities and utility billing departments

Relabeling or splitting a single taxable fee into separately-named line items doesn't by itself make any portion exempt. What matters is whether the underlying services are genuinely unrelated to the taxable service under Rule 3.356(i)'s four-part test, and whether the related taxable portion exceeds the 5% threshold — if so, the Comptroller presumes the whole combined charge is taxable.

Waste management and environmental services vendors

If you bill a bundled fee that mixes taxable real property services (like garbage collection or landfill-related work) with genuinely separate, stand-alone-available services, you need documented cost-based support for any apportionment — and landfill charges tied to garbage collection specifically cannot be carved out under Rule 3.356(f).

Accountants and tax professionals

This letter is a good illustration of the Rule 3.356(i) "unrelated services" bundling test and its 5% presumption rule — useful whenever a client tries to isolate a nontaxable component from an otherwise-taxable real property service charge.

Common questions

Q: Can a city avoid sales tax on part of its garbage fee just by giving that part a different name (like "Environmental Fee")?
A: No, per this letter — relabeling doesn't change the tax result; what matters is whether the underlying services meet Rule 3.356(i)'s unrelated-services test.

Q: What's the 5% rule?
A: Under Rule 3.356(i)(2), if related taxable services make up more than 5% of a single combined charge, the entire charge is presumed taxable.

Q: Can landfill charges connected with garbage collection ever be separated out as nontaxable?
A: No — Rule 3.356(f) specifically prohibits treating landfill charges tied to garbage collection as an "unrelated," separable service.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.356(i) (unrelated services — four-part test)
• 34 Tex. Admin. Code Rule 3.356(i)(2) (5% presumption for bundled taxable/nontaxable charges)
• 34 Tex. Admin. Code Rule 3.356(f) (landfill charges tied to garbage collection cannot be separated out)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9810912L

Original ruling text

October 16, 1998

Dear Mr. **:

Thank you for your recent letter concerning the taxability of the City of
**'s proposed Solid Waste Environmental Fee.

The total fee that the City charges residential Solid Waste customers is
proposed to be reduced next year from $** to $** per
month. This will be accomplished by dividing the existing taxed solid waste fee
into two components: a $** Waste Fee and a $** Solid
Waste Environmental Fee. Combined, residential customers will pay
$** for both the Waste and Environmental Fees, for a monthly
savings of 10 cents.

The new Environmental Fee will be applied Citywide starting January 1, 1999 to
the City's 286,922 residential customers and an estimated 180,000 apartment and
commercial utility customers. It is being proposed in order to fund various
environmental services that benefit all City residents and businesses. Services
that benefit the entire community that will be funded by the new fee include:

City-wide Clean-up and Collection days
neighborhood sweeps
illegal dumping clean-up and enforcement
dead animal pick-up
maintenance of the City's closed landfills
address environmental pollution sites
clean-up after storms and other natural disasters
for increased vacant lot related abatement services by Code Compliance
for added anti-graffiti enforcement overtime
for vacant lot related services coordinated by the Park's Department community
service restitution program
added ozone monitoring and planning services in Public Works
for added environmental toxic substance testing by the Health Department

QUESTION- The Solid Waste fee, which included some of the above services, was
charged applicable sales tax. Now that the services have been separated, can
the Environmental Fee be tax exempt?

Response. Enclosed Rule 3.356 concerns taxable real property services
including garbage or solid waste collection services. Subsection (i) discusses
unrelated services and states that services are unrelated when they are not
taxable services, not provided as a part of the taxable service, are commonly
provided on a stand-alone basis, and are distinct and identifiable from the
taxable service. Section (i)(2) states that when nontaxable unrelated services
and taxable services are sold for a single charge and the taxable services are
over 5% of the charge, the total charge is presumed to be taxable. Subsection
(f) of the rule states that landfill charges connected with garbage collection
services may not be separated out in order to reduce the amount upon which tax
is collected (cannot be an unrelated service).

Any of the fees to pick up garbage on non scheduled days (after storms or
special by neighborhood), maintain landfills, address the landfills as
pollution sites, mow vacant lots not covered by Code Compliance, and maintain a
service restitution program appear to be related services per Rule 3.356.
These services appear to be in excess of 5% of the services performed, and as
such, the entire $** fee would be taxable. Please note that your
books must support any apportionment between exempt and non exempt activities
based upon the cost of providing the service or in comparison to the normal
charge for each service if provided alone.

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