Is an environmental services company's cleanup of an oil spill in a Texas waterway, and its disposal of the spilled oil, subject to Texas sales tax?

Plain-English summary

The Comptroller ruled that when an environmental services company cleans up an oil spill in a Texas waterway and disposes of the recovered oil, neither service is subject to Texas sales tax. The customer here had hired the company after a spill from a vessel's overboard discharge into a river, and received two invoices — one for the cleanup, one for waste disposal.

The cleanup itself is a nontaxable service. The waste-disposal invoice is also nontaxable because oil is specifically excluded from the definition of taxable "waste removal" in Rule 3.356(a)(3)(A), which governs real property services — oil disposal is instead regulated under Chapter 26 of the Texas Water Code. Since neither service is taxable, the environmental company should not have billed sales tax on either invoice.

That doesn't mean the environmental company itself pays no tax at all: as the consumer of the equipment and supplies it uses to perform these nontaxable services, it owes sales tax on its own purchases or rentals of that equipment. If it wants to pass those costs through to the customer, it must clearly label the charge as a reimbursement — the two invoices at issue here didn't do that, so the sales tax billed on them wasn't owed.

What this means for you

Environmental services and spill-cleanup companies

If you clean up spills in Texas waterways and handle disposal of the recovered material, don't charge your customer sales tax on either service. You are the "consumer" of your own equipment and supplies, so you pay tax when you buy or rent them — and if you want to recover that cost from the customer, itemize it as a labeled reimbursement rather than folding it into (or billing as) sales tax on the service charge.

Business owners and accountants

Watch the labeling on pass-through cost invoices. The ruling turns partly on the fact that the sales tax the vendor had billed wasn't a proper "reimbursement" of the vendor's own tax cost — it was billed as tax on a nontaxable service. If your vendor is billing you sales tax on cleanup/disposal work like this, ask what the charge represents.

Common questions

Q: Is oil spill cleanup in Texas taxable as a real property service?
A: No. This ruling treats the cleanup of an oil spill in a waterway as a nontaxable service.

Q: Is disposing of the spilled oil a taxable "waste removal" service?
A: No. Oil is excluded from the definition of taxable waste under Rule 3.356(a)(3)(A); its disposal is instead regulated by Chapter 26 of the Texas Water Code.

Q: Does the cleanup company pay any tax at all?
A: Yes — as the consumer of the equipment and supplies used to perform the nontaxable services, the company owes sales tax on those purchases/rentals itself. It just can't collect tax from the customer on the service charge, unless it separately labels a pass-through as a reimbursement.

Q: Can I rely on this letter for my own spill cleanup?
A: Not directly — a STAR letter can support a detrimental-reliance claim only for the taxpayer it was issued to, and this letter says its answer is based on the specific facts submitted; different facts could change the result.

Citations and references

Rules and statutes:

• 34 Tex. Admin. Code Rule 3.356(a)(3)(A) — waste removal (real property services); oil is excluded from taxable "waste"
• Texas Water Code Chapter 26 — disposal of oil is regulated here, not as a taxable waste-removal service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911850L

Original ruling text

November 3, 1999

Dear **:

Thank you for your letter concerning the taxability of an oil spill cleanup by
an environmental services company for your client.

The spill occurred on September 12, 1999 at **, Texas. Oil was
spilled from the vessel's overboard discharge and into the **
River. The environmental services company had one invoice for the cleanup and
one invoice for the waste disposal.

A service to cleanup an oil spill in a waterway, such as the **
River, is not taxable to the customer. As far as the invoice for the waste
disposal of the oil that was spilled, this service is also not taxable to the
customer because oil is a waste excluded from the definition of taxable waste
in Rule 3.356(a)(3)(A) on real property services. The disposal of oil is
regulated under Chapter 26 of the Texas Water Code.

The environmental service company is not required to collect sales tax from
your client on the oil spill cleanup and disposal services. The environmental
service company is the consumer and must pay sales tax on the purchase or
rental of all taxable items (equipment and supplies) used in providing the
nontaxable services. If the environmental service company is seeking to
reimburse itself for its costs or expenses incurred in performing the
nontaxable services (such as sales tax it paid on equipment rentals), the
company must clearly label these charges as reimbursements. This is not the
case in the two invoices you forwarded and sales tax billed on the invoices is
not due on the services as I explained above.

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