SECTION 3.318. Water-Related Exemptions (Tax Code, §§151.314, 151.315, and 151.355)

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Brush control--The selective control, removal, or reduction from watershed rangelands of noxious mesquite, prickly pear, salt cedar, or other deep-rooted woody plants to enhance the availability of water. A brush control service that frees up water is not a taxable real property service as defined in §3.356 of this title (relating to Real Property Service).

(2) Desalination--The removal of salts from non-potable or brackish surface water or groundwater so that the water is useable freshwater or high-quality drinking water.

(3) Political subdivision--A city, county, district, authority, or any other political subdivision of the State of Texas, any interstate compact commission to which the State of Texas is a party, and any nonprofit water supply corporation that is created and operated under Water Code, Chapter 67.

(4) Precipitation enhancement--Cloud seeding to artificially induce rain clouds to produce rain.

(5) Rainwater harvesting--The capture and storage of rainwater for subsequent use.

(6) Reduction or elimination of water use--The use of devices, services, or supplies for the sole purpose of saving water.

(7) Regional water supply or waste water system--A system that the Texas Commission on Environmental Quality certifies as a regional system.

(8) Water recycling and reuse--The recapture of water for reuse.

(b) The following are exempt from sales and use tax. Equipment, services, or supplies when used solely for:

(1) brush control. Examples of equipment and supplies that are used in brush control include bulldozers, root plows, crawler tractors, hydro axes, chains, roller choppers, aerial sprayers, sling blades, grass seed, and herbicides;

(2) desalination;

(3) precipitation enhancement. Examples of equipment that is used in precipitation enhancement include aircraft, global positioning systems, weather radar equipment, and seeding chemicals;

(4) reduction or elimination of water use. For example, a toilet dam is used to reduce the amount of water used;

(5) construction or operation of a:

(A) regional water supply or waste water system; or

(B) water supply or waste water system by a private entity as a public-private partnership as certified by a political subdivision that is a party to the project;

(6) rainwater harvesting; or

(7) water recycling and reuse.

(c) Effective date. The effective date of the exemption that is described in subsection (b) of this section is September 1, 2001. A purchaser who claims the exemption must give the seller a properly completed exemption certificate. The purchase, lease, or rental of such items prior to September 1, 2001 is taxable, unless otherwise exempt.

(d) Divergent use. A person who claims a valid exemption on the purchase, lease, or rental of an item described in subsection (b) of this section, and who then uses the item in a taxable manner, is required to report and pay sales tax to the comptroller based on the fair market rental value of the tangible personal property or fair market value of the taxable service for the period of time that the item is used in a taxable manner. At any time, a purchaser may elect to pay sales tax on the purchase price of the item, but no credit is allowed for taxes that were previously paid based on fair market value. See §3.287 of this title (relating to Exemption Certificates).

(e) Taxable services performed on exempt items. A person who performs a repair, restoration, remodeling or maintenance service to tangible personal property described in subsection (b) of this section is not required to collect sales tax on that service if the customer provides a properly completed exemption certificate. This exemption applies to services that are performed on or after September 1, 2001.

(f) Water. The sales tax law specifically exempts the sale of water, including spring water, sparkling water, or mineral water, from sales or use tax. The exemption includes the sale of bottled water and water that a restaurant or any other food service provider sells. An exemption certificate is not required. Flavored water (carbonated or non-carbonated) is a soft drink and is taxable. See §3.293 of this title (relating to Food; Food Products; Meals; Food Service) for further information on soft drinks. The sale of brine water, other than naturally occurring brine water, is taxable.

(g) Rural Water Assistance Fund. A nonprofit water supply corporation or a nonprofit sewer service corporation is exempt from paying sales tax on the purchase, lease, or rental of tangible personal property and on the purchase of taxable services for projects that the Rural Water Assistance Fund finances. The nonprofit corporation must keep records that clearly show which taxable items were purchased for projects that the Rural Water Assistance Fund financed.

(h) Economically Distressed Areas Program (EDAP). A nonprofit water supply corporation or a nonprofit sewer service corporation is exempt from paying sales tax on the purchase, lease, or rental of tangible personal property and on the purchase of taxable services for projects that EDAP finances for an economically distressed area as defined in Water Code, §17.921(1). The nonprofit corporation must keep records that clearly show which taxable items were purchased for projects that the EDAP financed.

Source Note: The provisions of this §3.318 adopted to be effective October 9, 2002, 27 TexReg 9386; amended to be effective October 12, 2004, 29 TexReg 9551