SECTION 3.326. Carbon Dioxide Capture and Sequestration

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

(1) Advanced Clean Energy Project--A project for which an application for a permit or for an authorization to use a standard permit under Health and Safety Code, Chapter 382 is received by the Texas Commission on Environmental Quality on or after January 1, 2008, and before January 1, 2020. At its conclusion, the project will meet all standards with respect to energy sourcing, method of related generation or co-generation of electricity, emissions levels, and carbon dioxide capture and sequestration as set forth in Health and Safety Code, §382.003(1-a). A project may include new construction; nonresidential repair, remodeling, or restoration; maintenance; or the sale and installation of qualifying components of tangible personal property.

(2) Anthropogenic Emission Source--A location that emits man-made carbon dioxide, including but not limited to, a coal burning electric production plant.

(3) Clean Energy Project--A project defined by Natural Resources Code, §120.001(2), and certified as such by the Railroad Commission of Texas as provided by Natural Resources Code, §120.004. A project may include new construction; nonresidential repair, remodeling, or restoration; maintenance; or the sale and installation of qualifying components of tangible personal property.

(4) Components of tangible personal property--For the purposes of this section, the term shall have the meaning given to the term "tangible personal property" as defined in Tax Code, §151.009 and includes tubing, pipe, valves, tanks, machinery and equipment, including replacement parts for such items, used specifically to capture carbon dioxide from an anthropogenic emission source, to transport or inject carbon dioxide from such a source, or to prepare carbon dioxide from such a source for transportation or injection. The term also includes actuators, generators, transformers (and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, and telemetry units that are related to the transformers), electronic control room equipment, computerized control units, pumps, hydraulic units, and related accessories that are used to power, supply, support, or control such components.

(5) Install--To attach or incorporate components of tangible personal property that either retain their identity as tangible personal property or become improvements to realty.

(6) Maintenance on real property--For operational and functional improvements to realty, maintenance means scheduled, periodic work that is necessary to sustain or support safe, efficient, continuous operations, or to prevent the decline, failure, lapse, or deterioration of the improvement. Taxable real property services that are described by §3.356 of this title (relating to Real Property Service) do not qualify as maintenance. Maintenance does not include work to remodel, modify, upgrade, perform major repair, or restore, even if the work is scheduled or periodic.

(A) As it relates to maintenance, the term "scheduled" means anticipated and designated to occur within a given time period or production level.

(B) As it relates to maintenance, the term "periodic" means ongoing or continual or at least occurring at intervals of time or production that are reasonably predictable.

(7) Modification--The alteration or upgrade of an existing improvement to real property by repair, remodeling, or restoration (see §3.357 of this title (relating to Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance)) or the alteration or upgrade of existing components of tangible personal property that have maintained their identity as tangible personal property after installation. Partial demolition of existing nonresidential realty is taxable modification. The complete demolition of an existing nonresidential improvement to real property is not modification and is not taxable.

(8) Replacement part--Any part attached to an installed component of tangible personal property to repair or upgrade the component.

(9) Sequester--To inject carbon dioxide into a geological formation:

(A) as part of an enhanced oil recovery project that qualifies for a tax rate reduction under Tax Code, §202.0545(c); or

(B) in a manner and under conditions that create a reasonable expectation that at least 99% of the carbon dioxide will remain separated from the earth's atmosphere for at least 1,000 years.

(b) Exemption for certain components of tangible personal property.

(1) The sale, use, storage or consumption of components of tangible personal property used in connection with an advanced clean energy project or a clean energy project are exempted from sales and use tax if:

(A) the components are installed on the project, either to become annexed to realty or to retain their identity as tangible personal property, are necessary and essential, and are used in this state directly:

(i) to capture carbon dioxide from an anthropogenic emission source;

(ii) to transport or inject carbon dioxide from such a source; or

(iii) to prepare carbon dioxide from such a source for transportation or injection; and

(B) the carbon dioxide is sequestered in this state.

(2) Items that are merely useful or incidental to the project, such as office machines, office supplies, maintenance supplies, cleaning supplies, lubricants, consumables and similar items are taxable.

(c) Records required. A qualifying project must maintain records that support the exemption and are verifiable by audit. See §3.281 of this title (relating to Records Required; Information Required) and §3.282 of this title (relating to Auditing Taxpayer Records). The records must include copies of invoices showing the item purchased, the date of purchase, the amount of purchase and the identity of the seller. Records must also reflect the exempt nature of the component of tangible personal property purchased under an exemption certificate, and must also substantiate at the conclusion of the project that:

(1) in the case of a clean energy project, the project is certified by the Railroad Commission of Texas as provided by Natural Resources Code, §120.004; or

(2) in the case of an advanced clean energy project, the Texas Commission on Environmental Quality has received an application for a permit or for an authorization to use a standard permit under Health and Safety Code Chapter 382 on or after January 1, 2008, and before January 1, 2020, and the project:

(A) involves the energy sourcing types and related electricity generation or co-generation methods set forth in Health and Safety Code, §382.003(1-a)(A);

(B) meets the emissions level standards set forth in Health and Safety Code, §382.003(1-a)(B); and

(C) captures and sequesters carbon dioxide in accordance with the standards set forth in Health and Safety Code, §382.003(1-a)(C).

(d) Contracts to improve realty.

(1) A contractor who incorporates components of tangible personal property into realty as covered in §3.291 of this title (relating to Contractors) may accept an exemption certificate in lieu of tax for any components of tangible personal property that qualify for exemption under subsection (b) of this section sold under a separated contract. Taxable materials, such as foundation materials, must be separately stated from qualifying components of tangible personal property. A single charge for qualifying and nonqualifying materials will be presumed taxable.

(2) The services of a contractor who incorporates components of tangible personal property into realty under a lump-sum contract as part of new construction as covered in §3.291 of this title are not taxable. Although a contractor is the consumer of all the materials the contractor uses in the performance of a lump-sum contract, the contractor may issue an exemption certificate to a vendor of components of tangible personal property when the components will be installed on a project qualifying for exemption under subsection (b) of this section.

(3) When components of tangible personal property are incorporated into realty as part of a qualifying repair, remodeling, or restoration project as described in subsection (b) of this section, the components will be exempt and should be separately stated from both nonqualifying materials and taxable labor. A lump-sum charge to repair, remodel, or restore nonresidential realty is presumed taxable. The presumption may be overcome by the service provider at the time the transaction occurs by separately stating to the customer a reasonable charge for the taxable services. If, however, the charge for the qualifying components of tangible personal property is not separately stated at the time of the transaction, the service provider or the purchaser may later establish for the comptroller, through documentary evidence, the percentage of the total charge that relates to exempt qualifying components. Examples of acceptable documentation include purchase invoices, bid sheets, or schedules of values. See §3.357 of this title.

(e) Sale and Installation. The sale and installation of components of tangible personal property on a qualifying project, as described in subsection (b) of this section, are exempt when the items retain their identity as tangible personal property.

(f) Taxable services performed on exempt items. A person who performs repair, restoration, remodeling or maintenance services on exempt components of tangible personal property, which, after installation, retain their identity as tangible personal property, is not required to collect sales tax on that service if the customer provides a properly completed exemption certificate.

(g) Maintenance on real property. Components of tangible personal property installed as part of maintenance on real property are exempt when the installation is performed on a clean energy project or an advanced clean energy project. Persons performing real property maintenance under separated contracts should refer to subsection (d)(1) of this section. Persons performing real property maintenance under lump-sum contracts should refer to subsection (d)(2) of this section.

(h) Divergent use. A person who claims a valid exemption or refund on the purchase of a component of tangible personal property under the provisions of subsection (b) of this section, but 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 component of tangible personal 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).

(i) Effective date. The provisions of this section are effective September 1, 2009. A purchaser who claims an exemption under this section must give the seller a properly completed exemption certificate. The sale, use, storage or consumption of such items prior to September 1, 2009, is taxable unless otherwise exempt.

Source Note: The provisions of this §3.326 adopted to be effective August 5, 2010, 35 TexReg 6694