Sales Tax Slice: Wastewater: The Un-Tapped Resource?


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March 22 was U.N. World Water Day. Studies show that as globalization picks up its pace, the demand for water is expected to increase 50 percent by 2030. Enter this year’s theme: wastewater. This is the term for water after it’s used in homes, factories and even on farms; it’s the water that travels through public sewer lines and flows back into the environment untreated over 80 percent of the time globally. 1.8 billion people “use a source of drinking water contaminated with feces,” according to the World Health Organization. But access to clean water isn’t just an issue in the developing world. Here in the U.S., the Flint crisis is a recent reminder of our own domestic vulnerability. One creative solution to clean water shortages may be state sales tax exemptions for wastewater treatment.

There are currently 14,748 wastewater treatment plants in the U.S. These plants generally do not supply water to the public—their purpose is to treat and release safe water back to the environment. However, organizations like the U.N., through its World Water Day campaign, are hoping to reintroduce wastewater as a “resource[] rather than a burden.” This effort includes increasing the number of treatment plants, as well as advancing treatment methods to develop more opportunities for reuse.

States have the potential to encourage participation in this movement. Their authority to offer tax exemptions could incentivize increased facilitation of clean water. Six states already offer sales tax exemptions for wastewater treatment plants. Some, like Indiana, have passed specific statutes exempting machinery and equipment used in wastewater treatment. Others, like Texas, permit exemptions for tangible personal property used to treat wastewater—if the water is used in a manufacturing or processing activity.

In jurisdictions where the tax treatment of wastewater processing is not addressed, plants may be able to find relief through a customary manufacturing exemption. Related industries, such as drinking water filtration, have been attempting to use this exemption to purchase equipment tax-free. However, the Arkansas Supreme Court recently concluded that “converting raw surface water into potable drinking water” did not qualify as a manufacturing activity. Rather, the state viewed this process as “merely putting raw material into a marketable form.” In Pennsylvania, the Board of Finance and Revenue stated that altering the composition of water by removing minerals was not enough of a “change in physical property” to qualify for their exemption.

If these state decisions are any indication of a trend, it may be similarly difficult to squeeze wastewater treatment into a traditional manufacturing exemption. And riskier for businesses hoping to get involved. As a result, legislatures may be in a better position to carve out new tax exemptions for this specific industry.

Continue the discussion on the BBNA State Tax Group on LinkedIn: Should states offer tax exemptions for wastewater treatment?

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By Ariam Tsighe