The Alabama Tax Tribunal (Tribunal) determined that a wastewater treatment facility was entitled to a sales and use tax exemption for equipment purchased for use in its wastewater treatment business because the equipment was used primarily for exempt pollution control purposes.
The taxpayer, a privately owned entity that provided wastewater collection and treatment services, had previously received exemption certificates from the Alabama Department of Revenue (the Department) to purchase pollution control equipment and materials tax free (e.g., pumps, pipes, valves, fittings, etc.).
In 2023, the taxpayer applied for another exemption certificate, but the Department only partially granted the request, limiting the exemption to certain specified pieces of equipment, while denying the exemption for certain materials that transported wastewater from homes and other properties to sewer lines. The taxpayer appealed the denial, and during the appeal, the Department provided a similar partial grant for the taxpayer’s 2024 exemption certificate request.
The taxpayer argued that under both the statute and the regulation the materials were exempt devices used to control water pollution, whereas the Department asserted that the materials in question were not purchased for pollution control purposes, but were purchased to fulfill contracts with its customers as a part of the taxpayer’s profit-motivated business. The Tribunal concluded that because 1) wastewater is a form of water pollution and 2) the taxpayer’s wastewater treatment plants were built for the sole purpose of treating wastewater, the taxpayer was entitled to the full exemption certificate. The Tribunal also noted that the regulation acknowledges that an incidental or secondary purpose does not deprive the taxpayer of the exemption.