I am writing in response to your request for a Revenue Legal Opinion addressing the Sales Tax on the Wastewater Treatment equipment.

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Junior Morton
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STATE OF ARKANSAS REVENUE LEGAL COUNSEL Department of Finance Post Office Box 1272, Room 2380 Little Rock, Arkansas 72203-1272 and Administration Phone: (501) 682-7030 Fax: (501) 682-7599 http://dfa.

1 STATE OF ARKANSAS REVENUE LEGAL COUNSEL Department of Finance Post Office Box 1272, Room 2380 Little Rock, Arkansas and Administration Phone: (501) Fax: (501) March 15, 2016 VIA at RE: Opinion No Sales Tax Wastewater Treatment, I am writing in response to your request for a Revenue Legal Opinion addressing the Sales Tax on the Wastewater Treatment equipment. On behalf of the, with this letter, I am requesting a state sales tax exemption determination for the wastewater treatment equipment listed on the following page. We are trying to get this project to bid as quickly as possible since is under a Consent Administrative Order with the Arkansas Department of Environmental Quality. I am enclosing a copy of the determination letter from ADEQ. As you can see, they have determined that the only items that should not be exempt are the following: - Electrical work to wire / connect treatment system to electrical power - Operations building to house compressor, chemical feed pumps, control panel and chemical storage tank - Intermediate bulk storage container to store treatment chemicals The attached ADEQ letter lists the following items as machinery and equipment used to remove contaminants from wastewater: 1. Sand filtration system [tertiary treatment of lagoon effluent] 2. Concrete Junction Box [directing water away from existing overland flow fields] -1-

2 3. Reinforced concrete headwall/flume [for discharge to lagoon and to drainage stream to prevent erosion] SDR 35 PVC pipe [directing flow from existing overland flow fields away from the treatment system] 5. 8 SDR 35 PVC pipe [directing flow from lagoon to filter system] 6. 2 SDR 21 Class 200 PVC pipe [directing filter reject to lagoon] 7. Butterfly valves [valves to influent piping system] 8. Check valves [influent side of filters] 9. Screen/Strainer plate [prevents large solids from entering filtering system] 10. Pump station to transfer filter reject to back to treatment lagoon [pumping filter reject back to lagoon] 11. In-pipe static mixer for ferric chloride 12. Chemical feed tubing/conduit 13. Erosion control materials for construction RESPONSE The Arkansas Gross Receipts Tax, also referred to as the Sales Tax, is generally applicable to the sale of tangible personal property and certain enumerated services. See Ark. Code Ann (Repl. 2014). The tax is computed based on the total value of consideration paid for the taxable property or service. Ark. Code Ann ; see also Ark. Code Ann (13) (Repl. 2014). The Arkansas Code provides an exemption from the Gross Receipts Tax for machinery and equipment required by law or regulation to be installed and utilized to reduce water or air pollution. Ark. Code Ann (a)(3) (Supp. 2015). The Arkansas Gross Receipts Tax Rules further explain: E. WASTEWATER TREATMENT PLANTS. 1. Machinery and equipment used in a city or county wastewater treatment plant are exempt if the machinery and equipment is used to remove contaminants from wastewater. The treatment process begins when solids are first removed from the wastewater and ends when all solids and other contaminants are removed from wastewater. 2. The water treatment process does not include: a. Collecting wastewater from locations outside of the treatment plant and delivering wastewater to the treatment plant; or b. Disposing of solids or other contaminants removed from wastewater. 3. The following items are examples of exempt machinery and equipment provided that the machinery and equipment is used during the water treatment process as described in GR-66(E)(1) above: Examples: pipes, pumps, valves, screens, screen baskets, gates, blowers, fans, skimmers, aerators, diffusers, equalization basins, concrete flumes, 2

3 conveyor belts, flow meters, grit separators, grit removal equipment, back flow preventers, chlorination equipment, digester equipment, vacuators, and air eductors. 4. The following items are examples of taxable items: materials used in constructing improvements to real estate, housing for machinery, handrails, ladders, paint, lighting equipment, pump stations, lift stations, pipes and equipment utilized in sewage collection outside of the treatment area, machinery and equipment which control the flow of wastewater into the treatment facility, sludge de-watering equipment, machinery and equipment used for measuring, controlling, or testing the treatment process, sludge pumping equipment, and sludge application system. Ark. Gross Receipts Tax Rule GR-66. To qualify for this exemption, three initial criteria must be met 1) the party claiming the exemption must secure certification from state or federal pollution control authorities that the machinery or equipment is required for pollution control purposes; 2) the machinery or equipment for which the exemption is being claimed must be used to remove contaminants from wastewater during the treatment process; and 3) the party claiming the exemption must be either a manufacturing or processing plant or facility or a city or town in Arkansas. You have provided a copy of the letter for the Arkansas Department of Environmental Quality that serves as certification from the state authority that machinery or equipment is required for pollution control purposes. Assuming that your claim to be constructing the Wastewater Treatment Plant for the is true, this meets the third requirement. The pollution control exemption applies, generally, to machinery and equipment that acts directly upon the wastewater to prevent or reduce pollution. Equipment that does not act directly upon the wastewater during the treatment process, but which is used during and as a part of the treatment process will also be exempt. Machinery and equipment that is used solely before or after the treatment process, however, is taxable. Furthermore, machinery and equipment that perform testing functions are not considered to be involved in the actual treatment process and are therefore also taxable. Finally, the operative definition of machinery and equipment does not include fixtures, housings, or stand-alone control equipment which does not constitute an integral part of a device used in the actual treatment of the wastewater. 1. Sand filtration system [tertiary treatment of lagoon effluent] As I understand the backwash sand filtration systems, these are gravity based filtration systems that use the sand as an agent for filtration trapping and removing contaminant solids from the effluent. ANSWER: EXEMPT. The sand filtration system acts to remove contaminants from the effluent as required by GR-66. 3

4 2. Concrete Junction Box [directing water away from existing overland flow fields] ANSWER: TAXABLE. As described, this junction box is used to direct water to a surface discharge in conjunction with the pipe in Item 4, below, and appears to act on the water after the treatment process is complete. It, therefore, does not meet the requirements of GR-66 and is subject to tax. 3. Reinforced concrete headwall/flume [for discharge to lagoon and to drainage stream to prevent erosion] ANSWER: EXEMPT. As explained more fully in subsequent correspondence, the lagoon at issue is part of the treatment process. The effluent returning to the lagoon is partially treated and is being returned to the lagoon for further treatment through the settling of solids. Accordingly, this is machinery and equipment used in the process of wastewater treatment and is exempt under GR SDR 35 PVC pipe [directing flow from existing overland flow fields away from the treatment system] ANSWER: TAXABLE. As described, this piping is used to direct water to a surface discharge rather and appears to act on the water after the treatment process is complete. It, therefore, does not meet the requirements of GR-66 and is subject to tax SDR 35 PVC pipe [directing flow from lagoon to filter system] ANSWER: EXEMPT. As explained more fully in subsequent correspondence, the lagoon at issue is part of the treatment process. Because the lagoon acts as part of the treatment process through solid settling and this pipe transports the wastewater to the next step in the process, it is exempt under GR SDR 21 Class 200 PVC pipe [directing filter reject to lagoon] ANSWER: EXEMPT. As explained more fully in subsequent correspondence, the lagoon at issue is part of the treatment process. The effluent returning to the lagoon is partially treated and is being returned to the lagoon for further treatment through the settling of solids. Accordingly, this piping is machinery and equipment used in the process of wastewater treatment and is exempt under GR Butterfly valves [valves to influent piping system] ANSWER: EXEMPT. These valves are used in the influent piping system transporting partially treated wastewater between steps of the process. Specifically, these have been described as providing the ability to shift the treatment stream between two filters to allow one filter to be cleaned without disrupting the treatment stream. 8. Check valves [influent side of filters] 4

5 ANSWER: EXEMPT. Valves are specifically listed as an example of exempt machinery or equipment used in wastewater treatment plans in the process of removing contaminants from the wastewater. 9. Screen/Strainer plate [prevents large solids from entering filtering system] ANSWER: EXEMPT. Screens are specifically listed as an example of exempt machinery or equipment used in wastewater treatment plans when removing contaminants from the wastewater. 10. Pump station to transfer filter reject to back to treatment lagoon [pumping filter reject back to lagoon] ANSWER: TAXABLE. Pumping stations are specifically listed as an example of taxable machinery and equipment in GR-66(E)(4). 11. In-pipe static mixer for ferric chloride ANSWER: EXEMPT. Chlorination equipment is an example of machinery and equipment exempt from tax under GR-66(E)(3). Furthermore, this is described as a component of removing solid contaminants from the wastewater treatment which would be exempt machinery or equipment under GR Chemical feed tubing/conduit ANSWER: EXEMPT. The chemical tubing or conduit is part of the chlorination equipment used to sterilize the effluent prior to discharge and is an example of machinery and equipment exempt from tax under GR-66(E)(3). 13. Erosion control materials for construction ANSWER: TAXABLE. Erosion control materials are not machinery and equipment used directly in the treatment of wastewater. Additionally, erosion control services are taxable as Landscaping Services to commercial property under Ark. Gross Receipts tax Rule GR-9.2 which specifically lists landscaping for erosion control as taxable. This opinion is based on the facts provided in the opinion request. Any change in the facts or circumstances could result in a different legal opinion. You may rely on this opinion for three years pursuant to Ark. Gross Receipts Tax Rules GR-75(B). If you have further concerns or questions, you may contact me at joel.dipippa@dfa.arkansas.gov or

6 Sincerely, Joel DiPippa, Attorney at Law Revenue Legal Counsel 6

Gross Receipts Tax Exemption for Equipment Installed in a Wastewater Treatment Facility Opinion Number

Gross Receipts Tax Exemption for Equipment Installed in a Wastewater Treatment Facility Opinion Number STATE OF ARKANSAS REVENUE LEGAL COUNSEL Department of Finance Post Office Box 1272, Room 2380 Little Rock, Arkansas 72203-1272 and Administration Phone: (501) 682-7030 Fax: (501) 682-7599 http://www.arkansas.gov/dfa