Pollution Control Property in Texas: The Real and Personal Property Exemptions Process
By Paul Pennington The TNRCC:
Texas Natural Resource Conservation Commission Pollution Control
Program is controlled by the regulations of Title 30 of the
Texas Administrative Code. The purpose, of what has become known
as the Proposition 2 Program, created in 1993, was to promote
compliance with environmental laws by granting property tax
exemptions on pollution control property owned by companies
doing business in Texas. Initially, this program was primarily
utilized by chemical and oil and gas companies. Today, however,
the Texas Natural Resource Conservation Commission is receiving
background of the Texas Natural Resource Conservation Commission:
Before addressing the eligibility of the "Company’s"
right to any property tax exemption, first we must discuss
the agency and its procedures for securing an exemption. The
Texas Natural Resource Conservation Commission (TNRCC) is
the consolidation of the Texas Water Commission and the Texas
Air Control Board. The origin of these two agencies go back
to the first drainage district created in 1905 and continued
through all of the State and federal acts dealing with water
and clean air over the years. The TNRCC was created on "September
1, 1993, becoming the state’s lead environmental agency."
1 The mandate of the TNRCC is stated in its mission
promote and foster voluntary compliance with environmental
ensure that regulations promote flexibility in achieving
ensure that regulations and decisions are rational and based
on common sense, good science, and current risk factors."
ensure that regulations are applied clearly and consistently."
ensure meaningful public participation in the decision making
ensure strict, sure, and just enforcement when environmental
laws are violated."
ensure that unnecessary, ineffective, or redundant regulations
and processes are eliminated whenever possible."
ensure that this agency is dedicated to serving the people
of Texas and to hire, develop and retain a high-quality,
diverse workforce." 2
The exemption: The exemption, created in 1993,
was the result of the 73rd Legislature’s passage
of House Bill 1920. This was followed by a popular referendum
of a Constitutional Amendment (Proposition 2). The intent
of the amendment was to:
that compliance with environmental mandates, through capital
investments, did not result in an increase in a facility’s
receive an exemption through the Proposition 2/Use Determination
Program, "the property" must obtain two determinations
from the TNRCC.
Texas Natural Resource Conservation Commission shall
determine if the facility, device, or method is used
wholly or partly as a facility, device, or method for
the control of air, water, or land pollution. As soon
as practicable, the executive director shall send notice
by regular mail to the chief appraiser of the appraisal
district for the county in which the property is located
that the person has applied for a determination under
this subsection." 4
the executive director determines that the facility,
device, or method is used wholly or partly to control
pollution, the director shall issue a letter to the
person stating that determination and the proportion
of the installation that is pollution control property."
may contact the TNRCC directly or on-line at their web site
at: http://www.tnrcc.stste.tx.us/exec/chiefeng/prp2. The Predetermined
Equipment List (PEL) is divided into the following general categories.
Pollution Control Equipment
Pollution Control Equipment
Waste Management Pollution Control Equipment
Pollution Control Equipment
and Aboveground Storage Tanks
pollution Control Equipment (general category).
Control Devices (sub-category).
(specific PEL property), with the percent of exemption noted.
of these categories is subdivided into sub-categories. For
helps the applicant determine which assets they own which
on are already on the PEL and qualify as a total or as a partial
facility, device, or method for the control of air, water,
or land pollution.
How to request an exemption: The first step in applying
for an exemption starts with a request of necessary information.
Persons interested in the exemption should request from the
TNRCC their latest issue of the Regulatory Guidance
Use Determination for Pollution Control Property Publication.
The technical manual is divided into eight sections.
The first section deals with background of the creation of
the exemption and technical regulations and requirements.
The Appendix (A-G) provided a current PEL of pollution control
equipment, an application form and instructions, examples
of capital expenditures that do and not qualify, a sample
of a completed application, samples of calculations for partial
exemptions, frequently asked questions, and a flowchart and
timeline of the application process.
Pollution Control Equipment
Pollution Control Equipment
Waste Management Pollution Control Equipment
Pollution Control Equipment
and Aboveground Storage Tanks
above referenced manual may be obtained by requesting it from
TNRCC Proposition 2 Section, MC-110
P.O. Box 13087
Austin, Texas 78711-3087
E-mail address: http://www.tnrcc.state.tx.us/exec/chiefeng/prp2
Phone number: (512) 239-6348 Fax number: (512) 239-4007
application for obtaining a Use Determination from the TNRCC
is fairly straightforward. The application deadline is January
31, but an extension may be requested in writing. There are
fees associated with filing an application, which is a three-tier
fee structure. For example if all the property listed on an
application is on the TNRCC Proposition 2 predetermined equipment
list (PEL), and was acquired after January 1, 1994, the fee
would be $50.00. The acquisition date applies to all three-fee
structures. Tier II in intended for 100 percent pollution
control property, which is not on the PEL, requires a fee
of $1000.00. Tier III covers property that is not on the PEL
and only partially qualifies as pollution control property,
requires a $2,500.00 application fee. It should also be noted
if an applicant is approved they need only apply once on the
property in question. A positive determination by the TNRCC
will last for the life of the property.
application process is fairly straightforward as it is described
maintains a Pre-Determined list of pollution control
property. The applicant may request this list to assist
them with the filing, however it should noted that
the list only applies to property acquired after January
- with appropriate fee between December 31 and May 1.
the TNRCC receives and reviews the application it
has 30 days to determine if it is complete. If it
is determined to be incomplete the applicant will
be notified to submit additional information to complete
advises the appropriate appraisal district of the
makes its determination and applies appropriate percentages
of exemption (0 to 100%).
notifies both the applicant and appropriate appraisal
district of its determination and reasoning behind
the applicant receives a positive determination they
file the appropriate tax exemption form with the appraisal
should note that they can obtain assistance in completing their
application by referring to the "Technical Guidelines Manual
for Use Determination for Pollution Control Property".
The manuals are continually being updated. Additionally, the
Instructions for Completing Application Form (Appendix D), as
well as Title 30 of the Texas Administrative Code, Section 2773
(30 TAC 277), rules governing this program, can be obtained
as noted above by contacting the TNRCC Proposition 2 Section,
The Appeal Process: After proceeding through the
application process, a dissatisfied applicant has the right
to appeal a denial of an exemption through TNRCC. The appeal
process has three levels and proceeds as follows:
the first level a written appeal is filed and reviewed by
the program manager who will issue use determination.
applicant if not satisfied may then request a review by
the TNRCC chief engineer, who will render a decision.
the applicant may appeal to the TNRCC executive director,
who will also review and render a ruling, which is the final
after exhausting the administrative remedy, the applicant
can appeal for judicial revive.
The Case Study: A Texas Corporation is in the process
of becoming one of the few domestic producers of a full range
of radioisotopes, pharmaceutical grade radiochemicals and finished
radiopharmaceuticals for sale to the nuclear industry for diagnosis
and treatment purposes. Radioisotopes are radiation-emitting
atoms that are used for both medical diagnostics and in-the-body
therapeutics. The Company / Taxpayer is developing instrumentation
for radiation therapy and medical imaging. The
Taxpayer uses radiation-producing equipment and produce radioactive
products and waste. The question raised was, would any or part
of their real and/or personal property qualify for a property
tax exemption known as "Pollution Control Property,"
as defined above by the TNRCC. To complicate the issue, the
Taxpayer in question is so unique, that components of this type
of real and personal property had never previously been reviewed
by the TNRCC. After
an extensive review of their assets and the current use of said
assets, both real and personal property had never previously
been reviewed by the TNRCC.
an extensive review of their assets and the current use of
said assets, both real and personal property, qualified items
were selected by the Taxpayer for the application and determination
process. Accordingly, TNRCC rules and guidelines were followed
and a timely application was filed. Simultaneously, the their
Representitive was in telephone contact with the TNRCC Proposition
2 Use Determination staff discussing the eligibility of the
property in question.
The initial reaction from the TNRCC was that very few of the
items on the application would qualify. Their reasoning was
based on 30 TAC 277, which implemented the legislation enacted
and Constitutional Amendment previously mentioned above. Correspondingly,
the TNRCC adopted 30 TAC 277, which states, "The legislation
and proposition provide for an exemption from property taxes
for pollution control property purchased, acquired, installed,
constructed, replaced, or reconstructed after January 1, 1994,
to meet or exceed federal, state, or local environmental laws,
or regulations." 6 The TNRCC was of the opinion
that the vast majority of the items on the application would
probably not fall under federal, state, or local environmental
laws or regulations. Rather, they would fall under federal,
state, or local safety laws or regulations. In a nutshell,
the majority of our application dealt with worker safety and
not environmental issues.
the application was filed the their Representative received
a correspondence from the TNRCC staff, dated July 22, 1999,
stating that they had determined that "the application
is technically deficient." Their reasoning was as follows:
application references numerous equipment that is associated
with the manufacture of radioactive materials. It appears
that all of this equipment is either process related or worker
control is considered more of a health and safety concern
rather than pollution control."
federal rule cited 42 CFR Part 190 is an environmental rule,
but it relates to nuclear power operations, and none of
the equipment in your application appears to control exposure
of the general public from discharge of radioactive material
except for the process waste drain and storage system."
Taxpayer and the their Representative were given 30 days to
respond to the "notice of deficiency" or the application
would be returned. The staff was asking for a specific applicable
environmental rule or standard and a clearer explanation how
each "equipment item serves as pollution control equipment."
this point in time it became evident to both the Taxpayer and
the their Representative that we could appreciate the TNRCC’s
position due the fact that they were at a disadvantage in that
they were looking at an extremely unique property. There was
no other facility in the State of Texas to use as a model or
as a point of reference. Therefore, it was decided to extend
an invitation to the TNRCC staff to visit the facility. The
Taxpayer agreed to provide experts who could answer any questions
and put into laymen terms the extremely technical intended use
of all of the property listed in the application. The TNRCC
staff agreed to the tour and accepted it as an official response
to the "notice of deficiency," which they had previously
sent to the their Representative.
the tour it was very important to address the points brought
up in the correspondence (notice of deficiency), from the
TNRCC staff, dated July 22, 1999. Namely, that some of the
property in the application was "process related",
"worker safety related" and prove that the property
in our application does in fact "control exposure of
the general public from discharge of radioactive material."
Using good documentation, detailed explanations, and clear
communications to overcome come obstacles:
the Taxpayer and their Representative felt that the assets
on the original application, fell into all of the categories
of the TNRCC PEL, (Air Pollution Control Equipment, Wastewater
Pollution Control Equipment, Solid Waste Management Pollution
Control Equipment, Miscellaneous Pollution Control Equipment
and Underground and Aboveground Storage Tanks). Further, it
was determined that when the TNRCC staff saw the assets, i.e.:
the emergency showers, radiation scanners and monitors, hot
waste storage area, filtering systems, drainage systems, shielded
areas, etc. they would come to the same conclusion as stated
in the initial application. The application asserted that
the items noted in the application were used for storage,
containment and or treatment of environmentally hazardous
material. Thus, by their very nature these assets protected
the environment. Therefore the issue of "process related"
or more clearly defined as "production related"
property was easily cleared up with Company experts pointing
out and explaining that while all property within the facility
is interrelated, every item listed on the application has
a very specific purpose for environmental and pollution control.
That is to say, without the property in question, in place,
the Taxpayer would be prohibited from producing its product
due to the harmful release of radioactive production and byproducts
into the environment.
two other points brought up by the TNRCC staff, "worker
safety" and the "control exposure of the general
public from discharge of radioactive material" were interrelated.
There is a very fine line, which separates worker safety and
the protection of the general public. The Representative and
The Taxpayer contended that from its conception, the Preposition
2 Legislation and Constitutional Amendment, was generally
used by chemical and oil and gas manufacturers / refiners.
The historical applicants fell under the rules and regulations
of the Environmental Protection Agency (EPA). Nonetheless,
more and more diverse types of companies are now utilizing
the application process to seek tax exemptions for their pollution
control properties. This new generation of applicants may
or may not fall under the regulatory guidelines of the EPA.
problem with the Taxpayer’s application was that they did
not fall under the EPA rules and regulations and therefore
did not fit into the historical TNRCC cookie cutter mold.
As a rule of thumb, TNRCC’s position will be if the EPA requires
something, the property will probably qualify as a pollution
control property. Unfortunately, due to the unique nature
of the product (nuclear medicine), the Taxpayer’s application
property falls under the rules and regulations of the Department
of Energy (DOE) on the federal level. DOE is an agency who
can be traced back to the Manhattan Project, which evolved
into the Atomic Energy Commission. Later, it became the Energy
Research and Development Administration, and finally the Department
of Energy. Under its umbrella under which many departments
exist, including the Office of Nuclear Energy, Science and
Technology, which oversees the Office of Isotope Programs8.
On the state level the Taxpayer falls under the rules and
regulations of the Texas Department of Health’s, Bureau of
Radiation Control. On the local level the Taxpayer would fall
under all of the planning and zoning rules and regulation,
and all county and city environmental standards which cover
all real property owners. However in comparing the Taxpayer
to say an oil or chemical Company, it should be considered
that the rules and regulations which govern the Taxpayer are
much more restrictive than those of the EPA. This is simply
due to the nature of the material used in the development
of the Taxpayer’s product.
Texas Property Tax Code states a property would qualify if it
meets the guidelines of in section 11:31 (b):
property, that is used, or installed wholly or partly to
meet or exceed rules or regulations adopted by any environmental
protection agency of the United States, this state or a
political subdivision of this state for the prevention,
monitoring, control, or reduction of air, water or land
was our position that the rules and regulations of the DOE and
Texas Department of Health through their various offices and
departments required the Taxpayer to have and maintain pollution
control property. Further just because the rules and regulations
governing our Company are not those of the EPA or the TNRCC
(30 TAC 277), did not in itself disqualify us from the exemption
we sought. We contend that the Texas Property Tax Code states
". any environmental protection agency of the United States."
and that DOE would qualify as an environmental protection agency.
our initial discussions we were compared to a nuclear power
plant by the TNRCC staff. We obviously disagreed by stating
that the Taxpayer was in the business of nuclear medicine
not nuclear power. However, we took that argument and said
for discussion purposes, we asked that if we were comparable
to a nuclear power plant, would we be closer to an American
designed reactor or a foreign built reactor. The American
design govern by DOE, state and local agencies required a
rounded containment structure versus say the old Soviet design
without the containment design. Both were concerned with worker
safety, but the American design diminished the odds of a nuclear
catastrophe. The best example being the Three Mile Island
accident in 1979 versus the 1986 disaster at Chernobyl.7
In one case, Three Mile Island a catastrophe was avoided due
to American environmental safety measures. In the case of
Chernobyl a terrible disaster occurred.
when harmful material enters the environment, it becomes an
environmental problem. The prevention of such an occurrence
by the use of certain types of real and personal property
should be defined as pollution control property.
The comparison between worker safety and the control exposure
of the general public from discharge of any harmful material
can be measured to some extent by comparing requirements in
other countries. This is an approach was used by an international
firm in their dealing with the TNRCC and was proved to be
very effective. Other companies seeking an exemption on property
have successfully used this approach, which do not fit into
a nice clear-cut cookie cutter mold.
very important way to look at "worker safety" and
the "control exposure" is to compare the construction
cost of the subject facilities with and without concern for
the environment. In other words, what would our cost be with
worker safety in mind, but with no environmental concerns?
We successfully argued that we could put our workers in protective
clothing and still produce our product. Further the difference
in our costs for worker safety and those for environmental
protection were noted the application. This approach to had
been successfully used by other firms and did have some impact
with the TNRCC staff.
of the TNRCC: At
the end of our application process we were able to prove our
case to the satisfaction of the TNRCC staff. It was shown in
several different ways.
visual tour of the facility accompanied by Company experts.
comparison of rules and regulations of the DOE and other
comparison of the environmental regulations of the United
States and other counties.
additional cost incurred by the Taxpayer for environmental
points did prove the qualification of the assets noted on the
application. There was give and take both by the Taxpayer and
the TNRCC on the percentages of qualification of the assets
noted on our application. In the end however all parties were
in agreement and the issues raised had been resolved through
good documentation, detailed explanations, and clear communications.
The Taxpayer received total exemption on the vast majority of
the assets on the initial application and partial exemptions
the balance. The sizable tax savings obtained by the Taxpayer
proved to be a sound business decision, which would continue
to pay dividends for the life of the capital expenditures deemed
by the TNRCC to be qualified pollution control equipment.
Benefits for Others: The TNRCC Proposition
2 staff is constantly updating their predetermined equipment
list (PEL) and the equipment and / or real estate from this
application will be put on said list. Thus allowing other
Companies down the road to benefit from the application of
the Taxpayer’s property, specifically industries using radioactive
interested in this program and its potential effect on their
capital expenditures should begin their evaluation by requesting
a copy of Regulatory Guidance Use Determination for Pollution
Control Property publication from the address noted above.
After evaluating the cost benefit and the eligibility of real
and personal property assets, a company can determine if this
exemption program is something that they would want to pursue.
As stated previously, more and more there is a diversification
of types of applicants for pollution control property, because
of the one time application process and the life of the exemption.
Taxpayers and their representatives would be well advised
to discuss with their firms and / or clients the pros and
cons of this program. If the federal government requires the
out lay of capital for additional property for environmental
purposes, a taxpayer could, over the course of years recoup
their expenditures. This in effect put both the taxpayer and
the environment in a win-win situation
PAUL PENNINGTON is the President of P. E. Pennington &
Co., Inc,. a regional property tax consulting firm, established
in 1988 with offices in Austin and Dallas, TX.