Pollution Control Property in Texas Pennington & Co., Inc.

Pollution Control Property in Texas: The Real and Personal Property Exemptions Process

By Paul Pennington The TNRCC:

The 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

A 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 statement:

"To promote and foster voluntary compliance with environmental laws."
"To ensure that regulations promote flexibility in achieving environmental goals."
"To ensure that regulations and decisions are rational and based on common sense, good science, and current risk factors."
"To ensure that regulations are applied clearly and consistently."
"To ensure meaningful public participation in the decision making process."
"To ensure strict, sure, and just enforcement when environmental laws are violated."
"To ensure that unnecessary, ineffective, or redundant regulations and processes are eliminated whenever possible."
"To 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 73^rd 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:

".ensure that compliance with environmental mandates, through capital investments, did not result in an increase in a facility's property taxes."³

To receive an exemption through the Proposition 2/Use Determination Program, "the property" must obtain two determinations from the TNRCC.

".The 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
"If 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." ⁴

Pre-determinations: Applicants 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.

Air Pollution Control Equipment
Wastewater Pollution Control Equipment
Solid Waste Management Pollution Control Equipment
Miscellaneous Pollution Control Equipment
Underground and Aboveground Storage Tanks

Air pollution Control Equipment (general category).
Particulate Control Devices (sub-category).
Demister (specific PEL property), with the percent of exemption noted.

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.

Air Pollution Control Equipment
Wastewater Pollution Control Equipment
Solid Waste Management Pollution Control Equipment
Miscellaneous Pollution Control Equipment
Underground and Aboveground Storage Tanks

The above referenced manual may be obtained by requesting it from the following

Mailing address:

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

The 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.

The application process is fairly straightforward as it is described below:

TNRCC 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 1, 1994.

with appropriate fee between December 31 and May 1.

After 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 the application.

TNRCC advises the appropriate appraisal district of the filing.

TNRCC makes its determination and applies appropriate percentages of exemption (0 to 100%).

TNRCC notifies both the applicant and appropriate appraisal district of its determination and reasoning behind its finding.

If the applicant receives a positive determination they file the appropriate tax exemption form with the appraisal district.

Applicants 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, noted above.

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:

At the first level a written appeal is filed and reviewed by the program manager who will issue use determination.
The applicant if not satisfied may then request a review by the TNRCC chief engineer, who will render a decision.
Finally, the applicant may appeal to the TNRCC executive director, who will also review and render a ruling, which is the final administrative remedy.
If 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.

After 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.

After 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:

"The 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 safety related."
"Radiation control is considered more of a health and safety concern rather than pollution control."
"The 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."

The 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."

The Response:

At 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.

During 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:

Both 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.

The 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.

The 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.

The Texas Property Tax Code states a property would qualify if it meets the guidelines of in section 11:31 (b):

."that 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 pollution."

It 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.

In 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.

Obviously, 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.

Another 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.

Conclusion 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.

The visual tour of the facility accompanied by Company experts.
The comparison of rules and regulations of the DOE and other federal agencies.
A comparison of the environmental regulations of the United States and other counties.
The additional cost incurred by the Taxpayer for environmental protection.

These 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 materials.

Companies 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.

Return to publications and speeches