Is filter fabric used under railroad ballast an exempt railroad supply, and is the labor to install it in an existing track repair taxable?

Plain-English summary

A taxpayer asked whether "filter fabric" — a material placed between lime-stabilized dirt and railroad ballast (rock) that provides a moisture barrier, facilitates drainage, and keeps mud out of the ballast — qualifies for Texas's railroad supplies exemption.

Materials: Yes. The Comptroller confirmed the filter fabric qualifies for exemption "in the very same manner" as the ballast, rails, cross ties, plates, and spikes it's installed alongside — all are supplies essential to the operation of locomotives and trains. An exemption certificate must be given to the vendor at purchase.

Labor — it depends on repair vs. new construction, and on billing structure:

• Repair, remodel, or renovation of EXISTING track: the labor is taxable under Rule 3.357 (Real Property Repair and Remodeling). How the tax gets collected depends on the contract structure:
  • Lump-sum contract: the service provider may buy the track materials tax-free with a resale certificate, but must collect tax from the railroad company on the total lump-sum charge (materials + labor combined).
  • Separated contract (materials billed separately from labor): the service provider may accept an exemption certificate from the railroad company in lieu of tax on the materials, but must collect tax on the separately stated labor charge.
• NEW track construction: the labor is not taxable at all, regardless of billing structure. Under a lump-sum contract, the contractor buys materials tax-free with an exemption certificate, and the lump-sum charge to the railroad isn't taxable. Under a separated contract, the contractor buys materials tax-free with a resale certificate and may accept an exemption certificate from the railroad in lieu of collecting tax — and again, the new-construction labor charge itself isn't taxable.

What this means for you

Railroad track contractors and material suppliers

The exempt-materials rule is broad (it reaches ancillary materials like filter fabric, not just the obvious track components), but don't assume that exemption carries over to your labor charge — that depends entirely on whether the job is repair/renovation of existing track (taxable labor) or new construction (nontaxable labor), and on how you structure your billing.

Railroad companies contracting for track work

Ask your contractor whether the job is being billed lump-sum or with materials/labor separated — the tax collection point shifts between the two, even though the underlying exemption for the track materials themselves doesn't change.

Accountants and tax professionals

A clean illustration of the standard Texas real-property-improvement framework (Rule 3.357 for repair/remodel of existing improvements, Rule 3.291 for contractors generally) applied to railroad track — the repair-vs-new-construction line and the lump-sum-vs-separated billing distinction are the two variables that actually drive the labor tax result, while the materials exemption itself stays constant throughout.

Common questions

Q: Is filter fabric used in railroad track construction exempt from Texas sales tax?
A: Yes, it qualifies for the railroad supplies exemption the same as ballast, rails, cross ties, plates, and spikes.

Q: Is the labor to repair existing railroad track taxable?
A: Yes, under Rule 3.357 — though whether the tax is collected on the lump-sum total or just the labor portion depends on whether the contract separately states materials and labor.

Q: Is labor for building brand-new railroad track taxable?
A: No, new construction labor is not taxable, regardless of whether the contract is lump-sum or separated.

Q: Can I rely on this letter for my own contract?
A: No. This opinion is based on the facts presented, and additional or different facts may change the opinion; it can be relied on only by the taxpayer it was issued to.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.357 (Real Property Repair and Remodeling — governs taxability of labor to repair/remodel/renovate existing track)
• 34 Tex. Admin. Code Rule 3.291 (Contractors — governs tax treatment for new construction contracts)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200002042L

Original ruling text

February 11, 2000

Subject: Question of Sales Tax Exemption for Railroad Construction Material

Dear **:

Thank you for your recent email concerning the taxability of railroad
construction material.

You state that the filter fabric is a material that is placed between the lime
stabilized dirt and the railroad ballast (rock). The filter fabric provides a
moisture barrier between the ground and the ballast and facilitates the
drainage of moisture and keeps mud out of the ballast.

Question: Does the filter fabric qualify for exemption as supplies essential to
the operation of locomotives and trains?

Answer: Yes, the filter fabric qualifies for exemption in the very same manner
as does the ballast, rails, cross ties, plates and spikes. An exemption
certificate must be given to the vendor when the fabric is purchased.

Although the track materials may be exempt from tax, the labor to repair,
remodel, or renovate existing tracks is taxable as explained in Rule 3.357,
Real Property Repair and Remodeling.

Under a lump-sum charge or contract to repair, remodel, or renovate existing
track, the service provider may purchase the track materials tax free by
issuing a resale certificate to the supplier. Tax must be collected from the
railroad company on the total lump-sum charge. If the charge for the track
materials is separated from the charge for labor, the service provider may
accept an exemption certificate from the railroad company in lieu of tax on the
track materials. Tax must be collected on the separately stated charge for
labor.

New construction labor is not taxable. Under a lump-sum contract, the
contractor may purchase the track materials tax-free by issuing an exemption
certificate to the supplier. The lump-sum charge to the railroad company is not
taxable. Under a separated contract, the contractor may purchase the track
materials tax-free by issuing a resale certificate to the supplier, and may
accept an exemption certificate from the railroad company in lieu of collecting
tax. Again, the charge for new construction labor is not taxable. See Rule
3.291 concerning contractors.

The referenced Comptroller rule is available at
.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825. My
e-mail address is .

Sincerely,

Eddie C. Washington
Tax Policy Division