When a pipeline spill job involves backhoe work, pipeline repair, and hazardous waste removal billed by one contractor, does everything get taxed as one improvement-to-realty charge, or can each service be taxed separately?

Plain-English summary

A pipeline company hired Company X to respond to a pipeline spill. Company X, in turn, subcontracted the work to three separate subcontractors: Sub 1 excavated and backfilled the pipeline trench with a backhoe ($4,000), Sub 2 repaired the pipeline itself in place without relocating it ($2,000), and Sub 3 removed hazardous waste as defined in 34 TAC § 3.356(a)(3)(B) ($5,000) — a total $11,000 bill from Company X to the pipeline company, broken into those three separately stated amounts.

The pipeline company argued, leaning on the recent Rylander v. San Antonio SMSA decision, that only the $2,000 pipeline-repair charge should be taxable (as an improvement to realty under 34 TAC § 3.357), while the $4,000 backhoe work and $5,000 hazardous waste removal should qualify as nontaxable "unrelated services" under 34 TAC § 3.357(a)(12) — services that are (A) not themselves a taxable service, (B) commonly provided on a stand-alone basis, and (C) have a distinct, separate identity that's why they're commonly stand-alone (citing Comptroller's Decision No. 27,967 (1992) for the backhoe work, and Tax Code § 151.0048(3)(A) for the waste removal).

The Comptroller agreed, but on a more precise legal basis than "SMSA governs because it's a recent case." The Comptroller distinguished SMSA itself: in that case, engineering services were purchased first, then equipment was purchased as a genuinely separate later transaction, and both happened to land on the same invoice — the court rejected taxing the whole thing as one transaction on that fact pattern. Here, the facts are different (no two sequential separate contracts merged onto one invoice) — but the Comptroller applied the same underlying principle anyway: separately billing components of a single job, by itself, doesn't force them to be taxed together, as long as each service meets the stand-alone criteria — not required as a condition of buying the taxable component, priced the same regardless of which vendor supplies it, and regularly offered independently in the market. Under that test, the backhoe/excavation service and the hazardous waste removal here qualified as nontaxable unrelated services, while the pipeline repair itself remained taxable as an improvement to realty.

The letter also notes a long-standing, independent rule: hazardous waste collection services have historically been treated as nontaxable when separately stated, even before the SMSA case existed — so the waste-removal charge would likely have come out nontaxable either way.

What this means for you

Pipeline operators and emergency spill-response contractors

Structuring a multi-service spill-response job (excavation, repair, waste removal) as separately priced, independently offered services — rather than one bundled improvement-to-realty charge — can keep the non-repair components untaxed. Make sure each service genuinely is offered on a stand-alone basis in the market and isn't priced differently depending on bundling, or the "unrelated service" argument weakens.

General contractors on real-property repair jobs with subcontracted components

The core lesson from this letter (echoing SMSA): merely putting multiple services on one invoice from one vendor does not automatically make the whole thing taxable as a single improvement-to-realty transaction — what matters is whether each component independently satisfies the three-part "unrelated service" test in 34 TAC § 3.357(a)(12).

Environmental and hazardous waste removal contractors

Separately stated hazardous waste collection/removal charges have long been treated as nontaxable by the Comptroller, independent of the broader unrelated-services analysis — a durable, simple rule worth citing on its own.

Common questions

Q: If one vendor bills for backhoe work, pipeline repair, and waste removal together, is the whole invoice taxable?
A: Not necessarily. Each readily separable service is analyzed individually. Here, the pipeline repair (an improvement to realty) was taxable, but the backhoe/excavation and hazardous waste removal qualified as nontaxable "unrelated services" because they met the three-part stand-alone test.

Q: What's the test for a nontaxable "unrelated service" under Rule 3.357(a)(12)?
A: The service must (A) not itself be a taxable service, (B) be commonly provided on a stand-alone basis, and (C) have a distinct, separate identity reflected in its being commonly offered stand-alone — and, per this letter, not be required as a condition of the taxable service, priced independent of the vendor, and regularly offered independently.

Q: Is hazardous waste removal always nontaxable if separately stated?
A: The Comptroller notes a historical practice of not taxing separately stated hazardous waste collection charges, independent of the unrelated-services analysis.

Q: Does the SMSA case control every multi-service invoice?
A: Not directly — the Comptroller distinguished the specific facts of SMSA (two sequential separate transactions later billed together) from this case (one contractor's subcontracted spill-response job), but applied the same underlying non-taxation-by-bundling principle.

Q: Can any pipeline company rely on this exact allocation?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10). Confirm your own contract structure and pricing independence with a tax professional.

Citations and references

Statutes, rules, and cases:

• 34 Tex. Admin. Code § 3.357 (real property repair and remodeling); § 3.357(a)(12) (unrelated-service test)
• 34 Tex. Admin. Code § 3.356(a)(3)(B) (hazardous waste definition)
• Tex. Tax Code § 151.0048(3)(A) (real property services)
• Rylander v. San Antonio SMSA Ltd. P'ship, 11 S.W.3d 484 (Tex. App.—Austin 2000, no writ)
• Comptroller's Decision No. 27,967 (1992)
• Comptroller's Decision Nos. 31,694 and 37,930 (1999)
• Comptroller's Decision No. 34,221 (Hearing 34,221)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200102067L

Original ruling text

February 20, 2001

Dear **:

Thank you for you inquiry regarding the tax treatment of a transaction in light
of the recent decision Rylander, et al. v. San Antonio SMSA, Ltd. Partnership,
11 S.W. 3d 484 (Tex. App.--Austin, Feb. 03, 2000, no writ). I apologize for
the delay in responding.

The situation at issue involves work preformed in conjunction with a pipeline
spill.

Taxpayer, a pipeline company, hires Company X in connection with a pipeline
spill. Company X hires three subcontractors ("Sub. 1-3"). Sub. 1 is hired by
Company X to uncover and backfill the pipeline with a backhoe. Sub 2 is hired
to repair the pipeline. Sub 2 accomplishes this task without relocating any
portion of the pipeline, i.e., the pipeline remains in the same trench after it
is repaired. Sub 3 is hired to remove "hazardous waste: as defined in 34 TAC
3.356(a)(3)(B). Company X separately charges Taxpayer $4,000 for backhoe
services, $2000 to repair the pipeline and $5,000 to remove hazardous waste for
a total charge of $11,000.

Taxpayer believes that sales tax is owed on the $2000 separately stated charge
by Company X to repair the pipeline because it is an improvement to realty. 34
TAC 3.357. Taxpayer believes that the $4000 charge by Company X for backhoe
services qualifies as a nontaxable "unrelated service" as that term is defined
in 34 TAC 3.357 (a)(12) because the backhoe services meet the three criteria
provided therein, to wit: (A) the backhoe services are not a taxable service as
defined and taxed in the sales tax act; (B) backhoe services are commonly
provided on a stand-alone basis; and (C) the backhoe services have a distinct
and separate identity, which is why they are commonly provided on a stand-alone
basis. (Comptroller's Decision No. 27,967 (1992). Similarly, Taxpayer believes
that the charge for hazardous waste removal is not subject to tax as an
unrelated nontaxable service. (Tex. Tax Code Ann. 151.0048 (3)(A).

Taxpayer had three objectives that it hired Company X to accomplish: (1) dig
up and rebury the pipeline; (2) repair the leak in the pipeline; and (3) remove
hazardous waste that had escaped as a result of the leak. These three
transactions were "readily separable" and must be analyzed as distinct
transactions for sales tax purposes, even though performed by one contractor
pursuant to a single contract. See Rylander, et al. v. San Antonio SMSA, Ltd.
Partnership, 11 S.W. 3d 484 (Tex. App.--Austin, Feb. 03, 2000, no writ).
["Were we to adopt this one-contract theory, (nontaxable) services would be
taxable, when performed by one vendor who (also provides a taxable item), but
not taxable when performed by another vendor.... We hold that the
Comptroller's construction of section 151.007 (B) is unreasonable."] Cf.
Comptrollers Decision Nos. 31,694 and 37,930 (1999). Consequently, the
pipeline company believes that only the separately stated $2000 charge for
repairing the pipeline should be considered subject to sales tax.

Response: The SMSA court rejected the Comptroller's construction of section
151.007 because under the essence of the transaction test, neither of the two
separate components of the transaction was incident to the sale of the other.
The facts in the SMSA cases did not involve merely separate charges for
separable components in a single transaction, but separate transactions that
happened to be billed on the same invoice. First the engineering services were
purchased. After the engineering assessment was done, there was a second
transaction for the purchase of the equipment. Both transactions were then
billed on the same invoice.

In the pipeline spill transaction at issue, we don't have those facts. The
fact presented is that the pipeline company hires Company X in connection with
a pipeline spill. Company X then subcontracts with three separate companies to
perform different tasks to accomplish the work that it was hired to do. We
have no facts that the pipeline company separately contracted with Company X
for the performance of three separate services, each for a separate amount
where all three were subsequently billed on the same invoice. Unless the facts
are similar to the facts considered under the SMSA decision, the separate
billing for different components of a single transaction will not cause the
components to be taxed separately. The services should be transacted for
separately, provided on a "stand alone basis," not required with the purchase
of the other taxable components, the price of each taxable item not affected by
whether they are acquired from a different vendor, and the services are
regularly offered independent of each other.

However, even before the SMSA cases, we have historically not taxed separately
stated charges for hazardous waste collection services. We will continue to
allow exclusion of sales tax on those separately stated charges.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change. You may call me toll free (512)
463-4675. You also may write to Tax Policy Division, Comptroller of Public
Accounts. You may also e-mail our tax help section at:

Sincerely,

Tom Soto
Tax Policy Division