For Texas sales tax, is labor to replace or abandon a natural gas pipeline taxable real property repair, or non-taxable new construction/demolition?

Plain-English summary

A natural gas distributor asked the Comptroller to rule on the sales-tax treatment of six different pipeline replacement/abandonment scenarios, generating twelve separate rulings. The unifying test: is the work new construction, complete demolition, or repair/remodeling of existing real property?

• New trench, either beside or at a substantially different depth (at least 1/3 greater or shallower) than the old pipeline → non-taxable new construction. Placing pipe in a genuinely new location or at a substantially different depth isn't treated as fixing the old pipeline — it's new real property.
• Removing the old pipeline first, when it's being replaced at a substantially different depth → non-taxable demolition, because pulling the old pipe out ahead of a substantially-relocated new pipe counts as complete demolition, not partial removal tied to a taxable repair.
• Replacing the pipeline in the exact same trench at the exact same depth → taxable nonresidential real property repair/remodeling — this doesn't count as "relocation," so it stays taxable, and even the labor to excavate and lift out the old pipe segment in this scenario is taxable (bundled into the repair contract, since it's only partial, not complete, demolition).
• Inserting a new pipe inside the existing pipe (a "sleeve" repair) at the same depth → taxable repair/remodeling (reinforcing an existing structure, not new construction).
• Abandoning a dead pipeline by filling it with concrete → non-taxable, because that's economically irreversible — the functional equivalent of complete demolition.
• Abandoning a dead pipeline by capping the ends → taxable repair/remodeling, because capping is reversible and therefore not "complete" demolition.
• Tie-in/connection labor (welding new pipe to old pipe) is always taxable, regardless of scenario — and if that taxable tie-in labor isn't separately billed and exceeds 5% of a contract that's otherwise non-taxable new-construction labor, the Comptroller presumes the WHOLE charge is taxable unless the taxpayer can document (contracts, bid sheets, schedules of values) what each piece would have cost separately.
• Hauling the old, removed pipe off-site (to a recycler or the utility's own yard) is taxable as a real property service (garbage/solid-waste removal), regardless of which replacement scenario produced it.

What this means for you

Pipeline owners and utilities

The single biggest lever in this ruling is depth change: moving a replacement pipeline at least one-third deeper or shallower than the segment it replaces converts otherwise-taxable repair work into non-taxable new construction. Same-trench, same-depth replacement stays fully taxable. If you have flexibility in how a replacement project is engineered, the depth threshold is worth knowing before specs are locked in.

Contractors billing for pipeline work

Always separately state tie-in/connection labor from new-construction labor on mixed contracts. If tie-in labor exceeds 5% of the total and isn't broken out, the Comptroller presumes the entire contract is taxable — and you'll need documentary evidence (bid sheets, blueprints, schedules of values) to overcome that presumption after the fact.

Anyone abandoning pipe in place

The method matters: filling with concrete is non-taxable (irreversible = complete demolition), but capping the ends is taxable repair (reversible = not complete demolition), even though both accomplish "abandonment."

Common questions

Q: Is replacing a pipeline in a brand-new trench next to the old one taxable?
A: No — per this ruling, laying new pipe in a new trench beside the old, nonoperational pipeline is non-taxable new construction.

Q: Does replacing a pipeline at the exact same depth in the same trench qualify as new construction?
A: No — per this ruling, same-trench, same-depth replacement is taxable nonresidential real property repair/remodeling, not new construction, because it doesn't count as relocating the pipeline.

Q: Is the labor to connect new pipe to the remaining old pipe ever non-taxable?
A: No — per this ruling, tie-in/connection labor is always taxable regardless of which scenario produced it, and can taint an entire otherwise-nontaxable contract if it exceeds 5% of the charge and isn't separately stated.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0047 (Real Property Repair and Remodeling)
• Tex. Tax Code § 151.0048(a)(3) (Real Property Service — removal/collection of solid waste, applied to hauling removed pipe)
• Tex. Tax Code § 151.0101 (Taxable Services)
• Tex. Tax Code § 151.007 (Sales Price)
• 34 Tex. Admin. Code Rule 3.291 (Contractors)
• 34 Tex. Admin. Code Rule 3.356 (Real Property Service)
• 34 Tex. Admin. Code Rule 3.357(a)(11) (Demolition carve-out from taxable repair)
• 34 Tex. Admin. Code Rule 3.357(b)(3),(7) (Mixed-contract 5% presumption + documentation to overcome it)

Cited prior guidance:

• Comptroller's Decision No. 29,731 (1996) — new-trench replacement = non-taxable new construction; tie-in labor = taxable remodeling
• Comptroller's Decision No. 44,134 (2005) — one-third depth-change threshold for "substantial depth increase"
• Comptroller's Decision No. 34,112 (1995) — complete demolition when old pipe removed ahead of substantially relocated new pipe
• Comptroller's Decision No. 29,276 (1996) — sleeve/cut-out repairs = taxable nonresidential real property repair
• STAR Accession No. 8806L0903D05 (1988) — pipeline relocation generally not taxable
• STAR Accession Nos. 9207L1182E08 (1992) and 9302L1227G13 (1993) — debris/pipe removal taxable; concrete-filled abandonment = non-taxable demolition

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201706007L

Original ruling text

June 26, 2017

Re: Private Letter Ruling No. 153270861

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your September 21, 2015 request for guidance regarding the taxability of services to install, repair, replace, and abandon in place natural gas pipelines. Detrimental reliance relief is provided under Rule 3.10, Taxpayer Bill of Rights.

Facts Presented

You initially contacted us to request guidance on November 21, 2014. We responded to your inquiry by issuing a general information letter on February 20, 2015. You subsequently requested additional, specific guidance based on the six fact scenarios described below.

TAXPAYER is a seller/distributor of natural gas. TAXPAYER owns and operates underground natural gas pipelines. TAXPAYER monitors the condition of its pipelines and engages contractors to make necessary improvements. TAXPAYER typically purchases pipe from a pipe supply company and then hires contractors to perform the construction and related services.

In each of the six scenarios below, TAXPAYER identified a portion of an existing underground natural gas pipeline that is no longer operational. The contracts between TAXPAYER and its contractors separate the charge for labor from the charge for incorporated materials, if any.

Scenario One:

TAXPAYER engages a contractor to install new pipeline in a new trench that is either to the left or right of the existing, nonoperational pipeline. The contractor connects the new pipeline to the remaining operational portion of the existing pipeline.

Scenario Two:

TAXPAYER engages a contractor to excavate to the existing, nonoperational pipeline and lift the existing pipeline out of the trench, and then to excavate to a lower depth and install new pipeline, connecting it to the remaining operational pipeline. Sometimes the contractor transports the non-operational pipeline to a recycler’s facility. At other times, the contractor transports the non-operational pipeline to TAXPAYER’s service yard where a recycler collects it.

Scenario Three:

TAXPAYER engages a contractor to excavate to a point above the existing, nonoperational pipeline and construct a new pipeline at the shallower depth. The contractor connects the new pipeline to the remaining operational portion of the existing pipeline.

Scenario Four:

TAXPAYER engages a contractor to excavate to the existing, nonoperational pipeline, lift the existing pipeline out of the trench, and replace the existing pipeline by constructing a new pipeline at the same depth. The contractor connects the new pipeline to the remaining operational portion of the existing pipeline. Sometimes the contractor transports the non-operational pipeline to a recycler’s facility. At other times, the contractor transports the non-operational pipeline to TAXPAYER’s service yard where a recycler collects it.

Scenario Five:

TAXPAYER engages a contractor to trench down to the same depth of the existing, nonoperational pipeline and insert a new pipeline inside of the existing pipeline. The contractor connects the new pipeline to the remaining operational portion of the existing pipeline.

Scenario Six:

TAXPAYER abandons existing, nonoperational pipeline in place for various reasons. In order to abandon pipeline in place, TAXPAYER may engage a contractor to fill the existing, nonoperational pipeline with concrete, or TAXPAYER may engage a contractor to cap off the existing, nonoperational pipeline at both ends.

Rulings and Analysis

Our restatements of your questions are shown below, followed by our rulings and analysis.

Ruling One (Scenario One)

Question: Is the labor to construct a new pipeline in a new trench located to the left or right of the existing pipeline non-taxable new construction labor?

Ruling 1: The placement of a new pipeline in a new trench that is to the left or right of an existing pipeline is new construction, and the labor is not taxable.

Analysis:

See Rule 3.291 and Comptroller’s Decision No. 29,731 (1996) (“[R]eplacement of portions of an existing underground pipeline by the laying of new pipe in a new ditch or trench curved to tie into the old pipeline sections not being replaced constitutes non-taxable new construction of real property under the law and adopted rules.”).

Ruling Two (Scenario Two)

Question: Is the labor to construct a new pipeline in a trench that is deeper than the trench of the existing pipeline non-taxable new construction labor?

Ruling 2: The construction of a new pipeline in a new trench that is substantially deeper than the trench of the existing pipeline is new construction, and the labor is not taxable. A new pipeline is substantially deeper than an existing pipeline if the depth of the new pipeline is at least one-third greater than the depth of the existing pipeline.

Analysis:

The labor to repair or replace existing pipeline is generally treated as real property repair or remodeling. However, the provision of labor to relocate an existing pipeline by replacing the existing pipeline with a new pipeline at a new depth is not taxable if the depth of the pipeline changes substantially. Comptroller’s Decision No. 44,134 (2005) states that lowering a new pipeline to a depth at least one-third greater than the depth of the existing pipeline is a “substantial depth increase” and is new construction. Labor charges for new construction are not taxable.

Ruling Three (Scenario Two)

Question: Is the labor to excavate and lift out the existing pipeline from the trench in order to construct a new pipeline in a trench that is deeper than the trench of the existing pipeline non-taxable demolition labor?

Ruling 3: Removing existing pipeline from a trench before constructing a new pipeline at a depth that is at least one-third greater than the depth of the existing pipeline constitutes complete demolition of the existing pipeline, and the labor to lift the existing pipeline from the trench is not taxable.

Analysis:

Removing an existing pipeline from the trench pursuant to the placement of the new pipeline at a substantially greater depth constitutes complete demolition of the existing pipeline. See Rule 3.357(a)(11) and Comptroller’s Decision Nos. 34,112 (1995) and 44,134. As explained in the analysis of Ruling Two, replacing an existing pipeline with a new pipeline at a depth at least one-third greater than the depth of the existing pipeline is a “substantial depth increase.” Comptroller’s Decision No. 44,134.

Ruling Four (Scenario Three)

Question: Is the labor to construct a new pipeline in a new trench located above the existing pipeline non-taxable new construction labor?

Ruling 4: The placement of a new pipeline in a new trench that is substantially shallower than an existing pipeline is new construction, and the labor is not taxable. A new pipeline is substantially shallower than an existing pipeline if the depth of the existing pipeline is at least one-third greater than the depth of the new pipeline.

Analysis:

As explained in the analysis of Ruling Two, the provision of labor to relocate an existing pipeline by replacing the existing pipeline with new pipeline at a new depth is not taxable if the depth of the pipeline changes substantially. Comptroller’s Decision No. 44,134 states that installing a new pipeline at a depth at least one-third greater than the depth of the existing pipeline is a “substantial depth increase” and is new construction. Labor charges for new construction are not taxable.

Ruling Five (Scenario Four)

Question: Is the labor to replace an existing pipeline with a new pipeline at the same depth of the existing pipeline taxable as nonresidential real property repair or remodeling or is it non-taxable new construction?

Ruling 5: The replacement of the existing pipeline with a new pipeline at the same depth is nonresidential real property repair or remodeling, and the labor is taxable.

Analysis:

The repair, restoration, remodeling, or modification of a pipeline is a taxable service. See Sections 151.0047 (“Real Property Repair and Remodeling”) and 151.0101 (“Taxable Services”). However, longstanding Comptroller guidance provides that the relocation of a pipeline is not a taxable service. See STAR Accession No. 8806L0903D05 (June 14, 1988).

Replacing an existing pipeline in the same location and at the same depth, as described in Scenario Four, does not constitute relocation. Therefore, the service is taxable nonresidential real property repair or remodeling.

Ruling Six (Scenario Four)

Question: When an existing pipeline is being replaced with a new pipeline at the same depth, is the labor to excavate and lift out the existing pipeline from the trench non-taxable as demolition labor?

Ruling 6: The excavation of the existing pipeline is connected to the nonresidential real property repair or remodeling contract and the entire charge is taxable.

Analysis:

Although the complete demolition of an existing nonresidential real property improvement is not taxable, partial demolition of existing nonresidential realty is taxable remodeling. See Rule 3.357(a)(11). Replacement of a section of an existing pipeline, as described in Scenario Four, is not complete demolition of the pipeline. The labor to excavate and lift out the existing section of the pipeline is taxable as part of the sales price of the nonresidential real property repair or remodeling service. See also Sections 151.0047 and 151.007 (“Sales Price”).

Ruling Seven (Scenario Five)

Question: Is the labor to insert a new pipeline inside of the existing pipeline at the same depth as the existing pipeline taxable as nonresidential real property repair or remodeling or is it non-taxable new construction?

Ruling 7: The labor to insert a new pipeline inside of an existing pipeline is taxable as nonresidential real property repair or remodeling.

Analysis:

Real property improvements undertaken to support or reinforce an existing structure are taxable as the repair or remodeling of a nonresidential real property improvement. See Comptroller’s Decision No. 29,276 (1996) (services to correct pipeline anomalies in an existing ditch, such as performing a cut-out or installing a sleeve, constitute nonresidential real property repair and remodeling).

Ruling Eight (Scenarios One, Two, Three, Four, and Five)

Question: What is the taxability of the labor to “tie in” new pipeline to existing pipeline?

Ruling 8: The connection of new pipeline to existing pipeline is nonresidential real property repair or remodeling, and the labor is taxable.

Analysis:

See Rule 3.357 and Comptroller’s Decision No. 29,731 (1996) (“[T]he tie-in (i.e., welding) of a completely new pipeline or replacement pipeline sections (the latter, either in the same or a new ditch) to the old pipeline sections has consistently been viewed as the taxable remodeling of real property.”).

Ruling Nine (Scenarios One, Two, and Three)

Question: What is the taxability if the charge for tie-in labor is not separately stated from the charge for nontaxable new construction labor, and the tie-in labor represents more than five percent of the overall charge?

Ruling 9: A contract that involves both taxable tie-in labor and nontaxable new construction labor is presumed to be taxable in total if the tie-in labor represents more than five percent of the total charge, unless the charge for new construction labor is separately stated.

Rule 3.357(b)(3), (7). TAXPAYER can overcome the presumption that the overall charge is taxable through the presentation of documentary evidence in accordance with Rule 3.357(b)(7).

Analysis:

Rule 3.357(b)(7) explains that TAXPAYER and the contractor must retain documentation that clearly defines the work that is performed to show that, had the new construction and remodeling been done independently, the charge for each would reasonably approximate the amount allocated. Examples of acceptable documentation include written contracts that detail the scope of work, bid sheets, tally sheets, schedules of values, and blueprints.

Ruling Ten (Scenarios Two and Four)

Question: Is the contractor’s labor charge for transporting the old pipe from the job site to a third-party’s facility or TAXPAYER’s service yard subject to Texas sales and use tax?

Ruling 10: The charge to remove excavated, nonoperational pipe from the job site and transport it to either TAXPAYER’s service yard or to a recycler is a taxable real property service.

Analysis:

Section 151.0048(a)(3) states that “the removal or collection of garbage, rubbish, or other solid waste” is a real property service. See also Rule 3.356 and STAR Accession No. 9207L1182E08 (July 13, 1992) (“A charge for collection and disposal of the debris/pipe is ordinarily taxable.”).

Ruling Eleven (Scenario Six)

Question: Is the labor to abandon an existing, non-operational pipeline in place by filling it with concrete taxable?

Ruling 11: The labor to fill an existing pipeline with concrete in order to abandon the pipeline is not taxable because filling the pipeline with concrete constitutes complete demolition of the pipeline.

Analysis:

Filling an existing pipeline with concrete pursuant to abandoning the pipeline is not taxable because the result of the activity is the functional equivalent of demolition – it may not be practically or economically reversed. See Rule 3.357(a)(11) and STAR Accession Nos. 9207L1182E08 and 9302L1227G13 (February 19, 1993).

Ruling Twelve (Scenario Six)

Question: Is the labor to abandon an existing, non-operational pipeline in place by capping it off taxable?

Ruling 12: The labor to cap the ends of an existing pipeline in order to abandon the pipeline in place is taxable nonresidential real property repair or remodeling.

Analysis:

Placing caps on the ends of a pipeline is an improvement to the realty; the pipeline is being modified. Unlike filling an existing pipeline with concrete pursuant to abandonment, which is not practically or economically reversible, capping the ends of a pipeline is reversible. Therefore, it is not complete demolition of the pipeline under Rule 3.357.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #153270861.

Sincerely,

Tax Policy Division

Indirect Tax Section

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.