Is labor to install new pipe onto an existing above-ground pipe rack, or to add new levels to an existing rack, taxable new construction or taxable real property repair and remodeling?

Plain-English summary

A pipeline and processing-plant operator built a new production unit in Texas along with above-ground pipe racks — elevated concrete-founded structures that hold pipe (buried piping wasn't practical here). Some racks were brand new; others were older racks built years earlier, deliberately over-built (up to 30 feet wide) so more pipe could be added later. The company's contractor installed new pipe onto both the new and the pre-existing racks, and asked Texas whether the labor to do that is taxable.

Texas split the answer into two pieces. Adding the new pipe itself is nontaxable new construction — Texas Administrative Code Rule 3.291(a)(9) defines new construction as new improvements to real property, and the new pipe (up to 60 inches in diameter, with a 50-year expected life matching the racks) clearly counts as a new improvement, whether it's going onto a brand-new rack or an older one. Adding entirely new rack levels is likewise new construction, since it adds usable capacity to the structure.

But the labor to tie in (weld/connect) that new pipe to already-existing rack structures is taxable nonresidential real property repair and remodeling — Texas has consistently treated the connection of new pipeline sections to old ones as taxable remodeling of real property, going back to a 1996 Comptroller decision on the same fact pattern. The practical effect: a single project can have both a nontaxable "new construction" component and a taxable "tie-in" component, and how the contract is priced determines whether the whole job gets swept into taxable treatment.

What this means for you

Pipeline operators, processing plants, and similar heavy-construction owners

Expect any project connecting new pipe (or new structural additions) to existing plant infrastructure to have a taxable tie-in component, even though the new construction itself is exempt. The remodeling percentage matters: under Rule 3.357(b)(3), if you pay one lump sum and the remodeling (tie-in) portion is more than 5% of the total contract price, the Comptroller presumes the entire lump-sum charge is taxable — not just the remodeling piece.

Contractors billing for pipeline and rack work

You can avoid the "presumed fully taxable" outcome by separately stating the nontaxable new-construction labor from the taxable tie-in/remodeling labor on the contract or invoice, or by presenting documentary evidence that the remodeling share is under 5% of the total. A single undifferentiated lump-sum price is the highest-risk billing structure.

Accountants and tax professionals

This ruling applies the same new-construction-vs-remodeling framework used across many Texas real property rulings (Rule 3.347, Rule 3.357), with the added wrinkle that this is a two-question ruling: one on adding pipe to racks, one on adding new rack levels — both reach the same "new construction plus taxable tie-in" structure, and Comptroller's Decision No. 29,731 (1996) is the controlling precedent specifically for pipeline tie-ins.

Common questions

Q: Is the whole pipe-installation project taxable, or just the connection labor?
A: Just the connection (tie-in) labor is taxable remodeling — the labor to install and place the new pipe itself is nontaxable new construction. But if billed as one lump sum where the taxable tie-in exceeds 5% of the total, the whole charge can become taxable by presumption.

Q: Does it matter whether the rack the pipe is being added to is new or pre-existing?
A: Not for whether the new pipe installation itself is new construction — that holds either way. It matters for the tie-in analysis: connecting to a pre-existing structure is what triggers the taxable remodeling classification for that connection labor.

Q: How can a contractor avoid the 5% presumption sweeping in the whole project?
A: By separately identifying the taxable and nontaxable labor in the contract, or by presenting documentary evidence under Rule 3.357(b)(7) that the remodeling portion doesn't exceed 5% of the total price.

Q: Does this ruling apply to my construction project?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts. Different structures, materials, or contract terms could change the analysis.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code § 3.347(a)(2), (b)(1) (Improvements to Realty)
• 34 Tex. Admin. Code § 3.291(a)(9) (new construction defined)
• 34 Tex. Admin. Code § 3.357(a)(8), (a)(11), (b), (b)(3), (b)(7), (d)(3) (Nonresidential Real Property Repair, Remodeling, and Restoration)
• Logan v. Mullis, 686 S.W.2d 605 (Tex. 1985) (intent as preeminent factor for realty-improvement status)
• Comptroller's Decision No. 113,810 (2019); No. 104,772 (2011); No. 35,553 (1997)
• Comptroller's Decision No. 29,731 (1996) (pipeline tie-in labor is taxable remodeling)
• Comptroller's Decision No. 29,268 (1994) (5% remodeling threshold)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202104045L

Original ruling text

April 21, 2021

RE: Private Letter Ruling No. 20190402102646

**, Taxpayer No. **

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 request dated March 22, 2019, and additional information received via e-mail on April 11, Aug. 28, and Dec. 4, 2019. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of the charge for contract labor purchased to install new pipe (Pipes) onto existing pipe rack sections (Racks). You also requested guidance on the taxability of the charge for contract labor purchased to install additional Rack levels.

Facts Presented

** (Taxpayer) operates pipelines and processing plants in the United States. Taxpayer contracted for construction of a production unit (Unit) and Racks on land that it owns in Texas. Production units, which are also known as processing facilities, are primarily fractionators that separate feedstock (y-grade) into ethane, propane, butane, and gasoline.

Racks are aboveground, set into concrete foundations, and used to elevate Pipe because underground piping is not feasible or cost effective. Furthermore, laying Pipe on the ground or low to the ground obstructs access.

Taxpayer states that the Pipe is considered “inside facility” piping and the Racks and Pipes are not located at or near production well sites. The Pipe takes y-grade from other pipelines or storage wells to processing facilities, and then takes product (i.e., ethane, propane, butane, gasoline or some variation) from the processing facilities back to either storage wells or other processing facilities for further processing, and also transports product to other pipelines for customer delivery.

The Pipe connects to headers that could come from or go to other processing facilities, storage wells or pipelines, and will not directly connect to underground piping. It would also typically tie into meters or compressors/pumps. Over time, several thousand feet of Pipe will connect the Unit to other plant assets, including but not limited to other production units and storage facilities.

Many new sections of Rack are being constructed along with the Unit, while some of the Rack sections were built previously and currently serve other productions units. The Racks in question were “built out” during construction of the prior production units.

Taxpayer states that Pipe will be permanently installed on the Racks. Pipe will rest on the Racks but will not be welded, bolted or anchored in any fashion. The Pipe may, however, have guides to keep it in place horizontally.

Once set in place, Racks cannot be taken down and reassembled. Additionally, the Racks have an expected useful life of at least 50 years and are not required by law or contract to be taken down should production cease. Racks that were previously built will be utilized in connecting the Unit to other plant assets.

Taxpayer’s contractor will install new Pipe onto existing Racks. Taxpayer was aware at the time of the Racks’ construction that additional production units would be built. In anticipation of this, Racks were built to widths of up to 30 feet, which allows additional Pipe to be attached onto the Racks.

Taxpayer’s high initial investment in the production units and Racks requires extended use of the Pipe. Future projects may require further expansion of the existing Racks by installing additional levels.

Questions, Rulings, and Analysis

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

Question One: Does labor to install new Pipe onto existing Racks qualify as new construction?

Ruling One: Charges for installation of Pipe onto the Racks qualify as new construction. Labor to tie-in Pipe to existing structures is taxable nonresidential real property repair and remodeling.

Analysis:

Addition of New Pipe Constitutes New Construction

A contract to furnish and install property which becomes embedded in or permanently affixed to either land or a structure constituting real property is a contract for the improvement of realty. See Rule 3.347(a)(2) (Improvements to Realty). Similarly, a contract to install property that is not readily removable without substantial damage to the property or to the realty is also a contract for the improvement of real property. See Rule 3.347(b)(1).

Comptroller’s Decision No. 113,810 (2019) determined that “[w]hether an item that is attached to real property becomes an improvement to that real property depends upon the particular facts involved. The factors to consider are: intent of the party who annexed the tangible personal property to the realty, the mode and sufficiency of annexation, and the adaptation of the tangible personal property to the use or purpose of the realty. See Logan v. Mullis, 686 S.W.2d 605 (Tex. 1985). The intent factor is preeminent whereas the other two factors constitute evidence of intention. Id.; see also Comptroller’s Decision No. 104,772 (2011) and 35,553 (1997).”

Rule 3.291(a)(9) (Contractors) defines new construction as “[a]ll new improvements to real property, including initial finish-out work to the interior or exterior of the improvement.”

The Racks are secured to the realty in concrete foundations. They are “embedded” in the realty and are not removable without substantial damage to the Racks or to the real property as described by Rule 3.347. In addition, the useful life of the Racks is estimated to be 50 years with no provision for removal if production ceases.

The Pipe placed in the Racks is up to 60 inches in diameter. It is placed within the Racks, which are improvements to realty, and has a useful life equal to theirs (i.e., 50 years). It will not be removed after placement.

Taxpayer’s facts establish their intention for the Racks and Pipes to become permanent improvements to real property. The new Pipes placed in the Racks are new improvements as described by Rule 3.291(a)(9). Charges to place new Pipe are charges for new construction.

Tie-in of New Pipe to Existing Structures is Nonresidential Repair and Remodeling

Although the addition of the new Pipe is new construction, the connection of it to existing structures is nonresidential real property repair or remodeling, and total charges for that are taxable. See Rule 3.357(a)(11) and (b) (Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance) and Comptroller’s Decision No. 29,731 (1996) (“. . . the 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”).

Under Rule 3.357(b)(3), a job for adding Pipe that combines both remodeling and new construction will be presumed taxable in total if: (a) it is a lump-sum job, and (b) the remodeling portion of the contract exceeds 5 percent of the total price. A 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). The parties to the contract, however, can avoid the presumption of taxability altogether by separately identifying taxable and nontaxable labor in the contract.

Question Two: Does labor to install additional levels to the existing Rack qualify as new construction?

Ruling Two: Contract labor purchased to install additional levels themselves qualifies as new construction. Labor performed on the existing Rack to support the addition of new levels is taxable nonresidential real property repair and remodeling.

Analysis: Under Rule 3.357(a)(8), new construction includes the addition of new usable square footage to a structure. Adding additional levels to existing Racks adds new usable square footage and the labor to add those levels qualifies as new construction.

Note, however, the discussion in Ruling One concerning real property repair and remodeling. The labor to place the new Rack level itself would constitute new construction. However, modifying parts of existing structures for the sole purpose of supporting the addition of new space is nonresidential repair and remodeling. See Rule 3.357(b)(3). This will not change a nontaxable new construction contract into a taxable remodeling contract as long as the charges attributable to remodeling are 5 percent or less of a lump-sum charge. See Rule 3.357(d)(3) and Comptroller’s Decision No. 29,268 (1994).

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/web-forms/tax-help/ and reference Private Letter Ruling No. 20190402102646.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

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.