How did Texas tax a manufacturer-installer's permanently affixed airport baggage-handling system?

Plain-English summary

The described baggage-handling equipment was one computerized conveyor system connecting baggage claim, ticket counters, and gate areas. If permanently affixed, Texas treated it as an improvement to real property and treated the company that manufactured and installed it as a contractor.

For new construction, a lump-sum contractor paid tax on materials and did not tax the customer's labor charge. Under a separated contract, the contractor could buy transferred materials for resale, collected tax on materials, and did not tax labor.

For repair, restoration, or remodeling of nonresidential real property, the total customer charge for materials and labor was taxable under the letter.

Common questions

Was the baggage system tangible personal property after installation? Not if permanently affixed; it was an improvement to realty.

How was new-construction labor treated? It was not taxable under either stated billing method.

How was nonresidential remodeling treated? The total charge was taxable.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8811L0913A12

Original ruling text

November 28, 1988

Dear **:

Thank you for your letter dated November 9, 1988, concerning the taxability of
the manufacturing and installation of airline baggage handling equipment.

In the telephone conversation between Lupe Alvarado and INDIVIDUAL on November
18, 1988 and November 21, 1988, INDIVIDUAL stated that the baggage handling
equipment is the conveyor belt system at the baggage claim area. It also
includes the conveyor belt system behind the ticket counter, which INDIVIDUAL
stated was computerized and connected with the conveyor belt system to the
different gate areas (one complete system). He also stated that your client
manufactures and installs the baggage handling equipment.

The baggage handling equipment as described above would be considered an
improvement to real property if the equipment is permanently affixed to realty
(Rule 3.347). Since your client manufactures and installs the baggage handling
equipment which becomes an improvement to realty, he would be considered a
contractor (see Rule 3.300(b)(2).

Your client's sales tax responsibilities will depend on whether the
improvements are considered new construction or repair, restoration or
remodeling of real property.

Under a lump-sum contract, if the improvements are considered new construction
as defined in Rule 3.357(a)(4), your client is considered to be the consumer
and owes tax on all materials at the time of purchase. If the contract is
separated (labor and materials are separately stated), your client will collect
tax from its customer on the charge for materials. The charge for labor is not
taxable. In this situation, your client may purchase the materials transferred
to customers tax free under a resale certificate. Please refer to Rule 3.291.

The labor to repair, restore or remodel nonresidential real property is taxable
effective January 1, 1988. The total charge to your client's customer for the
labor and materials is taxable. Your client can purchase the materials that are
transferred to their customers as part of the job tax free under a resale
certificate. Please refer to Rule 3.357.

If there is any other type of baggage handling equipment, we will need more
information in order to determine the tax responsibilities of your client.

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

If you have any questions or need more information. please call our toll-free
number 1-800-252-5555. The regular number is 512/463-4600. You may write me at
Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Jo Ann Dieck
Tax Correspondence