How did Texas tax new pipeline construction, tie-in labor, gas-plant demolition, and debris removal?

Plain-English summary

A new stretch of pipeline tied into an existing line was new construction, so its labor was not taxable. Under a separated contract, the contractor collected tax on the materials' selling price; under a lump-sum contract, the contractor paid tax on items used in the job.

Labor to connect the new and existing lines was taxable remodeling. If included in the new-construction contract and worth less than 5% of the total job, it could be excluded from tax; at 5% or more it had to be separately stated and taxed or the entire contract became taxable.

Gas-processing plants and pipeline compressors were real-property improvements. Completely dismantling an improvement was nontaxable demolition. Ordinary debris collection and disposal were taxable, but qualifying hazardous-waste disposal was exempt. A contractor who knew the plant was resold rather than disposed of as hazardous waste could not accept a hazardous-waste exemption certificate in good faith; hauling away the dismantled parts remained taxable even if they were resold or reassembled elsewhere.

Common questions

Was new pipeline labor taxable? No.

Was the tie-in labor taxable? Yes, subject to the letter's under-5% rule when included in the larger new-construction contract.

Was complete gas-plant demolition taxable? No, but ordinary hauling of the debris 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/9004L1045F14

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller April 6, 1990

Dear **:

Please accept my apology for the delay in responding to your
questions concerning the contract between ABC COMPANY and XYZ
COMPANY .

The contract seems to indicate that the total job was performed
by XYZ COMPANY, including the dismantling and burial of the ar-
senic contaminated gas plant. In your letter dated March 2, 1990,
you stated that "the * Plant was actually dismantled and
buried on site by another contractor so please disregard my ear-
lier letter in which I indicated that XYZ COMPANY did the dis-
mantlement work also." My response will be based on the informa-
tion given in your March 2 letter, although the facts are not
entirely clear.

Tying into an existing pipeline with a new stretch of pipeline
should be treated as follows. The new stretch of pipe is con-
sidered new construction. The labor is not taxable. If the con-
tract is separated between materials and labor, then the con-
tractor should collect tax on the selling price of the materials.
If the contract is lump-sum, the contractor owes tax on all
items used to complete the job, including materials incorporat-
ed into the customer's real property.

Labor to tie the two lines together is remodeling. The total
charge is taxable. However, if this is included in the new
construction contract and the charge for remodeling is less
than five percent of the total job, it can be excluded from
tax. If the charge is five percent or more, the charge for
remodeling must be separately stated and taxed or the total
contract will be subject to tax.

A gas processing plant and compressors located along a pipe-
line are considered improvements to realty. Total demolition
of an improvement to realty is not taxable; this is not consi-
dered remodeling. Collection and disposal of the debris are
ordinarily taxable. However, if the debris is hazardous waste,
then the disposal is not taxable under Rule 3.356 - Real Prop-
erty Services.

You specifically asked about section (c)(1) of Rule 3.357.
This section refers to contracts to remodel or repair real
property for exempt entities. The verification required is ex-
plained in detail in section (c)(1) of Rule 3.291 - Contractors
(copy enclosed).

Your second question on the last page of your letter is not
entirely clear. I assume that you are asking whether the fact
that the contractor that dismantled the gas plant knows that
the plant was resold, not buried or otherwise disposed of as
hazardous waste, would affect the taxability of his charges.
It could, in that he would know that he did not dispose of
"hazardous waste". He could not accept an exemption certifi-
cate in good faith from a customer claiming an exemption for
that reason. A charge for completely disassembling or dismant-
ling an existing improvement to real property is not taxable.
A charge for hauling off the "debris" would be taxable to his
customer even if the parts were resold to another party or re-
assembled at a different location for the same customer.

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

Please feel free to contact me if you have any additional ques-
tions. You may write me, call toll free 1- 800 -252-5555 (ext.
3-4685) from anywhere in the United States or phone 512/463-4685.

Sincerely,
Julie Pesl
Tax Correspondence