How did Texas tax demolition, debris removal, site preparation, tank work, and equipment supplied with an operator, and what earlier answer did the Comptroller correct?

Plain-English summary

This May 4 letter corrected the Comptroller's February 6 answer about hauling excess dirt on a new-construction job and addressed several related transactions.

Complete gas-station demolition was nontaxable, but debris removal was taxable waste removal. If the charges were not separated and waste removal exceeded 5% of the total, the combined charge was taxable. Demolition could also be taxable when performed with repair or remodeling of a structure.

Site preparation for new construction was nontaxable, including excavation, bringing in fill dirt, and hauling away excess dirt under the construction contract. The earlier answer treating that excess-dirt disposal as taxable was incorrect. Landscaping remained taxable, including separately charged fill dirt used in landscaping.

Removing, draining, and replacing a leaking gasoline tank was nontaxable; repairing and reinstalling the same tank was taxable. Disposal of gasoline or contaminated dirt was nontaxable hazardous-waste disposal. Waste removal from a job site otherwise remained taxable even when delivered to a specified dump.

Equipment rental was taxable unless bought for rerental. Equipment and an operator billed together as a lump sum was presumed to be a service and followed the taxability of that service. Separate equipment and operator charges were treated as a taxable equipment rental plus an operator charge that was taxable only when the underlying service was taxable.

Equipment bought tax-free for rental became subject to use tax when used to provide a service, measured by fair market rental value during the service use.

Common questions

Was demolition by itself taxable? Generally no on the situations described.

Was debris or waste removal taxable? Yes, except for the hazardous-waste disposal described and excess-dirt hauling within new construction.

What earlier answer was corrected? Hauling excess dirt under a new-construction contract was nontaxable.

How were lump-sum equipment-and-operator charges classified? As a service.

How were separately stated equipment and operator charges classified? As a taxable equipment rental and a service charge whose taxability followed the service.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9005L0999D09

Original ruling text

May 4, 1990

Dear **:

This letter corrects my earlier letter of February 6, 1990 to you regarding
the tax treatment of various services to real property. Your questions
involved charges by a taxpayer in the business of renting out equipment and
men to perform various services to real property. The response I gave you
to the third question was partially incorrect. The answers to your
questions are as follows:

1. The demolition of the complete gas station is not a taxable service.
   The removal of the debris is a taxable waste removal service. If these two
   charges are not separated and if the amount attributable to waste removal
   is more than five percent of the total charge, the combined amount will be
   taxable.

2. The demolition charge is not taxable. Although the debris is being
   removed for free by the county flood control district, removing the debris
   in exchange for the materials is a barter transaction which is a sale.
   Because the county is exempt, it owes no tax on the materials it is
   receiving in exchange for the taxable service it is providing. It is not
   clear whether the taxpayer or the customer is the other party in the
   barter.

3. Site preparation for new construction is not taxable. If the excavation
   service is part of a new construction job, it is not taxable, nor is the
   separate charge for bringing in fill dirt. The charge attributable for
   hauling away excess dirt in connection with a construction contract is not
   taxable. My earlier response that the disposal of the excess dirt was
   taxable was incorrect when applied to a construction contract. However,
   landscaping is a taxable service. If the service falls within this
   category, it is taxable and so is the separate charge for bringing in fill
   dirt.

4. The charge for removing a leaking gasoline tank, draining it and
   replacing it with another is not taxable. However, if the leaking tank is
   repaired and placed back, the job is taxable. The charge for disposing of
   gasoline or gasoline contaminated dirt is not taxable because it is
   considered hazardous waste.

5. Digging the hole and covering the tank back up is not taxable because
   measuring the tank is not taxable. If the charge for the operator is
   separated from the charge for equipment, the equipment charge is presumed to be
   a rental charge and is taxable.

6. The demolition of the parking lot is not taxable. It would not be taxable
   if the site remained empty. Demolition would be taxable if done in conjunction
   with a remodeling or repair job to a structure.

7. Because waste is being removed from the job site, this is a taxable waste
   removal service. The fact that the contractor has arranged to have the waste
   delivered to a specific dump site does not render the waste removal
   non-taxable.

I am assuming that this taxpayer provides equipment and men to operate the
equipment.

The rental of equipment is taxable unless it is for re-rental to another
party. In this case a resale certificate should be obtained.

When equipment with an operator is provided for a lump-sum, the transaction is
presumed to be a service rather than a rental. Tax is due if the service is
taxable.

When equipment with an operator is provided with separate charges for the
operator and equipment, it is presumed that the charge for equipment and charge
for the operator are separate transactions. Under that presumption, the
equipment charge is a rental. The separate charge for the operator is taxable
when the service is taxable but is not taxable if the service is not taxable.

This distinction is necessary in order to determine the taxpayer's liability on
the equipment. When the equipment is purchased to be rented, a resale
certificate may be issued. Tax is due when the equipment is used to provide a
service. If the equipment was purchased for rental tax-free, use tax is due on
the fair market rental value during the period of use even if the service being
provided is taxable.

If you have other questions or need more information please call our toll-free
number 1-800-531-5441; the regular number is (512) 463-4861. You may write me
at the Taxability Section of Legal Services Division.

Sincerely,

Tom Soto
Taxability Section
Legal Services Division