How did Texas tax installed overhead cranes and conveyor systems when they became real-property improvements, remodeled an existing building, or remained removable equipment?

Plain-English summary

The result depended first on whether an overhead crane or conveyor system became an improvement to realty.

For equipment incorporated into qualifying new construction, the installer was a contractor. Under a separated contract, it was the retailer of incorporated materials and could buy them with a resale certificate. Under a lump-sum contract, it was the consumer and paid suppliers tax on those materials.

If a realty improvement was installed on an existing nonresidential building, the project was taxable remodeling. Labor, materials, and other charges were taxable, and incorporated materials could be bought for resale.

If the equipment did not become an improvement to realty, the total equipment charge plus billed delivery and installation was taxable whether the building was new or existing. The installer also paid tax on supplies, equipment, and other property used in the installation.

Common questions

What was the first classification question? Whether the equipment became an improvement to realty under Rule 3.347.

How were incorporated materials treated under a separated new-construction contract? The installer could buy them for resale.

What about a lump-sum new-construction contract? The installer paid tax as the consumer of incorporated materials.

Was installation on an existing nonresidential building taxable? Yes, as remodeling.

What if the equipment remained tangible personal property? Equipment, delivery, and installation charges were taxable.

Citations and references

• Comptroller Rules 3.291, 3.347, and 3.357.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9005L1026F12

Original ruling text

May 23, 1990

Dear *****:

In your letter of April 23, you requested information regarding the taxability
of equipment installed on a building.

You indicate that your client sells and installs overhead material handling
equipment (conveyor systems and overhead cranes) that operates from the tops of
buildings. The equipment may be installed permanently on the building or so
that it can be removed if the building is sold at a later date.

I presume that the equipment is installed on commercial buildings located in
Texas.

If the equipment is attached so that it becomes an improvement to realty as
defined in the enclosed Comptroller's Rule 3.347 (Improvements to Realty), your
client's tax responsibilities depend on whether the equipment is affixed to an
existing building or as part of new construction:

1. If your client installs the equipment on a nonresidential building which
   qualifies as "new construction" as defined in the enclosed Comptroller's Rule
   3.357 (Real Property Repair and Remodeling), your client is treated as a
   contractor for sales tax purposes. As a contractor, your client's tax
   responsibilities depend on whether the contract between your client and their
   customer is a "lump-sum contract" or "separated contract" as defined in
   Comptroller's Rule 3.291 (Contractors).

a. If the contract is a separated contract, your client is considered the
retailer of all materials physically incorporated into the realty. Under these
circumstances, your client should issue a resale certificate to their suppliers
in lieu of sales tax on these materials.

b. If the contract is a lump-sum contract, your client is considered the
consumer of the materials incorporated into the realty. In this case, your
client should pay tax to suppliers on the materials incorporated into the
realty.

2. If your client installs the equipment on an existing building (i. e., not
   new construction), the total charge is taxable because your client is
   remodeling nonresidential real property as indicated in Rule 3.357. Therefore,
   the labor, materials, and other charges are taxable. In this case, your client
   may issue a resale certificate to their suppliers in lieu of tax on materials
   incorporated into the customer's realty.

In either case, you should consult Rule 3.291 regarding the taxability of
supplies, equipment, and other tangible personal property used in performing
your contracts.

On the other hand, if your client installs equipment which does not become an
improvement to realty, your client's total charge for the equipment is taxable.
In addition, any charges for delivery (or transportation) and installation
charges billed by your client are also taxable. Accordingly, your client's
charges for the equipment and any installation or transportation charges billed
by your client are taxable whether or not the building qualifies as new
construction.

In this situation, your client should pay tax on supplies, equipment, and other
tangible personal property to install the equipment.

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

If you have any questions, please contact Tax Correspondence. You may call toll
free 1- 800- 252- 5555, or our regular number is 512/463-4600. My extension is
3-4662. You may write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Correspondence