Was restoring sludge-collection ponds exempt because the Texas Water Commission required the environmental work?

Plain-English summary

The Texas Water Commission required a company to remove sediment from sludge-collection ponds, with most of the project consisting of dirt work in and around the ponds.

The environmental mandate did not create an exemption. The Comptroller classified pond cleaning as restoration of nonresidential real property, taxable under Rule 3.357, rather than garbage or waste collection under Rule 3.356.

A contractor hired for the entire project had to collect tax on the total charge whether billed lump-sum or with separate items. If the owner contracted directly with different contractors for specific pieces of work, each contract was taxed based on the work actually performed.

Wages paid to the owner's employees for work during their regular workday were not taxable.

What this means for you

Government-required environmental work was not automatically tax-exempt. Contract scope and who performed the work affected the billing treatment.

Common questions

Did the Water Commission mandate create an exemption? No.

Was the work garbage collection? No. It was real-property restoration.

Was a whole-project contractor's charge taxable? Yes, in full.

Were regular employee wages taxable? No.

Citations and references

• 34 Tex. Admin. Code Rule 3.356 (real property services)
• 34 Tex. Admin. Code Rule 3.357 (real-property repair, remodeling, and restoration)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9010L1054A05

Original ruling text

October 24, 1990

Dear **:

I am responding to your letter regarding the restoration of sludge collection
ponds.

You stated that the Texas Water Commission is requiring your company to clean
the sediment out of your collection ponds. You also described the activities
proposed in order to comply with this requirement. The majority of the project
consists of dirt work in and around the collection ponds.

Your primary question is whether an exemption exists for this job because it is
required by the Texas Water Commission. There is no exemption available based
upon its being required by the Texas Water Commission even though for
environmental purposes.

Cleaning the ponds is restoring real property. The total charge for the repair,
remodeling, or restoration of nonresidential real property is taxable. This
overall job is not a real property service (garbage and waste collection and
removal) as discussed in Rule 3.356, but rather restoration as discussed in
Rule 3.357.

You did not fully explain how the restoration will be contracted, although you
did state that most of the work will be done by an outside contractor. Anyone
who contracts with your company for the total job must collect tax on the
entire amount whether separately stated or billed as a lump-sum. If you
contract directly with individual contractors to perform specific parts of the
overall job, then each contract is taxed according to the actual work
performed.

Work performed by your own employees during their regular work day is
considered labor that an employee provides to an employer. The wages paid for
this labor are not taxed.

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

You may also write to Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence