How did Texas apply sales tax to lump-sum and separated contracts for drilling and equipping a new water or irrigation well?

Plain-English summary

Texas treated drilling a new water or irrigation well as new construction. Under a lump-sum contract to drill, case, and equip the well, the contractor was the consumer and had to pay tax when buying materials and equipment; the customer owed no tax on the lump-sum charge. Under a separated contract, the contractor could buy incorporated materials and equipment for resale and had to collect tax on the material price, unless an exclusively agricultural well qualified for an exemption certificate. Construction and installation labor was not taxable.

The letter also said unprocessed gravel could be sold and delivered without paying or collecting tax, while processed gravel, such as crushed or mixed gravel, was taxable.

What this means for you

Contract format changed who paid or collected tax on the materials, while the stated construction labor remained nontaxable. The STAR page carries a later alert that 2011 legislation changed documentation for certain agricultural and timber exemptions effective January 1, 2012, so the 1991 certificate discussion should not be used without checking current requirements.

Common questions

Who paid tax under a lump-sum contract? The contractor paid tax on materials and equipment at purchase; no tax was due from the customer on the lump-sum charge.

What happened under a separated contract? The contractor could buy incorporated items for resale and collected tax from the customer on the materials portion.

Could an agricultural well qualify for exemption? The letter allowed an exemption certificate for a well used exclusively for agricultural purposes, but STAR now warns of later registration-number requirements.

Was drilling and installation labor taxable? No under the letter.

Was gravel taxable? Unprocessed gravel was not; processed gravel was.

Citations and references

• 34 Tex. Admin. Code Rule 3.291 — contractors.
• 34 Tex. Admin. Code Rule 3.296 — agriculture.
• STAR alert — H.B. 268, 82nd Regular Legislative Session (2011), effective January 1, 2012 for the registration-number requirement described in the alert.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9103L1086B11

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller March 11, 1991

Dear ** :

Thank you for your recent letter, in which you requested
information about taxability of water and irrigation wells.
Under state law, you are a contractor performing new
construction when you build new wells.

Therefore, under a lump-sum contract to drill and case a
well and install the equipment, whether or not the well will
be used exclusively for agricultural purposes: You are
considered to be the consumer of, and must pay tax on, your
materials and equipment at the time of purchase. There is
no tax due from your customer on the lump-sum charge.

Under a separated contract to drill and case a well and
install the equipment: You may issue a resale certificate
to purchase tax free all materials and equipment that you
will incorporate into your customer's property. You must
collect tax from your customer on the contract price for the
materials, unless the well will be used exclusively for
agricultural purposes, in which case you may accept an
exemption certificate from your customer in lieu of tax.
The labor to build the well and install the equipment is not
taxable, whether or not the well will be used exclusively
for agricultural purposes.

You are not required to pay or collect tax on the sale and
delivery of unprocessed gravel. Tax is due on processed
(e.g., crushed or mixed) gravel.

For your information, I have enclosed copies of Rules 3.291
(Contractors), Rule 3.296 (Agriculture), and a recent
opinion issued by this agency on the subject of water well
drilling. If you have further questions, feel free to write
or call 1-800-252-5555.

Sincerely,
John Christian
Tax Administration