How did Texas tax underground fuel-storage-tank removal, tank disposal, contaminated-soil disposal, repair or upgrading, and installation of a new tank?

Plain-English summary

The letter treated an underground fuel storage tank as an improvement to real property because proposed legislation that would have reclassified it as tangible personal property did not pass.

It then separated each service. Excavating and removing a tank for disposal or replacement was nontaxable demolition, with the provider paying tax on its materials and equipment. Hauling away and disposing of the tank itself was taxable waste removal. Overexcavating and disposing of fuel-contaminated dirt was nontaxable if the dirt was an industrial discharge regulated under Chapter 26 of the Texas Water Code, and the provider could accept an exemption certificate.

Repairing or remodeling an existing tank was taxable on the total charge, even when government-mandated. Installing a new tank was new construction: a lump-sum contractor owed tax on all materials used to perform the contract, while a separated contractor could buy incorporated materials for resale and collect tax from the customer on their agreed price. Separately stated inspection, testing, and soil-analysis charges were nontaxable.

A combined taxable-and-nontaxable lump sum was presumed taxable unless the taxable part was 5% or less and documented. If the taxable part exceeded 5%, the provider needed to state taxable and nontaxable charges separately to avoid tax on the entire contract.

What this means for you

The tax result turned on the exact task and contract presentation. Demolition, disposal, repair, new construction, and testing did not share one treatment, so bundled charges created an additional all-taxable risk.

Common questions

Was excavating and removing the old tank taxable? No. Was disposing of the tank taxable? Yes. Was qualifying contaminated-soil disposal taxable? No. Were tank repairs taxable? Yes, on the total charge. Was new installation treated as repair? No, it followed new-construction rules. Were separately stated testing charges taxable? No.

Citations and references

• Texas Water Code Chapter 26 (industrial-discharge regulation)
• Rule 3.291 (new construction)
• Rule 3.347 (improvements to real property)
• Rule 3.356 (waste removal)
• Rule 3.357 (repair or remodeling)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9110L1140F05

Original ruling text

October 28, 1991

Dear *****:

I apologize for the unusual delay in answering your letter. As we
discussed some time ago on the telephone, at the time we received your letter
there were unresolved policy issues in review. Also, legislation that would
have re-classified underground fuel storage tanks (UST's) as "tangible personal
property" for purposes of the limited sales and use tax was proposed, but did
not pass. Because the legislation did not pass, an underground fuel storage
tank remains an improvement to real property, as defined in enclosed Rule
3.347.

You ask about the taxability of the following services connected with
underground fuel storage tanks: EPA mandated tank removal; EPA remedial
clean-up including soil disposition and patching activities; upgrade existing
tank to EPA standards (preventive measure); and new facility gas tank
installation.

Excavation and removal of a UST in order to dispose of it or to replace
it with a new tank constitutes demolition of an improvement to real property.
This is a nontaxable service. The service provider is responsible for paying
tax on all materials and equipment purchased, leased, or rented for use in
providing the service.

The actual hauling away and disposing of a UST is a taxable waste removal
service. It is our understanding that a UST does not meet federal or state
definitions of "hazardous waste", nor the Texas Water Commission's definition
of an "industrial discharge", for purposes of the waste removal exclusions
found in Rule 3.356 (enclosed).

Overexcavation, hauling away and disposing of fuel contaminated dirt is a
nontaxable service, provided that the dirt meets the definition of an
"industrial discharge" subject to regulation by the Texas Water Commission
under Chapter 26, Water Code. Our present understanding is that such
fuel-contaminated dirt meets this definition. The service provider may accept
an exemption certificate from the customer instead of collecting tax on this
service.

Repair or remodeling of a UST is a taxable service, governed by Rule
3.357 (enclosed). The total charge, including labor, materials, overhead,
etc., to excavate a tank, repair or remodel it, and return it to the ground, is
taxable. The service is taxable even if performed pursuant to a government
mandate.

Installation of a new UST is new construction of an improvement to real
property, governed by Rule 3.291 (enclosed). Under a lump-sum contract, the
contractor owes tax on all materials used to perform to the contract. Under a
separated contract, the contractor may issue a resale certificate to purchase,
tax free, materials that will be incorporated into the customer's real
property. The contractor must collect tax from the customer on the total
agreed contract price for the incorporated materials. The contractor owes tax
on all other materials and equipment bought, leased, or rented for use on the
job.

Separately stated charges for inspection, testing, and soil analysis are
not subject to tax, even if provided in connection with a taxable service.

A lump-sum charge for both taxable and nontaxable services is presumed to
be taxable unless the charges attributable to taxable services constitute 5% or
less of the total charge, and the parties can document this fact. If the
charges attributable to taxable services constitute more than 5% of the total
charge, the entire contract is subject to tax unless the service provider
separately states the charges for taxable and nontaxable services.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions, feel
free to write or call me at 1-800-252-5555 ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division