How did Texas tax underground-tank excavation, tank disposal, contaminated-soil removal, replacement installation, repair, inspection, and mixed charges?

Plain-English summary

The Comptroller treated an underground fuel-storage tank as an improvement to real property. Excavating and removing it for disposal or replacement was nontaxable demolition, with the provider paying tax on its materials and equipment. Hauling and disposing of the tank itself was taxable waste removal because the tank did not meet the listed waste exclusions.

Over-excavating, hauling, and disposing of fuel-contaminated dirt was nontaxable when the dirt qualified as an industrial discharge regulated under Water Code Chapter 26. The provider could accept an exemption certificate.

Installing a new tank was new construction. Under a lump sum, the contractor paid tax on materials; under a separated contract, incorporated materials could be bought for resale and their agreed price was taxed to the customer. Repair or remodeling of a tank was taxable on the full charge, including excavation and reinstallation.

Separately stated inspection, testing, and soil-analysis charges were nontaxable even when connected to a taxable service. A mixed lump sum was presumed taxable unless taxable services were 5% or less and documented; above 5%, taxable and nontaxable charges had to be separated to avoid taxing the whole contract.

What this means for you

Tank contractors should separately price demolition, disposal, contaminated-soil work, construction, repairs, and testing and maintain documentation for waste classification and the 5% allocation.

Common questions

Was excavation taxable? No. Was tank disposal taxable? Yes. Was contaminated-soil disposal taxable? Not when the stated industrial-discharge conditions were met. Was repair taxable? Yes. Was separately stated testing taxable? No.

Citations and references

• 34 Tex. Admin. Code Rules 3.291, 3.347, 3.356, and 3.357
• Texas Water Code Chapter 26

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9110L1140G03

Original ruling text

October 28, 1991

Dear **:

I apologize for the delay in answering your letter. At the time we received
it, 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 write that you are engaged in the business of removing or installing UST's,
and also of disposing of soil and liquids contaminated with hydrocarbons. You
received apparently conflicting answers because some of these services are
taxable, and some are not.

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 fuelcontaminated 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.

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 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.

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.

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