How did Texas treat state contracts for abandoned strip-mine reclamation that permanently incorporated lime into the land?

Plain-English summary

The operative December 11 letter expressly told the requester to disregard the attached November 25 letter. It treated coal-strip-mine reclamation as an improvement-to-realty contract when the contractor permanently incorporated tangible personal property. Adding lime qualified because it permanently eliminated soil acidity caused by mining.

After House Bill 11, a contractor improving realty for a state agency could no longer use Tax Code Section 151.311 to exempt items it consumed. Under a separated contract, however, the contractor sold the tangible personal property incorporated into the land, and the state agency could claim its Section 151.309 exemption.

The contracts therefore needed to require the contractor to hold a sales-tax permit, give suppliers resale certificates for incorporated items, and separately state the price of those items to the Railroad Commission. The Commission would give the contractor an exemption certificate. The contract also needed to state that tax remained due on machinery, equipment, and other items not incorporated into the realty.

What this means for you

The corrected letter made contract wording and price separation central. State-agency status did not exempt equipment or consumed supplies, while incorporated property could move through resale and government-exemption certificates under a separated contract.

Common questions

Which letter controlled? The December 11 letter; it said to disregard November 25. Why was reclamation an improvement to realty? Lime was permanently incorporated to eliminate acidic soil. Were contractor-consumed items exempt? No under the stated House Bill 11 change. Could incorporated property be exempt? Yes through the separated-contract structure described.

Citations and references

• Texas Tax Code Section 151.309
• Texas Tax Code Section 151.311
• House Bill 11

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9112L1142E03

Original ruling text

December 11, 1991

Dear **:

The purpose of this letter is to clarify the status of your contracts
to reclaim pre-law abandoned mines. As I stated to Mr.***** of
your office, you may disregard our letter of November 25, 1991.

Coal (strip) mining reclamation activities are contracts for improvement
to realty if the contractor permanently incorporates tangible personal
property into the realty being improved. The addition of lime to the soil
meets this test because the intent and result is the permanent
elimination of an acidic condition caused by the mining activities.

Due to H.B. 11, a contractor improving realty for a state agency
may no longer obtain an exemption under Tex. Tax Code Ann. Sec.
151.311 for items consumed in the performance of the contract.
Under a separated contract however, the contractor is the seller
of the tangible personal property incorporated into the realty
being improved. The governmental agency may then claim exemption
under Sec. 151.309.

The actual language of your contracts should make it clear that
the contractor must be permitted for sales tax and issue resale
certificates to suppliers when purchasing the items to be
incorporated into realty. The price of the items to the Railroad
Commission must be separately stated in your contract. You should
then issue an exemption certificate to the contractor. In order to
fully inform the contractors of their tax responsibilities, the
contract should also make it clear that tax must be paid on
machinery, equipment, and other items not incorporated into realty
(sold to the Commission).

If I can be of further help in this matter, please contact me at
(512) 463-3939.

Sincerely,

Thomas L. Poole
Assistant Manager, Tax Administration

November 25, 1991

Dear **:

Thank you for your letter questioning the applicability of H.B. 11
to the sales tax exemption status of contracts to reclaim pre-law,
abandoned mines. This response is based upon information
presented in your letter, the attached bid document, and
conversations with Mr. ** of your office.

Coal (strip) mining reclamation activities are the necessary
completion to the mining operations and are not taxable real
property repair or remodeling services, nor taxable landscaping
services, nor new construction. The construction companies
(nontaxable service providers) that perform these activities are
the end consumers of the items purchased to perform these
activities.

These companies owe tax on taxable items at the time of purchase.
However, certain tangible personal property purchased by these
companies may be exempt. Seeds and annual plants that produce
food for humans or feed for farm and ranch animals, unprocessed
strata such as top soil, lime, sand, or gravel are a few examples.

Top soil, lime, sand, gravel, or other strata is considered
unprocessed when no activity other than washing or grading has
been performed on the strata. Mixing, crushing, cutting, and
grinding are examples of processing.

In my most recent discussion with Mr. ****, we were not sure
whether the lime is unprocessed or whether it has been processed.
This will determine whether the construction company must pay tax
on the lime at the time of purchase.

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 Administration Division,
Comptroller of Public Accounts.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9112042L