How did Texas tax equipment-and-operator charges for laying, burying, delivering, and removing sold or rented polyethylene pipe?

Plain-English summary

The company rented and sold polyethylene pipe used to carry water to oil-field drilling rigs. It could lay the pipe above ground or bury it and charged for spool trucks, backhoes, trenchers, and their operators.

For rented pipe, every laying or installation charge was taxable, including equipment and operator charges. Trenching and burial were taxable services connected with the rental. A separately stated charge to dig up or remove the pipe after the rental was not taxable.

For sold pipe laid on the ground, the laying charge and truck-and-operator charge were taxable. If the sales contract required a trench and permanent burial with no future removal, a separately stated trenching-and-burial charge was nontaxable. The truck-and-operator charge remained taxable unless a reasonable delivery charge was separately stated.

The letter acknowledged that equipment with an operator could be nontaxable when it was not supplied with a taxable sale, rental, or service.

What this means for you

Pipe providers should separate delivery, permanent trenching, and later removal from taxable rental or laying charges where the facts permit. The same operator-and-equipment charge changed treatment depending on the connected transaction.

Common questions

Was trenching for rented pipe taxable? Yes. Was later removal taxable? Not when separately stated. Was permanent trenching for sold pipe taxable? Not when separately stated and the contract did not provide for later removal. Were truck-and-operator charges always taxable? No, but they were taxable in the connected rental and laying situations addressed here.

Citations and references

• Texas Comptroller Hearing No. 24,783

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9112L1145E14

Original ruling text

December 30, 1991

Dear **:

Thank you for your recent letter which is restated in part with
responses below.

Facts: We have spool trucks which we use to lay and retrieve
polyethylene pipe for temporary use in the oil field. This line
is used to transport water to the drilling rigs and is on a rental
basis. We also have a back hoe with operator and a trencher
with operator.

In our follow-up phone conversation of December 18, 1991 you
said that you both rented and sold the polyethylene pipe and
that you would lay it on the ground or bury it depending on
the customers desire. You said that in the case of line
rentals, you were requested to bury the line about ten to
twenty percent of the time. You said that you charge tax on
the sales and rentals of the line but questioned the
taxability of the equipment charges with operators.

Response: When you rent polyethylene pipe, all the charges with
laying/installing the pipe are taxable. That includes the charge
for equipment and operator whether it is a truck, back hoe or
trencher. I am enclosing an edited copy of hearing number 24,783
dealing with laying above-ground polyethylene line. The labor to
dig a trench and buyer the line is taxable as a service in
connection with the line rental. However, a separately stated
charge to dig up and/or remove the pipe after the rental would
not be taxable.

In our conversation you mentioned that the provision of equipment
with an operator should not be taxable. That would be correct if
the equipment and operator were not provided in conjunction with
a taxable sale, rental, or service.

When you sell polyethylene pipe to a customer and your contract
calls for you to lay it on the ground, the charge for laying the
pipe, including the charge for truck and operator, are taxable.

However, if your contract requires you to dig a trench and bury
the pipe, and it makes no provision for you to remove it in the
future, the separately stated charge for digging the trench and
buying the line will not be subject to tax. The charge for the
truck and operator will be subject to tax unless you make a
reasonable, separately stated charge for delivering the pipe to
the job site.

This opinion is based on the facts you presented. Other facts,
though similar, may yield different results.

If you have questions or need more information, please call or
write. You may reach me by calling toll free, (800) 531-5441.
My direct line number is (512) 463-4680. The number for FAX
transmissions is (512) 475-0900. You may write to me in case of
Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division