How did Texas tax underground-tank demolition, tank and contaminated-soil removal, backfilling, surface restoration, repairs, replacement construction, and soil testing?

Plain-English summary

The Comptroller treated an underground fuel-storage tank as an improvement to real property. Excavating it for removal or replacement was nontaxable demolition, and the provider paid tax on materials and equipment used for that service.

Hauling and disposing of the tank itself was taxable waste removal. The letter said the tank did not meet the listed hazardous-waste, industrial-discharge, or other exclusion requirements. By contrast, 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.

Backfilling with dirt, gravel, or similar material after demolition was nontaxable restoration, with the provider paying tax on its inputs. Restoring concrete or asphalt was taxable nonresidential real-property repair. Repairing or remodeling the tank was taxable on the total charge, including excavation and returning it to the ground.

Installing a new tank was new construction. A lump-sum contractor paid tax on its materials and equipment; a separated contractor could buy incorporated materials for resale, collect tax on their agreed price, and pay tax on other inputs. Separately stated soil testing and analysis was nontaxable.

A mixed lump-sum charge was fully taxable unless taxable services were 5% or less and records supported the allocation. Separately stating reasonable taxable charges avoided tax on the nontaxable portions.

What this means for you

Tank contractors should separate demolition, tank disposal, contaminated-soil removal, backfill, surface repair, tank repair, new installation, and testing. Waste classification, exemption certificates, contract form, and the 5% mixed-charge rule all affected the result.

Common questions

Was tank excavation taxable? No. Was tank disposal taxable? Yes. Was contaminated-soil removal taxable? Not when the stated industrial-discharge conditions and certificate requirement were met. Was backfill taxable? No by itself. Were surface and tank repairs taxable? Yes. Was soil testing taxable? No when separately stated.

Citations and references

• 34 Tex. Admin. Code Rules 3.291, 3.294, 3.338, 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/9112L1150C01

Original ruling text

December 23, 1991

Dear *****:

Once again, I apologize for the unusual 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 sale 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.
Therefore, the tax laws that govern services to improvements to real property
cover many of the services that you provide.

Basically, your services fall into several distinct categories, some of
which are taxable:

Demolition:

Excavation of a tank in order to remove it from operation or to replace
it with a new tank constitutes demolition of an improvement to real property,
which is a nontaxable service. The service provider is responsible for paying
tax on all materials and equipment bought, leased, or rented for use in
providing the service.

Tank and dirt removal:

The actual hauling away and disposal 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, does not meet the definition of an "industrial
discharge" regulated by the Texas Water Commission, and does not meet any of
the remaining requirements in Rule 3.3565 for the exclusion of certain waste
removal services from tax.

Over excavation, hauling away and disposing of fuel-contaminated dirt is
a nontaxable service, provided 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.

Filling the hole and/or restoring the surface improvements:

Backfilling the hole with dirt, gravel, or similar materials following
demolition of a UST constitutes restoration of real property, which is not, by
itself, a taxable service. The service provider is responsible for paying tax
on all materials and equipment bought, leased, or rented for use in providing
this service.

Restoring concrete and/or asphalt atop a site where a UST has been
removed is a taxable service (repair of a nonresidential improvement to real
property). See Rule 3.357 for a discussion of real property repair and
remodeling. The service provider may issue a resale certificate to purchase,
tax free, materials that will be incorporated into the customer's real property
as part of the service.

Repairing or remodeling a UST:

Repair or remodeling of a UST is a taxable service, governed by Rule
3.357. The total charge to excavate a tank, repair or remodel it, and return
it to the ground is subject to tax.

New construction:

"Installation" of a new UST constitutes new construction of an
improvement to real property. The contractor owes tax on all materials used or
consumed, bought, leased, or rented to perform a lump-sum contract for new
construction. 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 agreed contract price for the incorporated materials. The contractor must
pay tax on all other materials and equipment bought, leased, or rented to
perform the contract. See Rule 3.291 for more on Contractors.

Unrelated services:

A separately stated, clearly identifiable charge for soil testing and
analysis is not taxable.

When you provide taxable and nontaxable services for a lumpsum charge,
the entire charge is subject to tax unless the charge attributable to taxable
services constitutes 5% or less of the total charge, and your business records
support this allocation. To avoid having to collect tax on the entire charge,
you may separately state and collect tax only on a reasonable charge for
taxable services.

Under separate cover, I have transmitted copies of Rules 3.291, 3.294,
3.338, 3.356, and 3.357, for your information.

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 1-800-252-5555. My direct extension is 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration