How did Texas tax French drains, drainage-system construction and repair, regrading, and unprocessed gravel or soil used in the work?

Plain-English summary

The Comptroller treated a French drain as an improvement to realty and applied different rules based on whether the work was new construction, residential repair, or nonresidential repair. The January 1992 portion corrected an earlier March 1991 explanation about unprocessed gravel and similar materials.

Building a drainage system where none existed was new construction. Repairing or remodeling a residential drainage system received the same treatment: under a lump-sum contract, the contractor charged no tax and paid tax on materials; under a separated contract, the contractor collected tax on incorporated materials but not labor and could buy those materials for resale.

Repairing or remodeling a nonresidential drainage system was a taxable service. Tax applied to the entire customer charge, including labor, materials, and overhead. Regrading or adding soil to improve drainage was taxable landscaping at both residential and nonresidential property.

The correction explained that a supplier's separately stated sale or delivery of unprocessed rock, dirt, sand, gravel, caliche, sandy loam, or black soil was generally nontaxable. But when the service provider transferred that material to its customer as part of a taxable service, the charge became part of the taxable service price and could not be excluded. When transferred through nontaxable new construction or residential repair, it remained within the nontaxable labor-and-service portion of a separated contract.

Washing, sizing, or sorting gravel did not count as processing. Mixing or crushing it did, making the gravel taxable under the letter.

What this means for you

Drainage contractors

Classify the site and work before pricing: new construction, residential repair, nonresidential repair, and landscaping each had different consequences.

Material suppliers

The supplier's direct sale and delivery of unprocessed material could be nontaxable even when the contractor's later charge to a customer became taxable as part of a taxable service.

Accountants and tax professionals

Read the January 1992 correction together with the included March 1991 letter. The correction expressly withdrew the implication that unprocessed material could always be excluded from a taxable service's tax base.

Common questions

Was a French drain an improvement to realty? Yes.

Was nonresidential drainage repair taxable? Yes, on the entire charge.

Was residential drainage repair taxable? It followed contractor treatment: no customer tax under lump-sum billing, or tax on materials but not labor under separated billing.

Was regrading taxable? Yes, as landscaping, for both residential and nonresidential property.

Was unprocessed gravel always excluded from tax? No. Its transfer became part of the taxable price when included in a taxable service.

Did washing or sorting make gravel processed? No. Mixing or crushing did.

Citations and references

The letter does not cite a numbered statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1149F14

Original ruling text

January 16, 1992

Dear **:

I am writing to correct and supplement some information in

my letter of March 28, 1991, regarding the installation of

drainage systems. Specifically, I wanted to discuss the

sale and delivery of unprocessed or processed rock, dirt,

sand, gravel, caliche, and similar materials.

In my letter, I said the following:

If you repair or remodel a drainage system at a

non-residential structure, the rules are different:

You are performing a taxable service, and lump-sum

and separated contracts are treated the same way.

You must collect tax from your customer on the

entire charge to the customer, including labor,

materials, and overhead (but see below, regarding

unprocessed gravel, etc.). You may issue a resale

certificate to purchase materials that you will

incorporate into your customer's property, or you

may pay tax on those materials and take credit on

your tax return for tax paid to your suppliers.

You must still pay tax on other materials you use

to perform the job, but do not transfer to the

customer.

(Emphasis added.) The underlined portion is misleading. A

charge to a customer for unprocessed materials sold as part

of a taxable service (for example, landscaping and lawn

maintenance, or the repair, remodeling, or restoration of a

nonresidential improvement to realty) is taxable as part of

the sale price of the service. The charge may not be

excluded from the tax base. (The service provider, however,

is still not required to pay tax to the person who only

sells and delivers the unprocessed materials; the supplier

is, by policy, performing a nontaxable service.)

You also asked the following questions, and I responded as

follows:

8. Is the gravel used in a French Drain taxable?

Answer: No tax is due on a separately stated

charge for sale and/or delivery of unprocessed

gravel. Merely washing, sizing or sorting the

gravel is not processing. Gravel that has been

processed (e.g., mixed with other material, or

crushed) is taxable.

9. Is sandy loam or black soil taxable?

Answer: If the sandy loam or black soil is sold

and/or delivered in an unprocessed state, then it

is not taxable.

I should add to these answers that your charge to a customer

for unprocessed rock, dirt, sand, gravel, caliche, sandy

loam, black soil, etc. is:

Taxable when you are transferring these materials to the

customer as part of a taxable service (for example,

landscaping, lawn maintenance, or repair, remodeling, or

restoration of a nonresidential improvement to realty); but

Not taxable when you are transferring these materials to the

customer as part of a nontaxable service (for example, new

construction, or repair, remodeling, or restoration of a

residential improvement to realty).

Regarding new construction and repair, remodeling, or

restoration of a residential improvement to realty, under a

separated contract, your charge for incorporating the

unprocessed materials into the customer's realty is included

in the nontaxable labor and service portion of the contract.

Under a lump-sum contract, of course, there is no tax

charged to the customer, anyway.

I apologize for any confusion or inconvenience this has

caused. If you have any questions, feel free to write or

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

Sincerely,

John Christian

Attorney

Tax Administration

March 28, 1991

Dear **:

Thank you for your recent letter. As I understand it, you

have numerous questions about the drainage systems your

company installs at homes and commercial buildings. I have

restated your questions below, followed by answers:

1. When is a drainage system taxable?

Answer: A drainage system is an improvement to realty. If

you construct a drainage system were there was no drainage

system before, you hare a contractor performing new

construction. If you repair or remodel an existing drainage

system at a residence, it is treated the same as new

construction, for sales tax purposes.

The following rules apply to all new construction, and to

repair or remodeling of a drainage system at a residence:

Under a lump-sum contract, you should charge no tax to the

customer. You must pay tax to your suppliers on all

materials that you use on the job, including materials that

you incorporate into the customer's property.

Under a separated contract (separately agreed contract

prices for materials and labor), you should charge tax to

your customer on the agreed contract price for materials

that you will incorporate into the customer's property.

This price cannot be less than your cost for the materials.

There is no tax on the labor. You should issue a resale

certificate to purchase, tax-free, materials that you will

incorporate into your customer's property. You must pay tax

on all other materials used on the job.

If you repair or remodel a drainage system at a nonresidential

structure, the rules are different:

You are performing a taxable service, and lump-sum and

separated contracts are treated the same way. You must

collect tax from your customer on the entire charge to the

customer, including labor, materials, and overhead (but see

below, regarding unprocessed gravel, etc.). You may issue a

resale certificate to purchase materials that you will

incorporate into your customer's property, or you may pay

tax on those materials and take credit on your tax return

for tax paid to your suppliers. You must still pay tax on

other materials you use to perform the job, but do not

transfer to the customer.

2. Is a French Drain taxable?

Answer: A French Drain is an improvement to realty, so the

rules set out in answers 1 apply.

3. Is regrading taxable if it is to improve or eliminate a

drainage problem?

Answer: Regrading is a taxable landscaping service. You

must collect tax on the total charge for regrading both

residential and nonresidential property.

4. If a drainage system is not taxable, are the parts and

material taxable?

Answer: See answer 1.

5. Is there any difference, tax wise, between residential

and commercial drainage work?

Answer: See answer 1.

6. If we bring in soil to improve drainage in a low spot in

a yard or around the foundation of a house, is it taxable?

Answer: This is a taxable landscaping service. You must

collect tax on the total charge for adding soil to low spots

to improve drainage at both residential and nonresidential

property. You may issue a resale certificate to purchase

tax free from your supplier soil that you will incorporate

into your customer's property. (If your supplier delivers

the soil in an unprocessed state, you would not have to pay

tax on it, anyway).

7. If we have to cut driveways and sidewalks to lay pipe,

is that taxable?

Answer: See answer 1. If you are cutting driveways and

sidewalks as part of a contract to repair or remodel

nonresidential real property, then you must collect tax on

the entire charge.

If you are cutting driveways and sidewalks as part of new

construction, or as part of a contract to repair or remodel

residential real property, then you should not charge tax

under a lump-sum contract. Under a separated contract, you

must charge tax on the agreed contract price for materials

that you incorporate into your customer's property, and

there is no tax on the labor.

8. Is the gravel used in a French Drain taxable?

Answer: No tax is due on a separately stated charge for

sale and/or delivery of unprocessed gravel. Merely washing,

sizing or sorting the gravel is not processing. Gravel that

has been processed (e.g., mixed with other material, or

crushed) is taxable.

9. Is sandy loam or black soil taxable?

Answer: If the sandy loam or black soil is sold and/or

delivered in an unprocessed state, then it is not taxable.

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

Tax Administration