Were unprocessed rock, dirt, sand, gravel, and similar materials taxable when used in a contract combining new construction and landscaping?

Plain-English summary

This letter corrected earlier advice for a theme-park contract that included both new-construction work and taxable landscaping.

Unprocessed rock, dirt, sand, gravel, caliche, and similar materials incorporated into real property as part of taxable landscaping were taxable as part of the total service charge. The same kinds of materials incorporated through new construction were not taxable to the customer under either lump-sum or separated contracting.

If a single lump-sum charge for unprocessed materials covered both uses, the entire material charge was taxable. Separately stating the landscaping materials and new-construction materials allowed tax to apply only to the landscaping allocation.

The Comptroller told the taxpayer to retain the correction with the earlier letters for audit purposes. Proven reliance on incorrect Comptroller advice could relieve prior tax, penalty, and interest, but detrimental reliance did not protect transactions after notice of the corrected information.

What this means for you

Landscapers and construction contractors

Track unprocessed materials by actual project use. Material identity alone did not control; inclusion in taxable landscaping or nontaxable new construction did.

Accountants and tax professionals

Avoid one combined materials line when a contract spans both categories. The letter taxed the entire mixed lump sum.

Common questions

Were unprocessed materials used in landscaping taxable? Yes, as part of the taxable service price.

Were the same materials taxable to the customer in new construction? No.

What if one material charge covered both uses? The entire lump-sum charge was taxable.

Could the taxpayer rely forever on the earlier incorrect advice? No. The letter said detrimental reliance ended after notice of the correction.

Citations and references

• 34 Tex. Admin. Code Rule 3.285 (resale certificates; cited in STAR's later alert)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1150A01

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

January 15, 1992

Dear **:

I am writing to supplement my letter of April 2, 1991, regarding charges in a
contract for the installation of plants, construction of an irrigation system,
and supervision of construction at a new theme park. Specifically, I wanted to
add more information about the sale and delivery of unprocessed or processed
rock, dirt, sand, gravel, caliche, and similar materials.

On page 1 of my letter, I stated:

However, separately stated charges for furnishing unprocessed dirt, sand,
gravel, soil and similar materials are not taxable. Such charges have been
correctly listed under "Amounts not subject to sales tax" on your sample
billing.

This answer might be partially incomplete as applied to the contract you asked
about, because the contract involved both a new construction services and
landscaping services.

A charge to a customer for unprocessed materials that are incorporated into the
customer's real property as part of a taxable service (such as landscaping) is
taxable as part of the total charge for that taxable service. A charge to a
customer for unprocessed materials that are incorporated into the customer's
real property as part of new construction (under either a lump-sum or separated
contract) is not taxable, however.

My original answer presumed that all unprocessed materials that were billed to
the customer were used to perform new construction services. If the unprocessed
materials were attributable to landscaping services, then the customer owed tax
on those materials. If unprocessed materials are being used in both ways, then
tax is due on the entire lump-sum charge for unprocessed materials. A separate
charge for unprocessed materials attributable to the landscaping only would be
taxable, while a separate charge for unprocessed materials attributable to new
construction would not.

I apologize for any inconvenience this has caused. Be sure to keep a copy of
the original letter on file, as well as this correction, in the event of an
audit. Generally speaking, a person who fails to collect tax on a taxable good
or service due to proven reliance on incorrect advice from a Comptroller
employee may be relieved of liability for the tax he or she failed to collect,
as well as any applicable penalty and/or interest. This letter and the letter
of May 10, 1991 constitute the proof of detrimental reliance that you would
have to produce in an audit.

Detrimental reliance is no defense against tax liability incurred after you
have received notice of the correct information.

If you have any questions, feel free to write or call 1-800-252-5555, extension
3-3889.

Sincerely,

John Christian
Attorney
Tax Administration