How did Texas tax replacement-building construction and the demolition, removal, testing, cleanup, and replacement of underground fuel tanks?

Plain-English summary

The Comptroller addressed a replacement-building project and several stages of underground fuel-storage-tank work.

Demolishing one complete section of an interconnected manufacturing plant and constructing a replacement building on the site was new construction. Construction labor was not taxable. Under a lump-sum contract, the contractor paid tax on materials bought, leased, or rented for the job and did not collect tax on the lump-sum amount billed to the manufacturer.

For the underground tanks, excavation to remove the tank was nontaxable demolition, but actually hauling away and disposing of the tank was taxable waste removal. Soil testing was not taxable. Soil removal was taxable waste removal unless fuel contamination made the soil a regulated “industrial discharge” under Water Code Chapter 26; disposal of that regulated material was not taxable under the letter.

Installing an above-ground tank of at least 500 barrels ordinarily qualified as new construction of an improvement to realty. A smaller tank was tangible personal property, making installation taxable when performed by its seller or lessor but nontaxable when performed by an unrelated third party. A contract stating that even a larger affixed tank remained personal property received the personal-property treatment.

The letter also warned that one lump-sum price combining taxable and nontaxable services was presumed fully taxable unless the taxable portion was 5% or less and documented. Separately stating and reasonably pricing the taxable services could overcome that presumption.

What this means for you

Manufacturers and property owners

Break a multi-stage environmental or construction project into its real activities. Demolition, hauling, testing, remediation, and installation did not share one tax result.

Contractors and tank service companies

Contract form matters. Lump-sum new-construction contractors paid tax on their inputs, while separated contracts required tax collection on incorporated materials. For tank installation, capacity and the contract's treatment of the tank as real or personal property were decisive.

Common questions

Was replacement-building labor taxable? No. The letter treated the complete demolition and replacement as new construction.

Was excavating an underground tank taxable? No, as demolition. Hauling away the tank was taxable waste removal.

Was soil testing taxable? No.

Was contaminated-soil removal taxable? Not if the fuel-contaminated soil met the regulated industrial-discharge condition described in the letter; ordinary soil removal was taxable.

How were above-ground tanks under 500 barrels treated? As tangible personal property. Installation by the seller or lessor was taxable, while a third-party installer's labor was not.

Citations and references

• 34 Tex. Admin. Code Rule 3.285 (resale certificates; cited in STAR's later alert)
• 34 Tex. Admin. Code Rule 3.291 (contractors and new construction)
• Texas Water Code Chapter 26 (regulated industrial discharge)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1157E05

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 30, 1992

Dear ***:

Thank you for your recent letters, regarding a building project and
underground storage tank services.

Situation 1: I understand that you are planning a building project in
1992. You have a manufacturing plant that is actually a series of buildings
that have been constructed over a period of years. The buildings are joined by
common doorways. One section was constructed many years ago and you plan to
demolish it entirely and construct another building on the site. The entire
project will be a turn-key job, and the contractor will furnish all materials
and labor.

Questions:

1. Is the building construction labor subject to sales tax?

Answer: This job constitutes new construction. New construction labor is
not taxable.

2. If the answer to (1) is "no", is the contractor required to show
   materials and labor separately and show sales tax on materials if he paid sales
   tax on materials directly or can he show a lump-sum amount on his invoice to
   us?

Answer: The contractor is not required to enter into a separated
contract. If your contract is a lump-sum contract (as defined in Rule 3.291),
then the contractor is required to pay tax on all materials bought, leased, or
rented for use on the job. The contractor should not collect tax on the
lump-sum amounts billed to your company.

3. If the answer to (1) is "yes", is the contractor required to show the
   sales tax on our invoice for materials if he paid the tax directly?

Answer: See the answer to Question 2, above.

Situation 2: Your company is having some work done regarding underground
fuel storage tanks (UST's). The old tanks are being removed from beneath the
ground, the soil tested and removed if contaminated, and new fuel storage tanks
being built above ground.

Question: Which of these activities is subject to state sales tax?
(Please distinguish between materials and labor.)

Answer: These activities constitute a combination of taxable and
nontaxable services, as follows:

1. Demolition: Excavation of the UST in preparation for its removal
   and disposal constitutes demolition of an improvement to real property, which
   is not a taxable service. The service provider owes tax on all materials
   bought, leased, or rented to perform the service.

2. UST removal and disposal: The actual hauling away of the UST is a
   taxable waste removal service, including charges for both material and labor.
   The service provider may issue a resale certificate to purchase, tax free,
   materials that will be transferred to the customer's care, custody, and control
   as part of the service. The service provider owes tax on all other materials
   bought, leased, or rented to perform the service. Note: It is our present
   understanding that regulatory agencies have not classified UST's as "hazardous
   waste", such that their disposal would not be a taxable service.

3. Soil testing: The testing of the soil is not a taxable service. The service
   provider owes tax on all materials bought, leased, or rented to perform the
   service.

4. Soil removal: The removal of the soil is a taxable waste removal
   service, unless the soil is fuel-contaminated and thus meets the definition of
   an "industrial discharge" whose disposal is regulated by the Texas Water
   Commission under the Water Code, Chapter 26, is not a taxable service. The
   service provider owes tax on all materials bought, leased, or rented to perform
   a nontaxable service.

5. Installation of an above-ground storage tank: The installation of an
   above-ground storage tank with a capacity of 500 barrels or more ordinarily
   constitutes new construction of an improvement to realty, governed by Rule
   3.291. The customer owes no tax on a lump-sum contract for new construction of
   an improvement to real property. The contractor owes tax on all materials
   bought, leased, or rented to perform a lump-sum contract. Under a separated
   contract, the contractor may issue a resale certificate to purchase, tax free,
   materials that will be incorporated into the customer's realty. The contractor
   must pay tax on all other materials bought, leased, or rented for use on the
   job. The contractor must collect tax on the separately agreed upon contract
   price for the incorporated materials. The separate labor and service charges
   are not taxable.

Exception: Regardless of the size of the above-ground tank, if the
contract specifically provides or contemplates that the tank remains tangible
personal property even after being affixed to real property, then this
provision will be given effect. (This is typical in an operating lease of an
aboveground storage tank.) In other words, the installation will be treated
not as new construction, but as installation of tangible personal property as
discussed below.

An above-ground storage tank with a capacity of less than 500 barrels is
considered tangible personal property. A seller (or lessor) of tangible
personal property must collect tax on a charge to install the property. The
labor to install tangible personal property is not taxable if performed by a
third party who did not sell, lease, or rent the tangible personal property
being installed.

A lump-sum contract for taxable and nontaxable services is presumed to be
taxable in its entirety, unless the charges attributable to taxable services
comprise 5% or less of the overall charges, and the parties can document this
fact. The presumption can be overcome by separately stating, clearly
identifying, and collecting tax on a reasonable charge for taxable services.

Under separate cover, I have transmitted copies of the relevant rules.
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, Attorney
Tax Administration Division