How did Texas tax monitoring wells, underground-tank removal and replacement, contaminated waste, soil work, testing, and cleanup equipment?
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This page answers the general question as of 1992. Ezel answers yours, under current Texas tax law, with citations.
Plain-English summary
The Comptroller treated an underground fuel-storage tank as an improvement to real property. New monitoring wells and replacement tanks, fuel islands, or canopies after complete demolition were new construction. Repairing existing wells, islands, or canopies was taxable real-property repair or remodeling.
Excavating a tank, island, or canopy for disposal or replacement was nontaxable demolition. Hauling, storing, and disposing of the old tank or demolition rubble was taxable waste removal. A mixed lump-sum charge was fully taxable unless taxable services were 5% or less and documented; separately stated charges allowed tax to apply only to taxable services.
Fuel-contaminated dirt, liquid residue, or hazardous waste could receive the waste-removal exclusion described in Rule 3.356 when it met the regulatory definition and the provider obtained an exemption certificate. The tank itself did not qualify for those exclusions, so its transport and disposal remained taxable.
Labor to fill a hole was nontaxable when part of new construction or demolition, but taxable when part of taxable nonresidential repair. Unprocessed dirt and similar material was nontaxable at purchase; processed material was taxable, subject to resale treatment when incorporated through a taxable service. Separately stated soil or water analysis was nontaxable. Equipment bought to clean contaminated dirt or groundwater was taxable.
Cleaning contaminated soil for return to the same customer's realty was nontaxable. Removing, cleaning, and holding it for resale to another customer produced different waste-removal and processed-soil sale consequences.
What this means for you
Tank and environmental contractors should separately price demolition, hauling, replacement construction, repair, testing, and remediation. The physical material and regulatory waste classification mattered as much as the work description.
Common questions
Was tank excavation taxable? No, as demolition. Was hauling away the tank taxable? Yes. Were replacement tanks new construction? Yes after complete demolition. Was sample analysis taxable? No when separately stated. Was cleanup equipment taxable? Yes.
Citations and references
- 34 Tex. Admin. Code Rules 3.291, 3.357, 3.292, and 3.356(a)(3)(A)
- Texas Water Code Chapter 26 (regulated industrial discharges)
Source
- STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
- Opinion: https://star.comptroller.texas.gov/view/9201L1162C08
Original ruling text
January 14, 1992
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 sales 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.
Your specific questions are set out below, followed by answers:
- Is the installation and development of environmental observation wells and
monitoring wells on real property taxable?
Answer: I presume that the observation and monitoring wells become improvements
to real property when constructed. If this is the case, then the new
installation of a well constitutes new construction of an improvement to real
property. Under a lump-sum contract, the contractor owes tax on all materials
bought, leased, or rented for use on the job. 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 on the agreed contract price for the incorporated materials. The
contractor owes tax on all other materials and equipment bought, leased, or
rented for use in performing the contract. See Rule 3.291 regarding
Contractors.
Repair or remodeling of an existing observation or monitoring well that is an
improvement to realty is a taxable service. See Rule 3.357. Repair,
maintenance, or remodeling of tangible personal property within a well is also
a taxable service. See Rule 3.292.
- Is the rent paid by customers for tanks used for storing environmentally
contaminated water taxable?
Answer: I presume that you are referring to a charge that you make to a
customer for the temporary storage of contaminated water that you remove from
the customer's site. This charge is taxable only if the waste removal service
itself is taxable. Under Rule 3.356 (a)(3)(A), you may accept an exemption
certificate from a customer instead of collecting tax on a charge to remove and
store a substance that meets the definition of an industrial discharge
regulated by the Texas Water Commission pursuant to a permit issued under
Chapter 26 of the Water Code. Our present understanding is that a person must
have a Chapter 26 permit to dispose of liquid waste and residue from a UST.
- Is the rental on tanks while they are waiting for final disposition taxable?
Answers: I presume that you are referring to a charge that you make to a
customer for the storage of UST's that have been excavated and are awaiting
disposal. If this is the case, then the storage fee is taxable as part of your
charge for taxable waste removal services. The total charge for hauling away,
storing, and disposing of a UST is subject to tax. See Rule 3.356, and the
answer to Question 7 below.
- Is the cost of transporting contaminated materials from the site to the
final disposition site taxable?
Answer: Charges to excavate, transport, and dispose of fuel-contaminated dirt
and/or liquid waste and residue from a UST are not taxable, provided these
waste items meet the definition of an "industrial discharge" regulated by the
Water Commission under Chapter 26, Water Code. Our present understanding is
that such fuel-contaminated waste does meet this definition. A charge for
transporting and disposing of hazardous waste is not taxable, either. See Rule
3.356 for more on waste removal services. Be sure to obtain an exemption
certificate from each customer for whom you provide the described services.
- Is the removal of the fuel island, the canopy, and the old fuel tanks
considered to be demolition and as such, is the charge for labor and material
taxable?
Answer: The excavation of a UST in order to dispose of it or replace it with a
new one constitutes nontaxable demolition of an improvement to real property.
Destruction or complete dismantling of a fuel island or canopy in order to
dispose of it and/or replace it is also a nontaxable demolition service. A
provider of a demolition service owes tax on all materials and equipment
bought, leased, or rented to provide the service.
The actual waste hauling services are taxable, including the hauling away and
disposing of a UST and of the rubble associated with the demolition of a fuel
island or canopy. See the answers to Questions 2, 3, and 4 regarding exempt
waste removal services.
A lump-sum contract for taxable and nontaxable services is taxable in its
entirety unless the charge attributable to taxable services constitutes 5% or
less of the overall charge, and the parties can document this fact. If charges
for taxable and nontaxable services are separately stated, then tax is due only
on the charge for the taxable services.
- Is the replacement of the fuel island, the canopy, and the fuel tanks deemed
to be new construction? Is the determination of new construction contingent on
the total replacement of the fuel installation or are phases deemed independent
of each other? for example, if only the fuel island or the canopy were replaced
would this be deemed to be new construction? Please explain how the rules on
new construction would apply in this situation.
Answer: For tax purposes, a UST is treated as an improvement to real property
unto itself. Therefore, it is not taxable remodeling of the entire service
station when a UST is excavated and replaced with a new one. Fuel islands and
canopies are typically affixed to realty in such a way as to be independent
improvements, as well. Therefore, it is possible to have a contract for the new
construction of a UST, a fuel island, or a canopy, at an existing service
station. This is true following the complete demolition of an existing UST,
fuel island, or canopy.
This is distinctly different from the restoration of an existing fuel island or
canopy, which constitutes repair of an existing nonresidential improvement to
real property (a taxable service). See Rule 3.357 for more on repair,
restoration, and remodeling of real property.
- Is transportation and final disposal of the old fuel tanks taxable?
Answer: Yes. A UST itself 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 other
exclusions from the definition of taxable waste removal services found in Rule
3.356.
- Is the filling of the hole with dirt taxable?
Answer: I will answer this question only with regard to labor charges to fill
the hole. (See the answer to Question 9, regarding materials used.) Depending
on the circumstances, the labor to fill the hole may or may not be taxable, as
follows:
A contractor performing new construction under either a lump-sum or separated
contract will collect no tax on a charge for labor to fill a hole with dirt;
A person who is providing nontaxable demolition services will collect no tax on
a charge for labor to fill a hole with dirt;
A person who is providing a taxable service (for example, repair or remodeling
of a nonresidential improvement to realty) must collect tax on the total charge
for the service, including a charge to fill a hole with dirt.
- Is the dirt purchased to fill the hole taxable?
Answer: The delivery of unprocessed dirt, sand, gravel, or similar materials is
not a taxable service. The materials are not considered processed if they have
been merely sorted, sized, screened, washed, and/or dried. The sale of the same
materials in a processed state (i.e., crushed or mixed with other materials) is
taxable. A person performing taxable or nontaxable services owes no tax on the
purchase of unprocessed materials as described above. A person performing
taxable services may issue a resale certificate to purchase, tax free,
processed materials that will be incorporated into the customer's real property
as part of the taxable service. A person performing nontaxable services must
pay tax on processed materials.
- Is the analysis of soil and water samples taxable?
Answer: A separately stated, clearly identified charge for analysis of soil
and/or water is not taxable.
- Does the classification of the site as "Leaking Petroleum Storage Tank"
site by TWC change any of the taxability of any of the above questions?
Answer: No.
- Is the disposal of contaminated dirt or contaminated water taxable?
Answer: Same as answer 4, above.
- Is the process of cleaning contaminated dirt taxable?
Answer: A charge to a customer for the removal of fuel based contaminant from
soil that will be returned to the customer's realty is not taxable. Before the
soil is removed, it is considered real property. Removing it from the ground
for decontamination purposes with the intent to return it to its original
location does not cause it to lose its identity as real property. (This is
similar to reclaiming land after strip mining, which is a nontaxable service.)
Unlike repair or restoration of a nonresidential improvement to real property,
restoration or repair of real property itself is not a taxable service.
This answer would be different if soil were removed from one customer's
property, decontaminated, and then held for resale to another customer. The
first customer would pay tax on the waste removal service, unless the soil were
a fuel-contaminated industrial discharge, hazardous waste, or another excluded
type of waste. The subsequent purchaser of the decontaminated soil would pay
tax on the purchase price of the processed soil.
- Is the equipment purchased to clean up contaminated dirt or contaminated
groundwater taxable?
Answer: Yes.
Under separate cover, I have transmitted copies of the rules referenced in this
letter. 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, ext. 3-3889.
Sincerely,
John Christian, Attorney
Tax Administration Division
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