How did Texas tax permanent truck and railroad scale installations in existing roadbeds versus new construction?

Plain-English summary

A company sold and installed truck and rail scales on permanent reinforced-concrete foundations. Tax treatment changed with the construction facts.

Adding a scale to an existing truck or railroad roadbed was taxable nonresidential repair or remodeling. The total charge, including labor and materials, was taxable. The provider could buy incorporated materials for resale but paid tax on job equipment and supplies.

Separately stated materials incorporated directly into railroad track—such as rails, ballast, bridges, trestles, and cross ties—could be supported by a customer exemption certificate. Materials for a depot or other improvements not directly essential to train operation, including the scale itself, remained taxable.

An entirely new roadbed and scale was new construction. Under a lump-sum contract, the contractor paid tax on taxable inputs and did not tax the customer price; qualifying railroad-track materials could be bought with an exemption certificate. Under a separated contract, the contractor taxed the agreed materials price, not labor, and could buy incorporated materials for resale. Consumable supplies and equipment remained taxable to the contractor.

For contracts mixing taxable remodeling and nontaxable new construction, a lump-sum charge was fully taxable unless the taxable service was 5% or less of the total and business records supported the allocation. Separately stating a reasonable taxable-service charge avoided taxing the whole amount. Freight connected to sale of scale equipment was part of the material's selling price.

What this means for you

Scale installers and contractors

Determine whether the job upgrades an existing improvement or creates a new one before pricing. The same scale can fall under different contractor rules.

Railroad operators and tax professionals

The railroad-material exemption was narrow. Track-essential materials could qualify, while a scale or depot did not merely because it served rail operations.

Common questions

Was adding a scale to an existing roadbed taxable? Yes, in full.

Was labor taxable on separated new construction? No.

Were scale materials exempt as railroad-track materials? No. The letter said the scale was not directly essential to train operation.

How were mixed remodeling and new-construction lump sums treated? Fully taxable unless the taxable portion was 5% or less and supported by records.

Citations and references

• 34 Tex. Admin. Code Rule 3.357 (nonresidential repair and remodeling)
• 34 Tex. Admin. Code Rule 3.297 (railroad rolling stock and track materials)
• 34 Tex. Admin. Code Rule 3.291 (construction contractors)
• 34 Tex. Admin. Code Rule 3.303 (transportation and delivery charges)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1155C02

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

JOHN SHARP
Comptroller February 4, 1992

Dear ****:

Thank you for your letter concerning the permanent installation of truck
and rail scales.

According to your letter, your company sells and installs truck and rail
scales on permanent reinforced concrete foundations. Depending on the
circumstances of the job, at times both materials and labor are taxable, at
other times only the materials are taxable, and it may even occur that the
labor is taxable, but a portion of the material charges are not taxable.

When an existing truck or railroad road bed is upgraded to incorporate a
scale, the job constitutes a taxable service (repair, restoration, or
remodeling of nonresidential improvements to real property). The total charge
is taxable, including all charges for materials and labor. The service
provider must collect tax from the customer on the total amount for the service
and then remit the tax to the state. The service provider may issue a resale
certificate in lieu of tax on materials actually incorporated into the
improvement to realty, but must pay tax on equipment and supplies he or she
uses on the job. (See Rule 3.357 on repairs and remodeling.)

A service provider may accept a properly completed exemption certificate
from a customer for materials that are actually incorporated into a railroad
track (e.g., rails, ballast, bridges and trestles, cross ties, and other track
material). The charge for materials must be separately stated to the customer.
The charge for materials not incorporated into the track and the labor is
still taxable to the customer. Materials for a depot or other improvements
(such as the scale) not directly essential to the operation of the train are
taxable. (See Rule 3.297 regarding rolling stock.)

New construction occurs when there is no existing improvement to real
property being upgraded or repaired and the scale is incorporated (not as part
of an existing road bed) as a new improvement to real property. An example
would be to build an entirely new road bed with the construction of the scale
as part of the new improvement to realty.

When the job is new construction, the contract for the work is either a
lump-sum contract or a separated contract. In a lump-sum contract, the
contractor is the consumer of all materials, supplies, and equipment used to
perform the job. As the consumer, a lump-sum contractor pays tax on all
taxable items purchased, leased, or rented for the job. The lump-sum
contractor does not charge tax to the customer on the lump-sum charge or any
portion of the charge. A lump-sum contractor does not pay tax on labor charges
made by third-party contractors assisting in the new construction because labor
in new construction of improvements to real property is not taxable.

When a lump-sum contractor on a new construction job incorporates
materials into a railroad track, the materials (rails, cross ties, etc.) may be
purchased tax free. The lump-sum contractor must issue an exemption
certificate to the supplier of the railroad track materials in lieu of paying
tax.

In a separated contract (charge for materials and labor are separated)
for new construction, the contractor is the seller of the materials
incorporated into the new improvement to realty. As a seller, the separated
contractor must charge tax on the agreed contract price for the incorporated
materials. The charge for labor in a separated contract for new construction
is not taxable. A separated contractor may issue a resale certificate to his or
her supplier in lieu of paying tax on the incorporated materials. A separated
contractor must pay tax on consumable supplies and equipment used on the job,
but not incorporated into the real property. (See Rule 3.291 regarding
contractors.)

A separated contractor may accept an exemption certificate from his or
her customer on a separately stated charge for railroad track materials
incorporated into real property as part of a new construction job. Tax must
still be charged on the portion for materials for a depot or other improvements
not directly essential to the operation of the train (scale, etc.).

At times you may be performing new construction and repair or remodeling
(taxable service) in the same contract. In those circumstances, please be
aware of the following:

When you provide taxable and nontaxable services for a lump- sum 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.

For your information, out of the seven items you listed in your letter,
items 1-4 appear to be charges associated with materials. Items 5-7 appear to
be charges associated with labor. The item listed as number 2 appears to be a
freight charge connected to the sale of tangible personal property (scale
equipment) and is considered part of the selling price of the material. (See
Rule 3.303 concerning transportation and delivery charges.)

Under separate cover, I have sent copies of Rules 3.291, 3.297, 3.303,
and 3.357, for your information.

This opinion is based on the facts that you presented. If there are
additional or different facts, this opinion may change.

You may call me toll free at 1-800-252-5555, ext. 5-0030. The direct
line is
512/475-0030. You may also write to Tax Administration, Comptroller of
Public Accounts.

Sincerely,
David Somerville
Tax Administration Division