Are materials used to build a railroad loading and containment facility exempt from Texas sales and use tax as railroad track materials?

Plain-English summary

A taxpayer asked the Comptroller about the taxability of materials purchased to build railroad loading and containment facilities. The Comptroller drew a line based on what the materials become part of, not on the overall railroad project they support.

Materials that are actually incorporated into the railroad track itself -- rails, cross ties, and similar track components -- qualify for exemption from Texas sales and use tax. But materials used to construct the loading and containment facility are taxable, because the Comptroller determined that facility is a separate structure, not directly essential to the operation of the rolling stock or the locomotives. The ruling analogizes this to a depot: "Materials for a depot or other construction not directly essential to the operation of the train are taxable."

The letter also explains how the exemption is claimed depending on the contract type. A lump-sum contractor building new track can buy the track materials (rails, cross ties, etc.) tax free by issuing an exemption certificate to the supplier. A separated contractor -- one who bills materials and labor as separate line items -- may instead accept an exemption certificate from the customer covering the separately stated charge for railroad track materials incorporated into real property as part of new construction.

The subject line inherited from the STAR system heading, "Railroad Loading And Containment Facilities — Not Essential To Operation Of Train," accurately captures the ruling's core holding and has been kept as the subject title.

What this means for you

Contractors building railroad-related structures

Only materials that go directly into the railroad track (rails, cross ties, and similar components) qualify for the exemption. Materials used for a loading facility, containment facility, depot, or other structure that isn't part of the track itself are taxable, even if the structure serves the railroad operation. Sort your material purchases by what they're incorporated into, not by the overall project.

Lump-sum contractors

If you're a lump-sum contractor incorporating materials into a railroad track as part of new construction, you can purchase the track materials tax free by issuing an exemption certificate to your supplier.

Separated contractors and their customers

If you separately state the charge for railroad track materials, you may accept an exemption certificate from your customer covering that materials charge, provided the materials are incorporated into real property as part of new construction.

Common questions

Q: Are materials for a railroad loading and containment facility exempt from Texas sales tax?
A: No. The Comptroller found the loading and containment facility to be a separate structure not directly essential to operating the rolling stock or locomotives, so materials for it are taxable.

Q: What railroad materials ARE exempt?
A: Materials actually incorporated into the railroad track itself -- rails, cross ties, and similar components -- qualify for exemption.

Q: How does a lump-sum contractor buy exempt track materials?
A: By issuing an exemption certificate to the supplier of the railroad track materials in lieu of paying tax on materials incorporated into a new construction job.

Q: Can a separated contractor's customer also use an exemption certificate?
A: Yes -- a separated contractor may accept an exemption certificate from the customer covering a separately stated charge for railroad track materials incorporated into real property as part of new construction.

Citations and references

Statutes:

• 34 Tex. Admin. Code Rule 3.287 (Exemption Certificates)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1169E01

Original ruling text

May 7, 1992

Dear *****:

I have received your letter regarding the taxability of certain materials
purchased by your company to construct railroad loading and containment
facilities.

Materials that are actually incorporated into the railroad track qualify for
exemption from Texas sales and use tax. Materials for a depot or other
construction not directly essential to the operation of the train are taxable.
It appears that the loading and containment facility is a separate structure
and not directly essential to the operation of the rolling stock or the
locomotives.

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.

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.

As you requested, I am enclosing copies of the latest Texas Sales & Use Tax
Statute, along with a copy of Rule 3.287, Exemption Certificates. The other
publication (96-109) you requested is currently being revised and is
unavailable.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion could change.

If you have any questions, please don't hesitate to write the Tax
Administration Division or call one of our tax specialists toll free at
1-800-252-5555.

Sincerely,

Joan Hale
Tax Administration Division