A pipeline contractor asks about the sales tax treatment of four kinds of jobs: removing and abandoning a pipeline, abandoning a pipeline in place and filling it with concrete grout, replacing an overhead pipeline crossing with a new underground pipe tied into the old line, and removing/disposing of old pipe. How is each taxed?

Plain-English summary

Note: the STAR system's own subject-matter heading for this letter referred to "replacement of portions by laying new pipe in new ditch/trench vs. removal of sections and replacement within same ditch or trench" — language that does not actually appear in the letter's text. The letter is a correction letter that addresses four separate pipeline-contractor scenarios, not a new-ditch-vs-same-ditch comparison. This page's subject_title has been corrected to reflect what the letter actually covers.

This letter is a correction to an earlier July 13, 1992 letter (both the corrected letter and the original June 9, 1992 letter it corrects are reproduced below). The only change between the two is the answer to Question #2. A pipeline contractor asked about the sales tax treatment of four types of jobs:

1) Pipeline removed and abandoned. If the removal is done in conjunction with a repair of the pipeline, the service is taxable. If the pipeline is simply being abandoned and the contractor's job is only to remove the pipe from the ditch, the service is not taxable.

2) Pipeline abandoned in place, filled with concrete grout. This is the answer that was corrected:

• Original (June 9, 1992) answer: Filling the buried, abandoned pipeline with grout is remodeling of nonresidential real property and is taxable.
• Corrected (July 13, 1992) answer: Filling with grout is not a taxable service. The Comptroller reasoned that grout-filling an abandoned pipeline in place is the functional equivalent of demolition, since it cannot practically or economically be reversed. The contractor must still pay tax on all taxable items it buys, leases, or rents to provide this service.

3) Replacing an existing overhead pipeline crossing with new underground pipe that connects into the old pipeline. This is treated as new construction, because no buried pipe previously existed at that location. The labor to lay the new pipe is not taxable. If materials are separately stated in the contract, sales tax must be collected and reported on the materials charge. However, the labor to tie the new pipe into the old pipeline is remodeling, and that labor charge is taxable — unless the remodeling labor is included in the new-construction contract and amounts to less than 5% of the total job, in which case it can be excluded from tax. If the remodeling charge is 5% or more, it must be separately stated and taxed, or the entire contract becomes taxable.

4) Removing old pipe — when does the pipe itself become taxable? A charge for removing the pipe is taxable if performed in conjunction with a repair (same rule as scenario #1). A charge for collecting and disposing of the debris/pipe is ordinarily taxable, including hauling it to the contractor's own yard or the customer's yard (both count as "disposal"). But if the debris is hazardous waste, disposal is not taxable under 34 Tex. Admin. Code Rule 3.356 (Real Property Services).

What this means for you

Pipeline and utility contractors

The tax treatment of pipeline work in Texas turns on characterization, not just on what physically happens to the pipe. The same physical act (removing pipe, filling a void) can be taxable or non-taxable depending on whether it's bundled with a repair, treated as demolition, or treated as remodeling. Structure and describe your contracts carefully, especially where multiple job types (new construction, remodeling, repair, demolition) might be combined in a single project.

Contractors doing grout-fill/abandonment work

This letter shows the Comptroller's own position changed on this exact question within about a month (June 9 to July 13, 1992) — grout-filling an abandoned pipeline went from "taxable remodeling" to "non-taxable, equivalent to demolition." If you rely on old STAR guidance for this kind of work, check whether it has been superseded, since policy in this area has moved before.

Contractors combining new construction with tie-in/remodeling work

When new pipe construction is tied into an existing line, split out (separately state) the remodeling labor if it's 5% or more of the total job — otherwise the whole contract can become taxable. If the remodeling labor is under 5% of the job and it's part of the new construction contract, it can be excluded from tax entirely.

Contractors handling pipe removal and debris disposal

Track whether debris being hauled away is hazardous waste — that reclassifies otherwise-taxable disposal charges as non-taxable under Rule 3.356.

Common questions

Q: Is removing and abandoning a pipeline taxable in Texas?
A: Not if that's the entire job (removing the pipe from the ditch, then abandoning it). It becomes taxable only if the removal is performed as part of a repair of the pipeline.

Q: Is filling an abandoned, in-place pipeline with concrete grout taxable?
A: Under the corrected July 13, 1992 answer, no — it's treated as the functional equivalent of demolition because it can't practically or economically be reversed. (Note: the original June 9, 1992 letter had said this was taxable remodeling of nonresidential real property; that answer was corrected.)

Q: If I replace an overhead pipeline crossing with new underground pipe, is the labor taxable?
A: The labor to lay the new pipe is not taxable, because it's new construction (no buried pipe existed there before). But the labor to tie the new pipe into the old pipeline is taxable remodeling.

Q: How do I avoid tax on the whole contract when a new-construction job includes some remodeling labor (like tying into an old line)?
A: If the remodeling labor is included in the new construction contract and is less than 5% of the total job, it can be excluded from tax. If it's 5% or more, it must be separately stated and taxed, or the entire contract is subject to tax.

Q: Is hauling away and disposing of old pipe taxable?
A: Generally yes — collection and disposal of debris/pipe, including hauling it to your own yard or the customer's yard, is ordinarily taxable. The exception is if the debris is hazardous waste, which is not taxable under Rule 3.356 (Real Property Services).

Q: Can I rely on this letter for my own pipeline contracting jobs?
A: No. This opinion is based on the facts presented, and other facts, though similar, may produce a different result. It can be relied on only by the taxpayer it was issued to.

Citations and references

• 34 Tex. Admin. Code Rule 3.356 (Real Property Services) — cited for the exemption on disposal of hazardous waste debris.
• The letter also references "enclosed microfiche #1045F14 and #1141A07, page 4" as supporting material on the 5% remodeling-labor separated-charge rule; these are internal Comptroller reference documents, not statutes or published rules, and are not independently available here.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1182E08

Original ruling text

July 13, 1992

Dear **:

This is to correct my letter to you, of July 13, 1992, regarding Question #2 on
the taxability of abandoning a pipeline in place. The corrected response is
underlined.

Your company is a pipeline contractor and you are asking about the taxability
of charges for the following jobs:

1) Pipeline removed and abandoned.

RESPONSE: If this service is performed in conjunction with a repair of the
pipeline, then the service is taxable. If the pipeline is being abandoned and
you contract only to remove the pipeline from the ditch, this service is not
taxable.

2) Pipeline abandoned in place, fill with concrete grout.

RESPONSE: The filling with grout of the buried pipeline is not a taxable
service. This work is the functional equivalent of demolition since it may not
be practically or economically reversed. Kaiser must pay tax on all taxable
items bought, leased, or rented to provide this service.

3) Replace existing pipeline crossing (overhead crossing) with underground
pipeline connecting into old pipeline.

RESPONSE: This is new construction since a buried pipe did not previously exist
at this location. The labor to lay the pipe would not be taxable. If you are
supplying materials and the contract is separated, you should collect and
report sales tax on your charge for the materials.

Labor to tie the new pipe to the old pipeline is remodeling. The total charge
for this labor is taxable. However, if this labor is included in the new
construction contract and the charge for remodeling is less than five percent
of the total job, it can be excluded from tax. If the charge is five percent or
more, the charge for remodeling must be separately stated and taxed or the
total contract will be subject to tax. See the enclosed microfiche #1045F14 and

1141A07, page 4.

4) When line is removed, when does pipe become taxable (i.e., if pipe is
disposed of, taken to **'s yard, or left on the job)?

RESPONSE: A charge for removing pipe is taxable if performed in conjunction
with a repair of the pipeline (see response to question #1). A charge for
collection and disposal of the debris/pipe is ordinarily taxable. A charge for
hauling the debris/pipe to your yard or to your customers yard is considered
disposal. However, if the debris is hazardous waste, then the disposal is not
taxable under Rule 3.356 - Real Property Services.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

If you have other questions or need more information, you may call me at
1-800-252-5555, extension 3-4502. The regular number is 512/463-4600. You may
also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

June 9, 1992

Dear **:

Thank you for your recent letter regarding the taxability of various jobs that
your company performs. I appreciate your patience and apologize for the delay
in responding.

Your company is a pipeline contractor and you asking about the taxability of
charges for the following jobs:

1) Pipeline removed and abandoned.

RESPONSE: If this service is performed in conjunction with a repair of the
pipeline, then the service is taxable. If the pipeline is being abandoned and
you contract only to remove the pipeline from the ditch, this service is not
taxable.

2) Pipeline abandoned in place, fill with concrete grout.

RESPONSE: The filling with grout of the buried pipeline is remodeling of
nonresidential real property and is taxable.

3) Replace existing pipeline crossing (overhead crossing) with underground
pipeline connecting into old pipeline.

RESPONSE: This is new construction since a buried pipe did not previously exist
at this location. The labor to lay the pipe would not be taxable. If you are
supplying materials and the contract is separated, you should collect and
report sales tax on your charge for the materials.

Labor to tie the new pipe to the old pipeline is remodeling. The total charge
for this labor is taxable. However, if this labor is included in the new
construction contract and the charge for remodeling is less than five percent
of the total job, it can be excluded from tax. If the charge is five percent or
more, the charge for remodeling must be separately stated and taxed or the
total contract will be subject to tax. See the enclosed microfiche #1045F14 and

1141A07, page 4.

4) When line is removed, when does pipe become taxable (i.e., if pipe is
disposed of, taken to **'s yard, or left on the job)?

RESPONSE: A charge for removing pipe is taxable if performed in conjunction
with a repair of the pipeline (see response to question #1). A charge for
collection and disposal of the debris/pipe is ordinarily taxable. A charge for
hauling the debris/pipe to your yard or to your customers yard is considered
disposal. However, if the debris is hazardous waste, then the disposal is not
taxable under Rule 3.356 - Real Property Services.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

If you have other questions or need more information, you may call me at
1-800-252-5555, extension 3-4502. The regular number is 512/463-4600. You may
also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division