Texas Letter Ruling 9211L1211B11: Energy Management/Control System — Installed To Existing Heating And Air Conditioning Systems

Plain-English summary

A company asked the Texas Comptroller how sales and use tax applies to a computerized energy management/control system it was considering installing in its supermarkets. The system is adapted to a store's existing heating, ventilating, air conditioning, and refrigeration (HVAC) equipment: it controls various installed mechanical and electro-mechanical devices to make the HVAC system run more efficiently, is individually designed for each location, and also provides security control and central equipment monitoring at the company's corporate headquarters.

Installing the system requires adapting or removing components, wiring, and piping of the existing HVAC system. Once installed, removing it again would leave little value in the system's components, and the customer's original HVAC system would need substantial reconstruction before it could work again.

The Comptroller held that selling and installing this system as a replacement and upgrade of a customer's existing HVAC controls is remodeling of the property. Under Rule 3.357(a)(7) (Real Property Repair and Remodeling), the total charge for remodeling nonresidential real property is taxable. The letter also points the taxpayer to Rule 3.357(b)(2) and (b)(4) for the remodeler's specific tax responsibilities (such as collecting tax on the full charge and paying tax on materials, as applicable under those provisions). The Comptroller noted the opinion is based on the facts presented, and that other, even similar, facts could lead to a different result.

What this means for you

Supermarket and other commercial property owners

If you have a contractor install a computerized energy management/control system into your existing HVAC equipment, expect the entire charge — system, installation labor, and related work — to be taxable, because the Comptroller treats this as remodeling of nonresidential real property rather than a nontaxable new construction or a separate sale of tangible personal property.

HVAC and energy-system contractors

Under this ruling, installing an energy control system as a replacement/upgrade to an existing HVAC system is remodeling under Rule 3.357. That means you are the "remodeler" for tax purposes and should look to Rule 3.357(b)(2) and (b)(4) for how to handle tax on your charges and purchases in that role.

Accountants and tax professionals

The key fact pattern driving this result: the system is installed into an existing HVAC system (not new construction), its installation requires substantial adaptation or removal of existing components, wiring, and piping, and removing it later would strand the components and require significant rework of the original system. That combination is what pushed the transaction into "remodeling" of nonresidential real property under Rule 3.357(a)(7), making the total charge taxable.

Common questions

Q: Is the whole charge for the energy control system and its installation taxable, or just the equipment?
A: The total charge for the remodeling job is taxable — the ruling says "the total charge for remodeling non-residential real property is taxable," citing Rule 3.357(a)(7).

Q: Why is this "remodeling" instead of just installing a new piece of equipment?
A: Because the system is a replacement and upgrade of the customer's existing HVAC controls, and installing it requires adapting or removing the existing HVAC system's components, wiring, and piping. Removing the new system afterward would leave little value in its parts and require substantial reconstruction of the original system — indicating it's integrated into the real property, not just an add-on appliance.

Q: Does this ruling apply to any energy control system installation?
A: The Comptroller expressly limited the ruling to the facts presented, stating that "other facts though similar may provide a different result." This letter concerns a system adapted to an existing HVAC/refrigeration system in a nonresidential building (a supermarket).

Q: What are the remodeler's specific responsibilities mentioned in the ruling?
A: The letter refers the taxpayer to Rule 3.357(b)(2) and (b)(4) of the Comptroller's Real Property Repair and Remodeling rule for "the remodeler's tax responsibilities in this situation," without spelling out those responsibilities in the letter itself.

Citations and references

• Rule 3.357, Real Property Repair and Remodeling, subsection (a)(7) (total charge for remodeling nonresidential real property is taxable)
• Rule 3.357, Real Property Repair and Remodeling, subsections (b)(2) and (b)(4) (remodeler's tax responsibilities)

Subject

Energy Management/Control System — Installed To Existing Heating And Air Conditioning Systems

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9211L1211B11

Original ruling text

November 30, 1992

Dear ***:

This is in response to your letter regarding the taxability of computerized
energy control systems that your client is contemplating installing in its
supermarkets in Texas.

FACTS

These systems are adapted to existing heating, ventilating, air conditioning,
and refrigeration systems (HVAC's). Through the control of various installed
mechanical and electro-mechanical devices, this results in a more efficient
HVAC system. Each system is individually designed to meet the unique energy
control needs of your client's premises. In addition, the system also provides
security control and central equipment monitoring at your client's corporate
headquarters.

Installation of the energy control system requires adaptation and/or removal of
the components, wiring, and piping of the existing HVAC system. Once installed,
removal of this system leaves little value remaining in the system's
components. In addition, the customer's system would require substantial
reconstruction before it could become operational again.

QUESTION

What is Texas' sales and use tax treatment of the purchase (and installation)
of this computerized energy control system.

RESPONSE

The sale and installation of the energy control system as a replacement and
upgrade of a customer's existing HVAC controls is considered remodeling. The
total charge for remodeling non-residential real property is taxable. See
section (a)(7) of the enclosed copy of Rule 3.357, Real Property Repair and
Remodeling. See also sections (b)(2) and (b)(4) for the remodeler's tax
responsibilities in this situation.

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