Is the removal, cleanup, repair, or replacement of an underground storage tank (UST) taxable in Texas, and how does the tax treatment differ for each step of the job?

Plain-English summary

This 1993 letter answers a taxpayer's multi-part question about the tax treatment of underground storage tank (UST) cleanup, removal, and replacement work. Rather than one holding, it walks through each stage of a typical UST job and gives a separate answer for each:

• Excavation and removal of an old tank — not taxable. Digging up and removing a UST to dispose of it or replace it with a new one is demolition of a real property improvement. The charge to the customer is not taxable, but the service provider owes tax on the equipment and materials it buys, leases, or rents to do the work.
• Hauling and disposal of the old tank — taxable. This is a taxable waste removal service under Rule 3.356, because a UST does not meet the state or federal definition of "hazardous waste" or the Texas Water Commission's definition of "industrial discharge."
• Over-excavating, hauling, and disposing of fuel-contaminated dirt — not taxable to the customer. Because contaminated dirt does meet the "industrial discharge" definition regulated under Chapter 26 of the Water Code, the charge for this service is not taxable, provided the provider can prove the dirt was contaminated (an exemption certificate from the customer is one acceptable form of proof). The provider still owes tax on the backhoe and other equipment used to do the digging.
• Renting pumps and separators to extract contaminated vapors and liquids — taxable. This equipment is taxable whether purchased or rented, regardless of whether the underlying recovery service charged to the customer ends up taxable (a question the letter says it cannot yet answer without more facts about the procedure).
• Installing a new tank — taxable, but the mechanics depend on the contract type. New installation is new construction of a realty improvement under Rule 3.291. Under a lump-sum contract, the contractor pays tax on all materials and equipment but does not charge the customer tax on the lump-sum price. Under a separated contract, the contractor buys materials tax-free with a resale certificate but must collect tax from the customer on the agreed price for incorporated materials.
• Repair or remodeling of an existing tank — taxable. Under Rule 3.357, the entire charge (labor, materials, overhead) to excavate, repair or remodel, and reinstall a tank is taxable, as is repair done without removing the tank, and restoring asphalt or concrete afterward.
• Inspection, testing, and soil analysis — not taxable if separately stated, even when billed alongside a taxable service.
• Mixed lump-sum contracts — the 5% rule. If a single lump-sum contract or billing covers both taxable and nontaxable services, the whole charge is presumed taxable unless the taxable portion is 5% or less of the total and the parties can document that split. Separately stating and itemizing taxable versus nontaxable charges avoids the issue entirely.

What this means for you

Contractors and excavation companies

Break your UST jobs into their component services and price/bill them separately wherever possible. Excavation-for-removal is nontaxable, but the same crew's hauling-away-for-disposal work is taxable, and new installation or repair work is taxable under different mechanics depending on whether you use a lump-sum or separated contract. Lumping everything into one undifferentiated charge risks the entire job being taxed if the taxable slice exceeds 5% of the total.

Waste haulers and remediation companies

Whether you owe tax on your charge to the customer depends on what you're hauling. Removing the tank itself is a taxable waste removal service under Rule 3.356. Removing fuel-contaminated dirt is not taxable to the customer if the dirt qualifies as an "industrial discharge" under Water Code Chapter 26 — but get documentation (such as an exemption certificate) proving contamination, and remember you still owe tax yourself on the equipment you use.

Property owners and businesses with USTs

Expect to see tax charged on hauling away your old tank, on new tank installation and repair work, and on vapor/liquid recovery equipment rental — but not on the excavation-only portion of removal, not on hauling contaminated dirt (if properly documented), and not on separately stated inspection, testing, or soil-analysis fees.

Common questions

Q: Is removing an old underground storage tank taxable?
A: The excavation and removal itself is not taxable — it's treated as demolition of a real property improvement. But hauling the tank away and disposing of it is a separate, taxable waste removal service.

Q: Why is hauling away contaminated dirt treated differently from hauling away the tank?
A: Contaminated dirt qualifies as an "industrial discharge" regulated under Chapter 26 of the Water Code, which falls under an exclusion in Rule 3.356 for waste removal services. The tank itself does not meet the "hazardous waste" or "industrial discharge" definitions, so hauling it away doesn't qualify for that exclusion.

Q: Do I owe tax on rented pumps and separators used to remove contaminated vapors and liquids?
A: Yes. That equipment is taxable whether you buy or rent it, regardless of how the underlying service charge to the customer is ultimately taxed.

Q: How is installing a brand-new tank taxed compared to repairing an old one?
A: New installation is new construction under Rule 3.291, taxed under the lump-sum or separated contract rules (tax paid by the contractor on materials under a lump-sum contract, or collected from the customer on incorporated materials under a separated contract). Repair or remodeling of an existing tank is covered by Rule 3.357 instead, and the entire charge — labor, materials, and overhead — is taxable.

Q: Can I avoid tax on inspection and soil-analysis charges?
A: Yes, as long as those charges are separately stated in the contract or billing, even if they're part of a job that also includes taxable services.

Citations and references

Rules and statutes:

• 34 Tex. Admin. Code Rule 3.356 (waste removal services; hazardous waste and industrial discharge exclusions)
• 34 Tex. Admin. Code Rule 3.291 (contractors; new construction of realty improvements)
• 34 Tex. Admin. Code Rule 3.357 (nonresidential repair, remodeling, and restoration)
• Texas Water Code Chapter 26 (industrial discharge regulated by the Texas Water Commission)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9303963L

Original ruling text

March 9, 1993

Dear **:

Thank you for your letter of February 23, 1993, regarding the taxability of the
work done to clean up underground storage tanks. The following states our
current position on the taxability of these services.

Excavation and removal - not taxable. The excavation and removal of an
underground storage tank in order to dispose of it or to replace it with a new
tank constitutes demolition of an improvement to real property. A charge by the
service provider to the customer for this activity is not taxable. The person
providing this nontaxable service is responsible for paying tax on all
materials and equipment bought, leased, or rented for use in providing the
service.

Hauling and disposal - taxable. The actual hauling away and disposing of an
underground storage tank is a taxable waste removal service. The last
information we have is that the underground storage tank does not meet federal
or state definitions of "hazardous waste," nor the Texas Water Commission's
definition of an "industrial discharge," for purposes of the waste removal
exclusions found in Rule 3.356. Unless or until a federal or state agency
changes their definition of "hazardous waste" or "industrial discharge, n a
charge to the customer for this service is taxable. The person providing this
service is responsible for paying tax on all materials and equipment bought,
leased, or rented for use in providing the service.

Over excavation, hauling away, and disposal of contaminated dirt - not taxable.
Over excavating, hauling away, and disposing of fuel-contaminated dirt is a
nontaxable service, provided the dirt meets the definition of an "industrial
discharge" subject to regulation by the Texas Water Commission under Chapter
26, Water Code. Our present understanding is that such fuel-contaminated dirt
meets this definition. The service provider must be able to prove that dirt
removed was contaminated. One form of acceptable proof the service provider may
accept is an exemption certificate from the customer. If the customer provides
an exemption certificate or other proof that the dirt removed was contaminated,
the service provider is relieved of the responsibility for collecting tax on
the charge for dirt removal. The person providing this service is responsible
for paying tax on all materials and equipment bought, leased, or rented for use
in providing the service.

In your letter of March 3, 1993, you asked: Should not the rental of pumps and
separators used to extract fuel contaminated vapors and liquids be nontaxable?

Response: Equipment used to extract fuel contaminated vapors and liquids is
taxable whether purchased or rented.

When we say that "over excavating, hauling away, and disposing of
fuel-contaminated dirt is a nontaxable service, provided the dirt meets the
definition of an "industrial discharge ...," we mean the charge to the customer
for this service is not taxable. We are not saying that the service provider
may purchase or rent the equipment to provide the service tax free.

The person who is providing the service of over excavating the dirt must pay
sales tax on the backhoe when it is purchased or rented.

The person who uses pumps and separators to extract vapors and liquids owes tax
on the equipment used to provide this service. We have not as yet addressed the
taxability of the charge to the customer for this vapor and liquid recovery
service. Until we have more information about the procedure, we cannot
determine the taxability of the service itself.

Whether the service provided the customer is taxable or nontaxable, the service
provider owes tax on the equipment used to provide the service.

New installation - taxability determined by contract type. Installation of a
new underground storage tank is new construction of an improvement to real
property, covered by Rule 3.291. The type of contract used will determine the
tax responsibilities of the parties involved.

Lump-sum contract. Under a lump-sum contract, a contractor owes tax on all
materials used to perform the contract. The lump-sum contractor also owes tax
on all other materials and equipment bought, leased, or rented for use on the
job. The lump-sum charge to the customer is not taxable.

Separated contract. Under a separated contract, the contractor may issue a
resale certificate to purchase materials tax free when the materials will be
incorporated into the customer's realty. The separated contractor must collect
tax from the customer on the total agreed contract price for the incorporated
materials. A separated contractor also owes tax on all other materials and
equipment bought, leased, or rented for use on the job.

Repair or remodeling - taxable. The repair or remodeling of an underground
storage tank is a taxable service, covered by Rule 3.357. The total charge
(including labor, materials, overhead, etc.) to excavate a tank, repair, or
remodel the tank, and return the tank to the ground is taxable. The total
charge is also taxable when the tank is not removed from the ground. The charge
to restore asphalt or concrete after the repair, replacement, or removal of an
underground storage tank is also taxable.

Inspection, testing, and soil analysis - not taxable. Charges for inspection,
testing, and soil analysis that are separately stated to the customer in the
contract or billing to the customer are not subject to tax, even if provided in
connection with a taxable service.

Taxable and nontaxable services - a single contract. A contract (or billing in
absence of a contract) that contains a lump-sum charge for both taxable and
nontaxable services is presumed to be taxable unless the charges for the
portion relating to the taxable services is 5% or less of the total charge, and
the parties can document this fact. If the portion relating to the taxable
services is more than 5~ of the total charge, the entire contract is taxable.
This can be resolved simply by separately stating and identifying the charges
for taxable services from charges for all other nontaxable services.

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

If you have any questions or need more information, you may call me toll free
at 1-800-531-5441, extension 3-4633. The regular number is 512/463-4633. You
may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division