Is dredging dirt, mud, silt, and sand out of a boat slip or waterway taxable as real property repair/remodeling, or exempt as new construction, and is the fee charged for disposing of the dredged material at a spoils facility taxable?

Subject

Dredging Dirt/Mud/Silt/Sand From Channels, Rivers, Ponds, Boat Slips, Waterways — New Construction Or Remodeling/Restoration Of Real Property

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9306L1244A06

Plain-English Summary

This June 21, 1993 letter responds to a Texas crude oil and refined product terminal and pipeline company (Corporation A) that expanded its terminal by constructing new boat slips and docks so it could accommodate more ships and crude oil products.

Building the docks and slips required first purchasing the land next to the waterway, then removing the dirt bordering the channel with a back hoe until the water level was reached, and finally completing the slip by "dredging" — digging out material with a dredging machine. The dredged dirt was mixed with water into a slurry and piped to a dredge spoils facility, where it was left to dry and settle (as required by the Corps of Engineers) before eventually being sold or the land reclaimed. The pipeline and any dirt received through dredging belong to the spoils facility.

The Comptroller's Tax Administration Division drew a distinction based on what kind of dredging is involved:

• Dredging that is part of building a brand-new slip or waterway (as in Corporation A's situation) is new construction labor and is not subject to sales tax.
• Dredging performed on an already-existing man-made waterway (such as an existing man-made pond or boat slip), or dredging that widens, deepens, or otherwise re-configures a naturally occurring river, lake, or channel, is taxable as real property repair, remodeling, or restoration.

The letter also addresses the fee charged for the right to dispose of the dredged material at the spoils facility, holding that this disposal fee is not taxable.

The letter notes it is based on the facts submitted and that other facts, though similar, may yield different results.

What This Means For You

If you are building a new dock, slip, or waterway

Dredging performed as part of constructing a brand-new slip, dock, or waterway is treated as new construction labor and is exempt from sales tax, per this letter's facts involving Corporation A's newly built docks and slips.

If you are dredging an existing pond, slip, or waterway

Dredging an existing man-made pond or boat slip, or widening, deepening, or re-configuring a naturally occurring river, lake, or channel, is taxable as real property repair, remodeling, or restoration. The key distinction is whether the waterway/slip already existed versus whether the dredging is part of creating it for the first time.

If you operate or use a dredge spoils facility

The fee charged for the right to dispose of dredged material at a spoils facility is not subject to sales tax, according to this letter.

If you are relying on this letter for your own transaction

This opinion was issued based on the specific facts Corporation A submitted, and the letter explicitly cautions that other facts, though similar, may yield different results — so the new-construction-versus-repair distinction should be checked carefully against your own project's facts.

Q&A

Q: Is dredging always taxable in Texas?
A: No. It depends on the context. Dredging done as part of new construction of a slip, dock, or waterway is not subject to sales tax. Dredging an existing man-made waterway, or widening/deepening/re-configuring a natural river, lake, or channel, is taxable as real property repair, remodeling, or restoration.

Q: Why was Corporation A's dredging not taxable?
A: Because it was performed as part of constructing new docks and slips — new construction labor — rather than as repair or remodeling of an existing waterway.

Q: What would make similar dredging work taxable instead?
A: Per the letter, dredging becomes taxable real property repair, remodeling, or restoration if it is done at an already man-made waterway (like an existing man-made pond or boat slip), or if it widens, deepens, or otherwise re-configures a naturally occurring river, lake, or channel.

Q: Is the fee to dispose of the dredged dirt at the spoils facility taxable?
A: No. The letter states the fee for the right to dispose of the dredged material at the spoils facility is not taxable.

Q: What happens to the dredged material after it reaches the spoils facility?
A: According to the facts in the letter, the slurry mix of dirt, silt, and water is received at the spoils facility (which consists of levees and spillways) and has to dry and settle over a period of time as required by the Corps of Engineers, after which the dirt is either sold or the land is reclaimed.

Q: Can I rely on this letter for my own dredging project?
A: This letter states it was rendered based on the specific facts submitted by Corporation A, and that other facts, though similar, may yield different results — so you should confirm how your own facts compare before relying on it.

Original ruling text

June 21, 1993

Dear *****:

Thank you for your recent letter to Tom Soto. I have been asked to
respond. Your facts are restated in part with response below.

Facts: Corporation A is located in Texas and is a crude oil and
refined product terminal and pipeline company. The terminal is located
so that it is accessible by ship from a local ship channel. Recently
Corporation A expanded its terminal and constructed new slips and
docks, so its facilities could accommodate more ships and crude oil
products. According to Webster's Dictionary a slip is: "a sloping ramp
extending out into the water to serve as a place for landing or
repairing ships....".

The construction of the docks and slips involved the following steps.
First, the land adjacent to the waterway had to be purchased; and the
dirt bordering the channel had to be moved away to construct the slip.
Dirt was removed by back hoe until the water level was reached, then
the slip had to be completed by "dredging." Dredging is defined by
Webster's Dictionary as: "to dig, gather, or pull out with a
dredge.... to deepen (as a waterway) with a dredging machine." After
the dirt is gathered, it is mixed with water to make a slurry, making
it possible to transport it through a pipeline to a dredge spoils
facility.

The spoils facility consists of levees and spill ways to receive the
dredged material. The pipeline is owned by the spoils facility, as
well as any dirt that is received through dredging activities. After
the slurry mix, comprised of dirt, silt, and water, is received at the
spoils facility, it has to dry and settle out over a period of time as
required by the Corp of Engineers; and eventually the dirt will either
be sold or the land reclaimed.

Question: Is the act of dredging taxable or not?

Response: In this instance, the dredging constitutes new construction
labor which is not subject to sales tax.

If dredging is done at a man-made waterway, such as a man-made pond or
boat slip, or in a naturally occurring river, lake, or channel that has been
widened, deepened, or any way re-configured, the dredging activity is
taxable as real property repair, remodeling or restoration.

Question: Is the fee for the right to dispose of the dredged material
at the spoils facility taxable or not?

Response: No.

This opinion is rendered based on the facts you submitted. Other
facts, though similar, may yield different results.
If you have questions or need more information, please call or write.

You may reach me by calling toll free, (800) 531-5441 (ext. 34680). My
direct line number is (512) 463-4680. The number for FAX transmissions
is (512) 475-0900. You may write to me in care of Tax Administration
Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9308010L.5 and/or 9308010L