Is removing or replacing an underground storage tank (UST) taxable in Texas, and how are the related excavation, hauling, disposal, and installation charges taxed?

Subject

Removing, Hauling, Disposing Of, And Replacing An Underground Storage Tank (UST) — Taxability Of Each Step

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307508L

Plain-English Summary

A taxpayer wrote in asking about the taxability of various services involved in removing and/or replacing an underground storage tank (UST). The Comptroller's response breaks the job into several distinct steps and gives a different tax answer for each one.

Excavation and removal (not taxable). Digging up and removing a UST — whether to dispose of it or to replace it with a new one — is demolition of an improvement to real property, so the charge to the customer for this activity is not taxable. However, the person doing this nontaxable work still owes tax on the materials and equipment they buy, lease, or rent to do the job, including barricades.

Hauling and disposal (taxable). Actually hauling the old tank away and disposing of it is a taxable waste removal service. The letter notes the Comptroller's understanding at the time was that a UST itself does not meet the federal or state definition of "hazardous waste," nor the Texas Water Commission's definition of "industrial discharge," so it doesn't qualify for the waste removal exclusions under Rule 3.356(a)(3). The provider of this taxable service still owes tax on materials and equipment used to provide it.

Over-excavation, hauling, and disposal of contaminated dirt/liquid waste (not taxable). Removing and disposing of fuel-contaminated dirt or liquid waste and residue from a UST is different — it's nontaxable, provided the waste meets the "industrial discharge" definition under Chapter 26, Water Code (fuel-contaminated waste does meet this definition). The provider must be able to prove the waste was contaminated, and an exemption certificate from the customer is one acceptable form of proof; getting one relieves the provider of the duty to collect tax on the disposal charge.

New installation (taxability depends on contract type). Installing a new UST is new construction of an improvement to real property under Rule 3.291. Under a lump-sum contract, the contractor owes tax on all materials used and on other materials/equipment bought, leased, or rented for the job, but the lump-sum charge to the customer is not taxable. Under a separated contract, the contractor can buy materials tax-free with a resale certificate but must collect tax from the customer on the contract price for materials incorporated into the customer's realty; the contractor still owes tax on other materials/equipment used on the job.

Repair or remodeling (taxable). Repairing or remodeling a UST is a taxable service under Rule 3.357. The total charge — labor, materials, overhead, etc. — to excavate, repair or remodel, and return the tank to the ground is taxable, and this is true even if the tank is never removed from the ground. Restoring asphalt or concrete after a repair, replacement, or removal is also taxable. The service provider can use a resale certificate for materials incorporated into realty but owes tax on other materials/equipment used.

Backfilling with pea gravel or soil. Whether the labor to fill the hole is taxable depends on what kind of job it's part of: no tax if it's part of nontaxable demolition or part of new construction (lump-sum or separated), but tax applies to the whole charge if it's part of a taxable service like repair or remodeling. Separately, the pea gravel or soil itself is taxable only if "processed" (e.g., crushed or mixed with other materials); unprocessed materials that are merely sorted, sized, screened, washed, and/or dried are not taxable to deliver.

Inspection, testing, soil analysis, permits, and consultant reports (not taxable). Charges for inspection, testing, and soil analysis that are separately stated on the contract or billing are not taxable, even when provided alongside a taxable service. The same treatment applies to a city permit charge and to a consultant's report to close the site.

Mixed taxable/nontaxable contracts. A lump-sum contract or billing covering both taxable and nontaxable services is presumed entirely taxable unless the taxable portion is 5% or less of the total charge and the parties can document that. If the taxable portion is more than 5%, the whole contract is taxable. If the contract or billing separately states and identifies the taxable and nontaxable charges, tax is only due on the taxable portion.

Refunds of tax collected in error. If tax was collected in error on a separately stated nontaxable charge, the seller can refund it to the customer as long as the four-year statute of limitations (from the date the tax was due and payable) hasn't run — the letter gives the example that tax reported on a June 1989 return, due July 20, 1989, would already be outside the statute of limitations. Sellers cannot retroactively refund tax collected on a completed job's lump-sum charge that properly included more than 5% taxable services. Refunds owed can be requested from the state under Rule 3.325(b), or taken as a credit on a current return under Rule 3.338.

The letter closes with the standard caveat that the opinion is based on the facts presented and may change with additional or different facts.

What This Means For You

Break the job into its component services. A single UST removal/replacement project can bundle several separately-taxed activities — nontaxable excavation/demolition, taxable hauling/disposal, taxable or nontaxable contaminated-waste removal, taxed-by-contract-type new installation, and taxable repair/remodeling. Getting the tax treatment right means classifying each piece of work correctly rather than treating the whole job the same way.

Watch the 5% threshold on lump-sum billing. If you bill a UST job as a single lump sum covering both taxable and nontaxable work, the whole contract becomes taxable unless the taxable portion is 5% or less of the total and you can document that. Separately stating and identifying the taxable vs. nontaxable charges avoids this all-or-nothing exposure.

Contract type controls tax treatment on new installations. Whether you use a lump-sum or separated contract for installing a new tank changes who owes tax on materials versus who must collect tax from the customer — this is a decision point worth making deliberately rather than by default.

Document contamination to avoid over-collecting. Because contaminated-dirt/liquid-waste removal is nontaxable while ordinary tank hauling/disposal is taxable, getting an exemption certificate or other proof of contamination from the customer protects the service provider from a duty to collect tax it doesn't owe.

Q&A

Q: Is excavating and removing an underground storage tank taxable?
A: No. The letter states that excavation and removal of a UST — to dispose of it or to replace it with a new tank — constitutes demolition of an improvement to real property, and the charge for this activity is not taxable.

Q: Is hauling away and disposing of the old tank taxable?
A: Yes. The letter describes hauling and disposal as "a taxable waste removal service," because a UST did not, per the letter, meet the federal, state, or Texas Water Commission definitions needed for the waste removal exclusions under Rule 3.356(a)(3).

Q: What about removing contaminated dirt or liquid waste from around the tank?
A: That is not taxable, provided the waste meets the definition of an "industrial discharge" under Chapter 26, Water Code — the letter states fuel-contaminated waste meets this definition. The provider must be able to prove the waste was contaminated, and an exemption certificate from the customer is one acceptable form of proof.

Q: How is installing a brand-new UST taxed?
A: The letter treats new installation as new construction of an improvement to real property under Rule 3.291, with taxability depending on whether it's done under a lump-sum contract (contractor owes tax on materials, lump-sum charge to customer not taxable) or a separated contract (contractor may buy materials tax-free with a resale certificate but must collect tax from the customer on the agreed price for incorporated materials).

Q: Is repairing or remodeling an existing UST taxable?
A: Yes. The letter states repair or remodeling of a UST is a taxable service under Rule 3.357, and the total charge — including labor, materials, and overhead — to excavate, repair or remodel, and return the tank to the ground is taxable, even if the tank is never removed from the ground.

Q: Can a seller refund sales tax it collected in error on a nontaxable charge?
A: Yes, according to the letter, as long as the four-year statute of limitations (running from the date the tax was due and payable) hasn't expired. The letter gives the example that tax reported on a June 1989 return, due July 20, 1989, would already exceed the statute of limitations.

Original ruling text

July 26, 1993

Dear **:

Thank you for your letter concerning services on 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 (UST) 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, including barricades.

Hauling and disposal - taxable. The actual hauling away and disposing of a UST
is a taxable waste removal service. The last information we have is that the
UST 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 3.356ta)(3), Real Property
Service. Unless or until a federal or state agency changes their definition of
"hazardous waste" or "industrial discharge," 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, including barricades.

Over excavation. hauling away. and disposal of contaminated dirt and/or liquid
waste and residue from a UST - not taxable. Over excavating, hauling away, and
disposing of fuel-contaminated dirt/liquid waste is a nontaxable service,
provided the waste meets the definition of an "industrial discharge" subject to
regulation by the Texas Water Commission under Chapter 26, Water Code.
Fuel-contaminated waste meets this definition. The service provider must be
able to prove that the waste 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 waste removed was contaminated, the service provider is relieved of the
responsibility for collecting tax on the charge for waste disposal. 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, including
barricades.

New installation - taxability determined by contract type. Installation of a
new UST 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, including barricades. 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, including barricades.

Repair or remodeling - taxable. The repair or remodeling of a UST 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 a UST is also taxable. The service
provider may issue a resale certificate to purchase materials tax free when the
materials will be incorporated into the customer's realty. The service provider
owes tax on all other materials and equipment bought, leased, or rented for use
on the job, including barricades.

Backfill site with pea gravel or soil. Depending on the circumstances, the
labor to fill the hole may or may not be taxable, as follows:

A person who is providing nontaxable demolition services will collect no tax on
a charge for labor to fill a hole with gravel or dirt;

A contractor performing new construction under either a lump-sum or separated
contract will collect no tax on a charge for labor to fill a hole with gravel
or dirt;

A person who is providing a taxable service (for example, repair or remodeling
a UST) must collect tax on the total charge for the service, including a charge
to fill a hole with gravel or dirt.

The materials (pea gravel and soil) are taxable or not taxable depending on
whether the materials are processed or unprocessed. The delivery of unprocessed
dirt, sand, gravel, or similar materials is not a taxable service. The
materials are not considered processed if they have been merely sorted, sized,
screened, washed, and/or dried. The sale of the same materials in a processed
state (i.e., crushed or mixed with other materials) is taxable. A person
performing taxable or nontaxable services owes no tax on the purchase of
unprocessed materials as described above. A person performing taxable services
may issue a resale certificate to purchase, tax free, processed materials that
will be incorporated into the customer's real property as part of the taxable
service. A person performing nontaxable services must pay tax on processed
materials.

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.

Permit from City - not taxable. See response above to inspection, testing, and
soil analysis.

Consultant to prepare report to close site - not taxable. See response above to
inspection, testing, and soil analysis.

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.
If the contract (or billing in absence of a contract) separately states and
identifies the charges for taxable services from charges for all other
nontaxable services, then tax is only required to be collected on the charges
for taxable services.

Refund of tax collected in error. If you collected tax on a separately stated
charge for a nontaxable service, you may refund the tax collected in error to
your customer as long as the statute of limitations has not expired. The
statute of limitations is four years from the date on which the tax was due and
payable by the seller to the state. For example, tax reported on the June 1989
monthly return was due July 20, 1989, which exceeds the statute of limitations.

You may not retroactively refund tax collected on a lump-sum charge to your
customer that included both taxable services (more than 5%) and nontaxable
services on jobs that are completed. Tax is due on the total lump-sum charge if
the taxable services portion is more than 5% of the overall contract.

If you do refund to your customer tax collected in error, you may request a
refund of the tax from the state in accordance with Rule 3.325(b), or take a
credit on a current sales tax return as explained in Rule 3.338.

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

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: PREVIOUS ACCESSION NO. 9307L1250G09