Is unprocessed dirt, sand, or gravel taxable, and is digging/backfilling flow line ditches a taxable service in Texas?

Subject

Unprocessed Dirt, Sand, and Gravel — Taxability And Flow Line Ditch Digging/Backfilling

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1262C07

Plain-English Summary

A dirt contractor asked the Comptroller about the taxability of dirt, sand, and gravel, and about digging and backfilling flow line ditches, after a client's CPA firm requested a letter of assignment to obtain a refund of sales tax the contractor had charged and collected.

The Comptroller's response makes two core points. First, digging and backfilling flow line ditches is not a taxable service. Second, the sale and/or delivery of unprocessed dirt, sand, gravel, or similar materials is not taxable. Materials are "unprocessed" if they have only been sorted, sized, screened, washed, and/or dried. If the same materials are sold in a processed state — meaning crushed or mixed with other materials — that sale is taxable. A contractor performing a taxable service may issue a resale certificate to buy processed materials tax-free when those materials will be incorporated into the customer's real property as part of the taxable service; a contractor performing a nontaxable service must instead pay tax on processed materials. This exemption for unprocessed materials has been effective since June 12, 1988.

The letter also addresses "scalpings," described as a by-product of processed caliche. If the caliche's "processing" consists only of sorting, sizing, screening, washing, and/or drying, the sale and transportation of the scalpings is not taxable. But if the scalpings result from a process that crushes the caliche, both the scalpings and the related transportation are taxable.

Separately, the letter treats the building of a pump unit site pad (referencing a specific invoice) as an improvement to realty qualifying as new construction. The labor to build the pad is not taxable, and the materials used are not taxable either, so long as they qualify as unprocessed materials under the definition above.

Finally, on the refund-assignment request itself, the Comptroller tells the contractor he may sign the letter of assignment after verifying that the materials sold were unprocessed as defined in the letter. As the vendor, he is also required to provide or verify a schedule showing: (1) the return period in which the tax was remitted, (2) the reported taxable amount, (3) the amount of tax actually remitted with the return (reported less discounts), separated out by tax type (state, city, county, and transit), and (4) the identification of each local taxing jurisdiction to which tax was remitted.

What This Means For You

If you sell or deliver dirt, sand, gravel, or similar materials: Whether the sale is taxable depends entirely on the state of the material. Merely sorting, sizing, screening, washing, and/or drying keeps it "unprocessed" and nontaxable. Crushing it or mixing it with other materials makes it taxable.

If you're a contractor buying processed materials for a job: Whether you can buy those materials tax-free with a resale certificate depends on whether the job itself is a taxable service. If you're performing a taxable service and the processed materials will be incorporated into the customer's real property as part of that service, a resale certificate applies. If your service is nontaxable, you must pay tax on the processed materials yourself.

If you dig or backfill flow line ditches: Per this letter, that service is not taxable.

If you're dealing with caliche or scalpings: Track how the caliche was actually processed. Scalpings from a caliche process limited to sorting/sizing/screening/washing/drying are not taxable (including their transportation); scalpings resulting from a crushing process are taxable, along with the related transportation.

If you're asked to sign a letter of assignment for a customer's refund claim: This letter shows the Comptroller expects the vendor to first verify the materials sold actually qualify as unprocessed, and to provide or verify a remittance schedule (return period, taxable amount reported, tax actually remitted net of discounts by tax type, and the local jurisdictions involved) before signing.

Q&A

Q: Is digging and backfilling flow line ditches taxable in Texas?
A: No. The letter states directly: "The digging and backfilling of flow line ditches is not a taxable service."

Q: Is selling unprocessed dirt, sand, or gravel taxable?
A: No. Per the letter, "The sale and/or delivery of unprocessed dirt, sand, grave, or similar materials is not taxable," where materials are considered unprocessed if merely sorted, sized, screened, washed, and/or dried.

Q: What if the dirt, sand, or gravel is processed — for example, crushed or mixed with other materials?
A: It becomes taxable. The letter states "The sale of the same materials in a processed state (i.e., crushed or mixed with other materials) is taxable."

Q: Can a contractor buy processed materials tax-free?
A: Only in limited circumstances. Per the letter, "A person performing taxable services may issue a resale certificate to purchase, tax fee, 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."

Q: Are "scalpings" from caliche processing taxable?
A: It depends on the processing method. The letter states that if the caliche processing "consists only of sorting, sizing, screening, washing, and/or drying," the scalpings' sale and transportation is not taxable, but "if the scalpings result from a process that crushes the caliche, the scalpings and the related transportation are taxable."

Original ruling text

October 8, 1993

Dear *:

Thank you for your letter requesting information on the taxability of

dirt, sand and gravel and the digging and backfilling of flow line ditches.

***, is a dirt contractor and has been charging tax on

the above noted sales and services. ***, Certified Public

Accountants, are requesting that you sign a letter of assignment to obtain a

refund of sales taxes paid by their client, ***, for dirt work

performed by your company.

RESPONSE: The digging and backfilling of flow line ditches is not a

taxable service.

The sale and/or delivery of unprocessed dirt, sand, grave, or similar

materials is not taxable. The materials are considered unprocessed 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 services may issue a resale

certificate to purchase, tax fee, 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. The

exemption for unprocessed materials is effective from June 12, 1988.

You indicated that the scalpings were a by-product of processed caliche.

If the "processing" of the caliche consists only of sorting, sizing, screening,

washing, and/or drying of the caliche, the sale and transportation of the

scalpings is not taxable. If the scalpings result from a process that crushes

the caliche, the scalpings and the related transportation are taxable.

The building of the pump unit site pad (Invoice #** ) is

considered an improvement to realty qualifying as new construction. The labor

to build the pad is not taxable and the materials used are not taxable if they

qualify as unprocessed materials.

You may sign the letter of assignment, after you verify that the

materials you sold to ***, were unprocessed materials as that

term is defined above. Additionally, as the vendor, you are required to provide

or verify a schedule reflecting:

(1) the return period in which the tax was remitted,

(2) the reported taxable amount

(3) the amount of tax actually remitted with the return (reported less

discounts), separated out by tax type (state, city, county, and transit), and

(4) the identification of each local taxing jurisdiction to which tax was

remitted.

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

1-800-531-5441, extension 3-4502. The regular number is 512/463-4502.

You may also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora

Tax Administration Division

NOTE: Previous Accession Number 9308105L.4 and/or 9308105L