Is labor to relocate, modify, or rebuild railroad track taxable as remodeling, or exempt as new construction, under Texas sales tax rules?

Subject

Railroad Track — New Construction — Materials Incorporated (Rails, Ballast, Bridges, Cross Ties, Culverts)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1294D10

Plain-English Summary

A railroad contractor asked the Comptroller how sales tax applies to charges for relocating and modifying railroad facilities when the work is required by the Department of Transportation and paid for by the railroad company, given that the contractor normally charges a lump sum for material and labor. The Comptroller addressed three specific situations.

Situation 1 — abandoning a section of existing track, installing a new switch into a portion of existing track, and building and connecting a new section of track: Installing the new switch in the existing track is taxable remodeling. The rest of the described work (abandoning old track and building/connecting new track) is nontaxable new construction.

Situation 2 — replacing existing jointed track through a crossing and welding longer individual rail sections into the existing track: This entire activity is remodeling. The labor charge is taxable; a separately stated material charge is not taxable.

Situation 3 — building a new road bed and moving a rail spur for expanded plant capacity, with new crushed stone placed on everything: Building the new road bed, laying track, and moving the existing spur are new construction (including the labor to put new crushed stone on the newly constructed portion). But labor to put new crushed stone on the existing road bed is taxable remodeling.

Running through all three situations is the same lump-sum rule: if remodeling labor charges are lumped together with material and new-construction charges, the entire combined charge becomes taxable once the remodeling portion exceeds 5% of the total. If the remodeling portion is 5% or less of the total charge, no tax is due on the lump sum.

What This Means For You

If you are a railroad contractor billing lump-sum for track work: Classify each piece of work as either new construction (exempt) or remodeling of existing track/road bed (taxable labor). Track what percentage of your total lump-sum charge is attributable to remodeling — if it's over 5%, the whole lump sum becomes taxable, not just the remodeling portion.

If you want to avoid taxing your new-construction charges: Separately state remodeling labor from new-construction and material charges wherever possible. As Situation 2 illustrates, separately stated material charges are not subject to tax even when the associated labor is taxable remodeling.

If your project mixes new track with work on existing track/road bed (like Situation 3): Pay close attention to which surfaces are "new" versus "existing." The same activity (placing crushed stone) can be exempt new construction on newly built sections and taxable remodeling on existing sections within the same job.

Q&A

Q: Is installing a new switch into existing railroad track taxable?
A: Yes. The ruling states that installing a new switch in existing track constitutes taxable remodeling, even when it's part of a larger project that also includes new construction.

Q: If I replace old jointed track with continuous welded rail, is that new construction or remodeling?
A: Remodeling. The ruling treats replacing existing jointed track through a crossing and welding in longer rail sections as remodeling; the labor is taxable, though a separately stated material charge is not.

Q: What happens if remodeling and new-construction work are billed as one lump sum?
A: The whole lump-sum charge is taxable if the remodeling portion exceeds 5% of the total. If remodeling is 5% or less of the total charge, no tax is due on the lump sum.

Original ruling text

March 1, 1994

Dear *****:

Thank you for your recent letter regarding the tax treatment
of charges to relocate and modify rail road facilities when
the work is required by the Department of Transportation and
paid for by the rail road company. Note: In our phone
conversation of February 25, you said that you normally
charge a lump-sum price for material and labor.

In situation 1, you will abandon a section of existing
track, build and install a switch in a portion of existing
track, and build and connect a new section of track.

Response: Installing the new switch in the existing track
constitutes taxable remodeling. The remainder of the work
is new construction.

If the charges for remodeling labor are lumped together with
the material charges and new construction charges, and, the
portion attributable to remodeling exceeds 5% of the total,
the total charge will be taxable. No tax is due if the
remodeling portion is 5% or less of the total charge.

In situation 2, you will replace existing jointed track
through a crossing and weld the longer individual tracks
into the existing track.

Response: This work constitutes remodeling. The charge for
labor is subject to sales tax. Separately stated charges
for material are not subject to sales tax.

In situation 3, you will build new road bed and move a rail
spur to facilitate expanded plant capacity. New crushed
stone will be put on everything.

Response: Charges for building new road bed, laying track
and moving the existing rail spur constitute new
construction. Labor to put new crushed stone on the
newly constructed portion also constitutes new construction.

Labor to put new crushed stone On existing road bed
constitutes taxable remodeling. The total charge will be
taxable if the charges are lumped together, and, the charge
for remodeling labor exceeds 5% of the total.

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 9403215L