Are drafting charges from a third party taxable when building or remodeling a natural gas pipeline in Texas?

Plain-English summary

This letter is actually an internal Texas Comptroller memo, not a letter sent directly to a taxpayer. It runs from Kevin Koller of the Tax Administration Division to Tamara Haught, an auditor, answering her questions about a natural gas pipeline company whose purchases include services and products to build or remodel gas pipelines. Some of the drafting and surveying work for these projects is done by the taxpayer's own field personnel, and some is done by a third party.

The memo draws a line between two kinds of drafting-related work:

• Taxable "draftsman" work: If a third-party firm is simply supplied with schematic drawings, specifications, and requirements for a pipeline, and from that material creates drafting work (drawings, blueprints, etc.), the firm is acting as a "draftsman." Its charge to the taxpayer — including any expenses detailed in the bill — is a taxable sale of tangible personal property.
• Nontaxable professional engineering services: If instead the third party develops the original specifications and schematics itself (or works together with the taxpayer to develop them) and also produces the actual design, that is professional engineering services, which is not taxable — even if the end product is a finished design or drawing.

The memo confirms this same distinction applies whether the work is for new pipeline construction or for remodeling/repair of an existing pipeline, and that a "professional service" such as engineering can be separately stated on the bill per Rule 3.357(a)(11). It also confirms that using a computer-aided design (CAD) system instead of manual drafting does not change the analysis — CAD-based professional engineering services remain nontaxable, and CAD does not convert them into taxable data services or graphic arts.

Finally, the memo addresses how to tell the two apart when the product isn't obviously labeled "drafting": items like alignment sheets and piping drawings could be either taxable drafting product or nontaxable professional service output, depending on which of the two situations above produced them. The key factual question is whether the specifications/information supplied by the client (systems requirements, materials, site plats, and sometimes rough drafts or schematics) already framed the design, so that the third party's job was really just producing a drawing or layout of components and space — as opposed to the third party actually engineering and designing the system based on the customer's needs.

What this means for you

Businesses that hire drafting or engineering firms (including pipeline companies)

Whether a third party's charge is taxable depends on who actually did the design work, not on the job title or invoice label. If you hand a firm your own schematics, specifications, and requirements and they just turn that into drawings or blueprints, expect the whole charge to be taxed as tangible personal property. If the firm develops the specifications and design itself (alone or jointly with you), that charge should be treated as nontaxable professional engineering services, even though a finished design or drawing is what you receive. This is true whether the work is for new construction or for remodeling/repairing existing pipeline.

Drafting and engineering firms billing clients

If you are performing genuine engineering work — developing specifications, schematics, and the underlying design, not just converting a client's specs into drawings — this memo indicates that charge is not automatically taxable merely because a drawing is the deliverable. Separately stating professional engineering services on the invoice (per Rule 3.357(a)(11)) is relevant support for that treatment. Switching from manual drafting to a CAD system does not change this analysis in either direction.

Accountants and tax professionals

This is an internal Comptroller memo (auditor question to Tax Administration Division), not a letter addressed to a taxpayer, so it cannot be the basis of a detrimental reliance claim for any particular business. But it lays out the Comptroller's reasoning in more detail than a typical short taxpayer letter: the taxable/nontaxable line turns on who originates the specifications and design (client-supplied specs plus a hired "draftsman" = taxable; engineer-developed specs and design = nontaxable professional service), and that line doesn't move based on whether CAD software is used. The memo also flags that ambiguous deliverables (e.g., alignment sheets, piping drawings) require looking at the underlying facts of who created the specifications, not just the document type.

Common questions

Q: Is drafting always taxable in Texas?
A: Not necessarily. According to this memo, drafting is taxable when a third party is given schematic drawings, specifications, and requirements by the client and simply produces drawings or blueprints from them (acting as a "draftsman"). It is not taxable when the third party develops the original specifications and design itself, even if a drawing is the end product.

Q: Does using CAD software instead of manual drafting change whether the charge is taxable?
A: No. The memo states that using a computer (CAD system) to perform engineering services does not turn otherwise nontaxable professional engineering services into taxable data services or graphic arts.

Q: Does the answer change for remodeling or repair work versus new construction?
A: No. The memo says the same taxable/nontaxable distinction applies to drafting charges for remodeling or repair of an existing pipeline as for new construction.

Q: Can a professional engineering charge be separately stated to keep it nontaxable?
A: The memo notes that a "professional service" such as engineering can be separately stated per Rule 3.357(a)(11), implying that stating it separately from any taxable items is relevant to its treatment.

Q: How do you tell whether something like an alignment sheet or piping drawing is taxable drafting or nontaxable engineering?
A: The memo says these could be either, depending on the facts — specifically, whether the client supplied the specifications/information (systems requirements, materials, site plats, rough drafts, or schematics) and the third party merely produced a drawing or layout from them, versus the third party actually engineering and designing the system based on the customer's needs.

Q: Is this letter addressed to the taxpayer involved?
A: No. This is an internal Comptroller memo from the Tax Administration Division to an auditor who was examining a natural gas pipeline company, not a letter sent directly to that company. It answers the auditor's questions about how to classify the company's drafting charges.

Citations and references

The original memo does not cite any Texas statute. It refers to Comptroller Rule 3.357(a)(11) regarding separately stating professional services on an invoice, but does not cite it as a formal statutory or rule citation beyond that in-text reference.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9404L1316E09

Original ruling text

Date: April 20, 1994

TO: TAMARA HAUGHT, AUDITOR, ** AUDIT

FROM: KEVIN KOLLER, TAX ADMiNISTRATION DIVISION

SUBJECT: TAXABILITY OF DRAFTING **

The taxpayer is a natural gas pipeline company whose purchases
consist of services and products to build and or remodel gas pipelines.
In order to facilitate the construction or remodeling, some drafting and
surveying work is performed by either the taxpayer's field personnel or
a third party.

A. Are drafting charges by a third party taxable for the new construction
of a pipeline?

Response. For sales and use tax purposes, professional engineering
services are treated differently from sales of tangible personal property.
If the third-party firm is supplied with schematic drawings, specifications,
and requirements for a pipeline from which they create drafting work,
they are considered a "draftsman." Their charge to the taxpayer is a
taxable sale of personal property. This appears to address situation (A)( 1).
All charges, including expenses detailed in the bill, are considered taxable
as part of the sales price.

However, if the third party works with your taxpayer to develop (or if the
third party independently develops) the original specifications, schematics,
etc., as well as to produce the actual design, the services would be
considered professional engineering services and would not be subject to
tax even if a finished design is delivered. This appears to address
situation (a)(2).

B. Are drafting charges by a third party company taxable for the remodeling
or repair of an existing pipeline?

Response. The above response still applies. Any "drafting service" is taxable.
A "professional service" such as engineering can be separately stated per Rule
3.357(a)(11).

C. If the drafting charge is not taxable for either of the above situations,
would the answer change if a computer is used (CAD) to provide the drafting
service?

Response. The use of a computer (CAD system) to perform engineering services
will not change otherwise nontaxable professional engineering services into
taxable data services or graphic arts.

D. How can drafting services be identified if not obviously labeled as such,
i.e., are alignment sheets and piping drawings considered drafting products?

Response. Alignment sheets and piping drawings may be either taxable tangible
personal property or nontaxable professional services as discussed in Response
A.

E. Various research states that drafting is taxable when produced from
information or specifications provided by the client whether using CAD or
manually produced. What qualifies as information of specifications?

Response. Specifications or information can include all of the systems
requirements, materials to be used, locations or site plats, and, on occasion,
rough drafts or schematics. The gist of the service becomes a drawing or layout
of components and space instead of the actual engineering and design of a
system based solely on the needs of a customer.

NOTE: Previous Accession Number 9404583L