Texas Letter Ruling 9407673L: Relocation/Relocating Telephone/Gas Lines To Add New Customers Or New Areas — New Contruction

Plain-English summary

A telephone utility contractor asked the Comptroller to classify five specific types of jobs as either exempt new construction or taxable remodeling, and also asked about a materials tax credit and whether it could rely on job descriptions to make these calls itself.

The Comptroller's answers turn on one core distinction: work that extends utility service into a location that never had it before is new construction, while work that upgrades, ties into, or reconfigures an existing system is taxable remodeling. Applying that rule to the five scenarios: (1) running new conduit/cable from an existing manhole to a building that never had service is new construction, but the tie-in connecting the new line to the existing system is taxable remodeling (and if that tie-in charge exceeds 5% of the total job, the whole job becomes taxable unless the tie-in is separately stated); (2) the same rule applies when the new line runs from an existing line to a new building; (3) and (4) building new manholes and connecting them with conduit is new construction if it expands the utility system into a new area, but taxable remodeling if it merely upgrades the existing system; (5) relocating an existing line due to a municipal road-widening order is new construction, but simply moving a line from above ground to below ground (or the reverse) is taxable remodeling, even though both are "relocations" in a general sense.

On the separate materials question, a contractor that pays sales or use tax on materials it incorporates into realty may take the Tax Code § 151.056(c) credit for that tax, but only if the job is genuinely a separated contract for new construction — meaning material charges are stated separately from labor charges — and the contract isn't otherwise exempt. A fixed-unit-price contract is not automatically a separated contract; it only qualifies if it separately states material and labor charges. Under a separated new-construction contract, the customer still owes tax on the sales price of the materials, but cannot also claim credit for tax the contractor already paid on those materials. Finally, on reliance, the Comptroller advised that job descriptions can be used to determine tax treatment only if they contain enough detail to show whether the work brings service to a new area versus upgrades an existing system, and specifically whether a road-widening relocation is involved.

What this means for you

Utility construction contractors

Before invoicing, classify each job by asking: is this line reaching a location that had no prior service, or is it modifying/upgrading a system that's already there? If a job mixes new-construction line extension with a system tie-in, separately state the tie-in charge on the invoice — otherwise, if that tie-in exceeds 5% of the total contract price, the entire contract becomes taxable. For relocations, document why the line is moving: a municipally-ordered road-widening relocation is new construction, but a routine above-ground-to-below-ground move is taxable remodeling labor.

Accountants and tax professionals advising utility contractors

When reviewing a contractor's materials tax credit claim under Tax Code § 151.056(c) and 34 Tex. Admin. Code Rule 3.338, confirm the underlying contract is a true separated contract (material and labor charges stated separately) — a fixed-unit-price contract does not automatically qualify. Also remember the credit doesn't shift the customer's own tax liability: the customer still owes sales tax on the materials' sales price and gets no credit for tax the contractor already paid.

Anyone drafting job descriptions or contracts for this type of work

This letter specifically warns that generic job descriptions are not enough to safely determine tax treatment. Descriptions need enough detail to show whether work serves a new area (exempt) versus upgrades an existing system (taxable), and must flag road-widening-driven relocations specifically, since that fact determines whether labor is taxed.

Common questions

Q: Is running new conduit and cable to a building that never had telephone service before taxable?
A: No, that line-extension work is new construction. But the tie-in connecting it to the existing system is taxable remodeling, and if that tie-in charge is more than 5% of the total job, the whole job becomes taxable unless the tie-in is billed separately.

Q: Is moving an existing telephone or gas line always treated the same way for tax purposes?
A: No. If a municipality orders the line relocated for a road-widening project, that's new construction. But moving a line from above ground to below ground (or below to above) without such a mandate is taxable remodeling.

Q: Can a contractor take a credit for sales tax it already paid on materials?
A: Yes, but only under a genuinely separated contract for new construction (materials and labor billed separately) that isn't otherwise exempt, per Tax Code § 151.056(c) and Rule 3.338(b)(1)-(2). A fixed-unit-price contract only qualifies if it separately states the material charges.

Q: If the contractor already paid tax on materials, does the customer still owe tax too?
A: Yes — the customer owes tax on the sales price of the materials and cannot claim credit for tax the contractor already paid on those same materials.

Citations and references

• Tex. Tax Code § 151.056(c) (credit for tax paid to suppliers on materials incorporated into realty under a separated contract for new construction)
• 34 Tex. Admin. Code Rule 3.338(b)(1) (allowance for credit for tax paid to suppliers)
• 34 Tex. Admin. Code Rule 3.338(b)(2) (guidelines for valid local sales and use tax credits)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9407673L

Original ruling text

June 22, 1994

Dear **:

Thank you for your letter concerning the sales tax treatment of contracts
performed for telephone utilities. You described five jobs and asked if they
were new construction or remodeling. I've restated your descriptions below:

1. Placement of new conduit/cable for service; new conduit/PVC is placed from
   an existing manhole/cable junction to an existing non-residential building or
   structure. While there may or may not be existing lines between these two
   points, there is no pre-existing cable/service where the new line is to be
   placed. A new trench and route is excavated and built for the line.

Adding new conduit/cable to provide service to a building that did not have
service before, is new construction. The system tie-in is remodeling and
taxable. If the charges for the tie-in represent more than 5 percent of the
service provided by your client, the total amount will be taxable, unless the
amount charged for the tie-in is separated from the other charges.

2. Placement of new conduit/cable line from an existing line to an existing
   non-residential building or an existing manhole; same as 1, except the new line
   is run from an existing cable line to a building or manhole.

If this is the addition of new conduit/cable to provide service to a building
that did not have service before (as in #1), the answer is the same as the
answer to #1.

3. Build new manholes and placement of new conduit/cable between new manholes;
   new conduit/PVC line is placed to tie together new manholes.

If this work is upgrading the system, it's taxable remodeling. If this work
expands the utility system into a new area, then the work is new construction.

4. Build new manhole and place new conduit/cable between the new manhole and an
   existing manhole; a new manhole is constructed and conduit/PVC is placed to tie
   the new manhole and old manhole together.

Once again, if this work is upgrading the system, it's taxable remodeling. If
this work expands the utility system into a new area, then the work is new
construction.

5. Lowering or moving existing cable/PVC from one location to another; movement
   of an existing line from one location to another
   (up/down/north/south/east/west). This type of work is usually associated with a
   road widening project in which the utility company is directed by a municipal
   authority to relocate existing telephone lines.

Relocating cable/PVC because of a road widening project is new construction.
Moving cable from above ground to below ground is taxable remodeling.

You then asked that given Company A pays sales tax on the purchase of all
materials incorporated into a job, and the job is a separated or fixed-unit
contract for new construction, does the credit for material purchases as
provided by Tax Code 151.056(c) apply to Company A.

First, let me clarify that a fixed-unit contract is not automatically
considered a separated contract. If the fixed-unit contract separates the
charges for materials from the charges for labor, it will be considered a
separated contract.

Company A may take credit for sales or use tax paid on materials incorporated
into realty under a separated contract for new construction provided the
contract is not an exempt contract. See Rule 3.338, (b)(1) Allowance for Credit
for Tax Paid to Suppliers. Section (b)(2) of Rule 3.338 provides guidelines on
valid credits for local sales and use tax.

Company A's customer owes tax on the sales price of the materials. The customer
may not take credit for any tax Company A paid on the building materials.

In your last question, you asked if your client could rely on job descriptions
such as those in your letter to determine sales tax treatment of a particular
contract.

The descriptions should include enough information to determine whether the
work will provide new service in areas that did not previously have service, or
the work upgrades the existing system (taxable remodeling). If the job is
moving cable/PVC because of a road widening project, that fact should be
included in the description to avoid tax on the labor.

I hope this satisfactorily answers your questions.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration