If a construction contract to expand a chemical or petrochemical plant's capacity was signed before October 1, 1995 (when Senate Bill 640 took effect), is the labor taxed under the old law or the new law?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered questions from a taxpayer about how to handle sales tax on repair or remodeling labor that increases the capacity of a chemical or petrochemical plant, given the Section 151.0047 change made by Senate Bill 640, effective October 1, 1995. The taxpayer had contracts already underway when the law changed and wanted to know how to split the taxable and non-taxable labor.

In the first fact pattern, a contract was signed in May 1995 (before the law change) to increase a chemical plant's capacity, with actual work starting in September 1995 and continuing for two years. The Comptroller held that labor performed in September (before October 1) is taxable regardless of the billing date, while labor performed in October (on or after the effective date) is not taxable. The date the work was actually performed controls, not when it's billed.

In the second fact pattern, a contract signed over a year earlier had progress payments already being made, with the contract specifying that title and acceptance of the craftsman's labor pass only when the finished work is inspected and accepted (estimated January 1996), and with legal remedies available if the work fails to meet contract standards. The taxpayer asked whether the whole contract, including prior progress payments, could be exempt under Section 151.0047. The Comptroller said no: under Tex. Tax Code § 151.005, a sale of tangible personal property occurs when title or possession transfers, but a sale of a service occurs when the service is performed — and this was a taxable remodeling service. So all services performed before October 1, 1995 remain taxable no matter what the contract says about when title passes, when work is "accepted," or what legal remedies exist for defective work.

What this means for you

Contractors and plant owners with capacity-expansion projects spanning the 10/1/1995 change

If your contract to increase or expand production capacity at a chemical or petrochemical plant straddled the October 1, 1995 effective date of the SB 640 change to Section 151.0047, the tax treatment is determined service by service, based on the date the labor was actually performed — not the date the contract was signed, the date invoices go out, or contract language about progress payments.

Businesses relying on "title passes on acceptance" contract clauses

Don't assume that structuring a contract so title or acceptance doesn't transfer until final inspection (e.g., January 1996) pushes all of the labor into the non-taxable period. The Comptroller specifically rejected that argument here: for services, the taxable event is when the service is performed, not when title to associated property passes or when the customer formally accepts the work.

Accountants and tax professionals tracking law-change transitions

This letter illustrates the Comptroller's general approach to statutory effective-date transitions for services: apportion tax based on the performance date of each increment of labor, splitting a single contract's billing period at the effective date line if needed, rather than treating the whole contract as governed by one rule based on its signing date.

Common questions

Q: We signed our capacity-expansion contract before October 1, 1995 — does that mean the whole job is grandfathered in under the old rules?
A: No. Under this letter, only the labor actually performed before October 1, 1995 is taxed under the prior law. Labor performed on or after that date is governed by the new Section 151.0047 rule and is not taxable, even though the contract predates the change.

Q: We bill our labor later than when it's performed — does the invoice date control which tax rule applies?
A: No. The letter states labor performed before the effective date is taxable "regardless of the billing date." What matters is when the work was actually done.

Q: Our contract says title to the equipment, materials, and craftsman's labor doesn't pass until final inspection and acceptance (months after the work is done) — doesn't that mean none of the labor is taxed until then?
A: No. The Comptroller pointed to Tex. Tax Code § 151.005, under which a service sale occurs when the service is performed, not when title passes. Provisions about title transfer, acceptance, or available legal remedies for defective work don't change when the labor is treated as sold for tax purposes.

Q: Does this apply to any construction project, or specifically to plant capacity expansions?
A: This letter answers questions specifically about repair or remodeling that increases the capacity of a chemical or petrochemical plant, in the context of the Section 151.0047 change made by Senate Bill 640. It doesn't address other types of construction contracts.

Q: Can another business rely on this letter for its own contract?
A: The letter itself doesn't include the usual "based on the facts you submitted" caveat found in some other letters, but as with all STAR letters, it can be the basis of a detrimental-reliance claim only for the taxpayer it was issued to. Other taxpayers should confirm current guidance for their own facts.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0047, as amended by Senate Bill 640, effective October 1, 1995
• Tex. Tax Code § 151.005 (a sale of tangible personal property occurs on transfer of title/possession; a sale of a service occurs when the service is performed)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9509544L

Original ruling text

September 12, 1995

Dear *****:

Thank you for your letter of August 31, 1995, concerning the taxability of
repair or remodeling that increases the capacity of a chemical or petrochemical
plant.

Your letter references the changes to Section 151.0047 of the statute that are
effective October 1, 1995 (Senate Bill 640). Your questions concern contracts
that are already in progress prior to the law change.

Fact Situation: A contract was signed three months ago (May 1995). The nature
of the contract is to increase the capacity for a chemical plant as defined in
SB 640, Section 7. The actual work will not begin until October 1995. Some
work will begin in September and the contract will take two years to complete.

Issue: Will the labor charges incurred in September be subject to Texas sales
and use tax under SB 640? Will the labor charges incurred in October be
subject to Texas sales and use tax under SB 640?

Response: The labor performed before the effective date of the law change will
be taxable regardless of the billing date. Labor performed in October will not
be subject to tax.

Fact Situation: A contract was signed over a year ago. Progress payments are
currently being made towards the contract. The acceptance of the craftsman's
labor is clearly stated in the contract as "when title passes" which is
estimated to be January 1996. In January of 1996, the workmanship of the
project will be inspected and title accepted for all equipment, materials and
craftsman labor. Legal remedies are available if the equipment, materials and
craftsmanship labor does not meet the acceptable standards as provided in the
contract.

Issue: Would the entire contract including the progress payments already made,
be exempt under Section 151.0047 of the Statute?

Response: Section 151.005 Subsection(1) of the statute states a sale or
purchase occurs when a transfer of title or possession of tangible personal
property is made. Subsection (3) states that the sale or purchase of a service
occurs when the service is performed. Your scenario involves a taxable
remodeling service.

Therefore, all services performed prior to October 1, 1995 are taxable
regardless of contractual provisions for the transfer of title, acceptance of
work, or legal remedies available to the purchaser.

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. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division,Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division