Is the labor to repair refinery/chemical plant processing equipment taxable, and is the labor to repair railroad track taxable, given that the equipment and track were exempt as manufacturing equipment or rolling stock when first purchased?

Subject

Refinery/Chemical Plant — Machinery, Equipment And Repair/Replacement Parts Used In Processing — Treated As Tpp At Time Of Initial Purchase And Real Property Once Attached To Realty

Plain-English summary

The Comptroller answered two separate repair-labor questions raised by a taxpayer about a client's operations:

Question 1 — repairing refinery/chemical plant processing equipment. The client's oil refineries are classified as being both real property and manufacturing equipment. Since manufacturing equipment is exempt from sales and use tax, is the labor to repair refinery processing equipment taxable? The Comptroller explained that qualifying equipment purchased for use in refineries is treated as manufacturing equipment before it's installed. After installation, sometimes the equipment keeps its character as personal property, and sometimes it becomes an improvement to realty. If the equipment retains its character as personal property, repair labor on it is exempt. If it becomes an improvement to realty, repair labor on it is taxable.

Question 2 — repairing railroad track. The client purchased labor and materials to repair personal and public railroad tracks. The track and other tangible personal property used in it were exempt when originally purchased, under the rolling stock exemption. Is the labor to repair the track taxable? The Comptroller answered yes: although the track and other property were exempt when purchased, they lost their character as tangible personal property once the track was laid — track becomes an improvement to realty. So the repair labor is not labor to repair exempt tangible property, but labor on realty, and it is taxable. However, if the repairman separately states the cost of materials from other repair costs, the repairman may still accept an exemption certificate for the materials transferred in the course of the repair (e.g., welding rods, additional track, cross ties).

What this means for you

Owners/operators of refineries, chemical plants, and similar processing facilities

The exempt status of manufacturing equipment purchased for your facility does not automatically carry over to repair labor. Whether repair labor is taxable turns on whether the equipment, after installation, is still personal property or has become an improvement to realty. That characterization needs to be made equipment-by-equipment (or repair-by-repair), since some manufacturing equipment stays personal property after installation while other equipment becomes part of the realty.

Railroad track owners and repair contractors

Even though track and rolling stock can be purchased exempt from sales tax, once track is laid it is treated as realty, not personal property. Labor to repair laid track is therefore taxable. Repair contractors should separately state the cost of materials used in a track repair (e.g., welding rods, replacement rail, cross ties) from labor and other charges, since the repairman may accept an exemption certificate for those materials even though the labor itself is taxable.

Common questions

Q: If manufacturing equipment was exempt when I bought it, is labor to repair it always exempt too?
A: No. It depends on whether the equipment, once installed, is still personal property or has become an improvement to realty. Repair labor is exempt only if the equipment retains its character as personal property; if it becomes realty, repair labor is taxable.

Q: Is labor to repair railroad track taxable, even though the track was bought exempt under the rolling stock exemption?
A: Yes. Once track is laid, it is treated as having become an improvement to realty rather than personal property, so labor to repair it is taxable.

Q: Can a repair contractor still buy repair materials tax-free even if the labor is taxable?
A: Yes, for railroad track repairs, the repairman may accept an exemption certificate for materials transferred in the repair (e.g., welding rods, additional track, cross ties) if the cost of those materials is separated from other repair costs.

Q: Can I rely on this letter for my own facility or track-repair situation?
A: This letter answers the specific facts described by the requester. Whether particular equipment or track in your situation is personal property or realty is a factual determination, so you should confirm your own facts with the Comptroller or a Texas tax professional before relying on this letter.

Citations and references

No Texas statutes or administrative rules are cited by section number in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9601227L

Original ruling text

January 23, 1996

Dear **:

In your letter of January 19, 1996, you asked for a ruling concerning your
client **'s operations. Your first example involved ****'s
operations, including its oil refineries which are classified as being both
real property and as manufacturing equipment. Your question was as follows:
Since manufacturing equipment is exempt from sales and use tax, is the labor to
repair refinery processing equipment taxable?

Answer: We have considered qualifying equipment purchased for use in refineries
as manufacturing equipment before it is installed. Some of the time the
manufacturing equipment may retain its characterization as personal property;
in many other cases the equipment becomes improvements to realty.

If the manufacturing equipment retains its character as personal property, the
repair of the equipment is exempt. On the other hand, if the manufacturing
equipment becomes an improvement to realty, its repair is not exempt.

Your second question involved the repair of railroad track. **
purchased labor and materials to repair personal and public railroad tracks.
The track and all essential tangible personal property was exempt when
originally purchased under the rolling stock exemption.

You asked if the labor to repair a railroad track is taxable?

Answer: Yes. While the track and other personal property was exempt when
purchased, it lost its character as tangible property when it was laid.
Therefore, the labor is not to repair exempt tangible property but an
improvement to realty. Consequently, the labor is taxable. If the repairman
separates the cost of materials from all other costs, the repairman may accept
an exemption certificate for the items transferred to ** in the
process of repairing the track, e.g., welding rods, additional track, cross
ties.

I hope this satisfactorily answers your inquiry. Please write me at 111 E.
17th, Austin, Texas 78774 or call me at 1-800-531-5441, extension 3-4004 should
you have additional questions.

Sincerely,

Wade Anderson
Director, Tax Policy

cc: Karey Barton, Manager, Tax Policy