Can a contractor building an exempt government facility buy waste-hauling services tax-free when jobsite clean-up is required by the contract?

Plain-English summary

A contractor built a 2,250-bed prison for the Texas Department of Criminal Justice Institutional Division — a tax-exempt project. Its contract required jobsite clean-up: clearing all construction debris (broken concrete, pipe ends, form materials, wire, cables, etc.) from the site. The contractor hired a local hauler to remove the debris and paid sales tax on the hauler's invoices. A subsequent audit discussion with the Comptroller's Taxpayer Assistance Division suggested this should have qualified as tax-exempt, and the contractor sought a letter ruling to pass on to its waste-hauling vendor.

The Comptroller confirmed: a contractor may issue an exemption certificate for waste removal services when improving realty for an exempt entity, if the contract specifically requires the contractor to remove the waste. Because the contract here required waste removal from the jobsite, the contractor could issue the waste hauler an exemption certificate in lieu of paying sales tax on that service.

What this means for you

Contractors on exempt government or nonprofit projects

If your contract with a tax-exempt entity specifically obligates you to remove construction waste/debris, you can buy that hauling service tax-free by issuing the hauler an exemption certificate — but the requirement must actually be written into the contract; a general practice of cleaning up the jobsite without a contractual obligation may not qualify.

Waste haulers and subcontractors

Accept an exemption certificate from a general contractor for a government/exempt-entity job only when the underlying contract requires debris removal — that's the condition the Comptroller is checking for, not simply that the job itself is tax-exempt.

Common questions

Q: Is waste/debris removal automatically tax-exempt on a government construction project?
A: No — it's exempt only if the contract between the contractor and the exempt entity specifically requires the contractor to remove the waste.

Q: How does a contractor buy the hauling service tax-free?
A: By issuing the waste hauler an exemption certificate, in lieu of paying sales tax on the hauling invoices.

Q: Can another contractor rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9710938L

Original ruling text

October 14, 1997

Dear ****:

This is in response to your request for a ruling regarding jobsite clean-up on
a tax exempt project. CORPORATION A (CORPORATION A) contracted with the Texas
Department of Criminal Justice Institutional Division to construct a 2250 bed
prison in CITY A, Texas.

The facility in question was exempt from Texas Sales and Use Tax. As part of
CORPORATION A's responsibility and included in our contract with the owners was
a clause relative to jobsite clean-up. It was CORPORATION A's obligation to
insure that the site was clear of all construction debris, including broken
concrete, pipe ends, form materials, wire, cables and other debris associated
with the project. CORPORATION A cleared the debris and hired a local hauler to
remove the materials from the site. A recent audit of our jobsite costs
indicated that we paid sales tax on the hauler's invoices for their services.
Our auditors had a discussion with Mr. Andrew Richardson of your Taxpayers
Assistance Division, and he indicated that this should have qualified as tax
exempt. He further indicated that we could get a "Letter Ruling" from your
Department in order to pass on to our Vendor.

Response: A contractor may issue an exemption certificate for waste removal
services when he improves realty for an exempt entity if the contract
specifically requires the contractor to remove the waste. You indicated that
your contract requires that waste be removed from the jobsite, therefore
CORPORATION A may issue the waste hauler an exemption certificate in lieu of
paying sales tax on this service.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division