Is installing a new sewage system, adding capacity to one, or repairing an existing one taxable in Texas, and does it matter whether billing is lump-sum or separated, or whether the property is residential?

Plain-English summary

Someone emailed the Comptroller asking about the taxability of sewage-system work performed for them. The response walked through several distinct scenarios that hinge on billing structure, whether the work is new construction or repair, and whether the property is residential or nonresidential:

• Installing a new sewage system is new construction. If billed lump-sum (one combined charge for materials and labor), the installer is the consumer of the incorporated materials and owes sales tax on the materials when purchased — the lump-sum charge to the customer is not taxable. If billed with separated charges (materials separate from labor), the installer is treated as a seller of the materials and must collect sales tax on the materials charge, while the separately stated labor charge stays nontaxable.
• Repairing an existing sewer line or sewage tank on residential property is not taxable — the repairer has the same tax responsibilities as someone installing a new system (i.e., follows the lump-sum vs. separated framework above for any materials involved).
• Installing additional capacity — a new tank, new drainage lines, or a new drain field — is treated as new construction, regardless of whether the property is residential or nonresidential.
• Repairing an existing sewage system on nonresidential property is taxable as nonresidential repair and remodeling, and here the total charge (both labor and materials) is taxable — unlike new construction or residential repair.

What this means for you

Plumbing, septic, and sewage-system contractors

Your tax treatment on a sewage job depends on three separate questions: (1) is this new construction/capacity addition, or a repair of something that already exists? (2) if it's new construction, are you billing lump-sum or with separated materials/labor? and (3) if it's a repair, is the property residential or nonresidential? Adding capacity is always new construction no matter the property type, but plain repair work splits sharply between nontaxable-on-residential and fully-taxable-on-nonresidential.

Accountants and tax professionals

This letter is a clean, compact map of the lump-sum/separated-billing distinction and the residential/nonresidential repair distinction as applied specifically to sewage systems — useful as a template for the same analysis applied to other realty-improvement trades.

Common questions

Q: If I install a new septic/sewage system for a lump-sum price, do I charge my customer sales tax?
A: No — under lump-sum billing, you (the installer) owe tax on the materials when you buy them, but your lump-sum charge to the customer is not taxable.

Q: What if I bill materials and labor separately?
A: Then you must collect sales tax on the materials charge from your customer; the separately stated labor charge remains nontaxable.

Q: Is repairing an existing sewage system taxable?
A: Not on residential property. On nonresidential property, it's taxable as nonresidential repair and remodeling, with the total charge (materials and labor) taxable.

Q: Does adding capacity to an existing system count as a repair?
A: No — adding a new tank, drainage lines, or drain field is treated as new construction regardless of the property type.

Citations and references

No specific Tax Code section or Comptroller rule number is quoted 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/9910772L

Original ruling text

October 7, 1999

Subject: Question

Dear **:

Thank you for your recent e-mail concerning the taxability of work performed
for you.

A person installing a new sewage system is performing new construction. The
materials incorporated into the realty are taxable but the labor to install the
materials is not. If the person installs the sewage system under lump-sum
contract (a single charge for materials and labor), the person is the consumer
of the incorporated materials and owes sales tax on the materials when they are
bought. The lump-sum charge made to you is not taxable.

If the job is installed under a separated billing (a separate charge for the
incorporated materials and a separate charge for installation labor), the
person is considered a seller of the incorporated materials. The person must
collect sales tax on the charge for the incorporated materials from you. The
separately stated charge for installation labor is not taxable.

The repair of an existing sewer line or sewage tanks is not taxable if the work
is performed on residential property. The person performing the repair on
residential property has the same tax responsibilities as person installing a
new sewage system.

The installation of additional capacity (a new tank, new drainage lines, or new
drain field) is considered new construction. This applies whether the work is
performed on residential or nonresidential property.

The repair of an existing sewage system at a nonresidential property is taxable
as nonresidential repair and remodeling. The total charge (labor and materials)
is taxable.

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 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts. My e-mail address is
.

Sincerely,

Eddie C. Washington
Tax Policy Division