Is a contractor's work insulating oil-field pipes and storage tanks taxable installation labor on personal property, or nontaxable work on real property — and is this ruling still good law?

Plain-English summary

This ruling was withdrawn by the Utah State Tax Commission on November 16, 2004 — that notation appears verbatim at the top of the official source document. The analysis below describes what the ruling originally said; it should not be treated as the Commission's current position on this question.

As issued, a contractor that insulates oil and gas production equipment (buildings, pipes, storage tanks) in a Utah county asked whether its installation work was taxable (personal property) or exempt (real property improvement). The contractor had been paying sales tax on its own materials but not charging customers sales tax on the installation labor — until an audit challenged that practice.

The Commission analyzed three types of property under Rule 58 (Utah Admin. Rule R865-19S-58(B)):

• Buildings: the ruling's own text on this item is incomplete in the source document (the "must be" sentence cuts off with no further analysis preserved).
• Pipes: the specific pipes at issue were short connectors linking an oil well to its storage tank — not part of a larger buried pipeline system — and were movable. The Commission held they (and their insulation) were personal property, so installing the insulation was a taxable service.
• Storage tanks: the tanks were not bolted down, just set on a gravel bed, and could be moved by truck without structural dismemberment or damage to the underlying real property. Applying a two-factor test from a prior Commission appeal (Appeal No. 91-0330) — (1) does removal require structural dismemberment, and (2) would removal substantially damage the real property — the Commission held these tanks were personal property, making their insulation taxable as well, citing Union Pacific R.R. v. Auditing Division, 842 P.2d 876 (Utah 1992) for the general rule that installing or renovating personal property in connection with other personal property is taxable.

Under that (now-withdrawn) analysis, the contractor would have owed sales tax on the full materials-plus-labor charge for pipe and tank insulation, while being able to buy its own insulation materials tax-free under the resale exemption since the customer, not the contractor, was the final consumer.

What this means for you

Oil-field service contractors and similar installers

Don't rely on this ruling's real-vs-personal-property conclusions — the Commission withdrew it in 2004. If you install protective coverings, insulation, or similar work on oil-field or industrial equipment, get current guidance (a new private letter ruling or a licensed tax professional) rather than citing this one.

Accountants and tax professionals

The underlying Rule 58 framework it applied — is the item permanently attached (integral to realty) or removable without structural dismemberment/property damage — remains a real analytical tool used across many other Utah rulings (see the two-factor test also discussed in later PLRs on installed equipment). What's unreliable here specifically is how the Commission applied that framework to these facts; the withdrawal doesn't necessarily mean the general Rule 58 test itself changed, but you cannot cite this ruling as confirming any particular outcome.

Why rulings sometimes get withdrawn

A withdrawal typically means the Commission concluded its own prior analysis was wrong, outdated, or superseded — but the ruling text doesn't explain the withdrawal's reason. Treat a withdrawn ruling as informative history only, never as current authority.

Common questions

Q: Can I still rely on PLR 01-032 for how Utah taxes oil-field insulation work?
A: No. The Commission withdrew it on November 16, 2004. Seek current guidance.

Q: What was the ruling's original holding on pipes and tanks?
A: That insulating short well-to-tank connector pipes and non-bolted, gravel-bedded storage tanks was taxable, because both were "personal property" removable without structural dismemberment or real-property damage.

Q: What about the buildings analysis?
A: The official source text for the buildings discussion is cut off after one incomplete sentence — no conclusion on buildings is preserved in the available record.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-103 (sales tax on installation/repair services to tangible personal property)
• Utah Admin. Rule R865-19S-58(B) (Rule 58 — real vs. personal property classification)

Case law and prior Commission decisions cited:

• Union Pacific R.R. v. Auditing Division, 842 P.2d 876 (Utah 1992)
• Appeal No. 91-0330 (Commission decision establishing the structural-dismemberment/property-damage two-factor test)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/01-032.htm

Original ruling text

REQUEST LETTER

WITHDRAWN BY COMMISSION NOVEMBER 16, 2004

01-032

NAME

ADDRESS

Dear Commissioners:

We are writing on behalf of NAME., a small company engaged in the business
of providing insulation protection to oil and gas facilities in the COUNTY.

The work performed by COMPANY consists of providing protective structures and covering for facilities such as pumps, pipelines, storage tanks, and other oil and gas production equipment and facilities. Examples of the work performed are shown on the photographics included with this request for advisory opinion. Sometimes buildings with insulated walls and ceilings are built over equipment installations. Sometimes storage tanks and connecting pipelines are covered with insulation. When pipelines are buried at sufficient depth to prevent freezing they do not require insulation. As those pipelines come out of the ground to connect to surface facilities the line requires insulation of the part of the line above ground. Sometimes buildings are built on skids and insulated. Sometimes buildings are placed on a foundation of railroad ties. These facilities are rarely if every moved and remain in place for many years. The tanks that are insulated are usually not fastened to the ground except for bedding them in gravel. The tanks are filled and remain in place for the life of the operation then usually salvaged for junk metal.

A recently completed tax audit by Tax Commission Auditors has raised the issue of the need to charge sales tax on the installation of insulation on some oil field equipment. COMPANY, and, we believe, all of COMPANY competitors have heretofore paid sales tax on materials purchased to accomplish the insulation work. It has not been the practice to charge customers sales tax on the installation of the insulation. The practice of paying sales tax on the material purchased, but not charging sales tax to COMPANY customers, was considered in prior tax commission audits.

COMPANY considers the work it does for which it does not charge sales tax as an addition to real property. The buildings it builds and the pipelines and other such structures it insulations are considered permanent even if, for example, a tank is not attached to a foundation. If the facilities reach a stage where they re no longer used the most common thing to happen is to simply abandon them and convert them to scrap for removal to a recycle facility.

In discussing this matter with the Tax Commission Staff the suggestion was made than an advisory opinion will be appreciated.

If you have questions do not hesitate to contact the undersigned.

NAME

RESPONSE LETTER

DATE

NAME

COMPANY

ADDRESS

Re: Advisory Opinion on whether installation of insulation on oil field improvements is considered to be real or personal property work

Dear Mr. NAME:

We received the letter written on behalf of your client, COMPANY, regarding whether the work performed on oil and gas facilities in the COUNTY would be considered real or personal property improvements. According to your letter, your client�s work includes installing protective structures and insulating facilities such as pumps, pipelines, storage tanks and other oil and gas production equipment. The improvements are designed to prevent the tanks and pipelines used in oil and gas production from freezing. In order to address these issues we will discuss three separate items of property: buildings, pipelines and storage tanks.

Your letter stated that COMPANY is paying sales tax on the materials purchased to perform the work on oil and gas facilities. Your client is not charging its customers sales tax on the services it performs or the materials it incorporates into its services. The Auditing Division told your client that it should be charging its customers sales tax on the buildings and insulation it installs. Your client has requested the Commission to reconsider Auditing�s position because your client�s competitors are supposedly not charging sales tax on their sales and services. Your client is concerned that if it charges its customers sales tax, it will no longer be competitive in the market.

In Utah, sales tax is levied on, among other things, retail sales of tangible personal property and services for repairs, renovations, or installations of tangible personal property in connection with other tangible personal property. See Utah Code Section 59-12-103. Utah law also provides that the sale of real property and the labor performed on real property, however, is not subject to sales tax. See Utah Administrative Rule R865-19S-58 (B) (Rule 58).

A large number of items begin as tangible personal property, and end up as real property. For example, the sale of a completed home or building is not subject to sales tax because it is real property, but contractors must pay sales tax on their purchases of materials and supplies (tangible personal property) that they use in building the home. The sales tax applies to the ultimate or final consumer of the tangible personal property. With regard to items that become affixed to real property, the person who is liable for the sales tax, or the person who is the final consumer, is the last person to own the items as tangible personal property.

Classification of property for sale and installation is addressed in Rule 58, which discusses the following items that remain tangible personal property even when attached to real property:

1. moveable items that are attached to real property merely for stability or for an obvious temporary purpose;

2. manufacturing equipment and machinery and essential accessories appurtenant to the manufacturing equipment and machinery; and

3. items installed for the benefit of the trade or business conducted on the property that are affixed in a manner that facilitates removal without substantial damage to the real property or to the item itself.

Using these guidelines, we will determine whether the improvements described above are permanently attached and thus, real property or temporarily attached and thus, personal property.

** I. Buildings.** In order for an item to be considered real
property, it must be

** II. Pipes.** The second item we were asked to address concerns
the insulation of the pipes. Under Rule 58, if the insulation of the pipes
becomes an integral part of real property, then these materials will take on
the character of real property for sales tax purposes. Two factors must be
closely analyzed to determine whether insulation of the pipes should be treated
as real property. First is whether the pipe insulation is attached to real
property, and second, if so, is the insulation an integral part of that real
property?

Pipes that are installed and part of a pipeline, either underground or permanently attached over ground, are generally considered real property. During a telephone conversation with you, you explained that the pipes in question are not part of a large oil and gas pipeline system, but are used to link the oil well to the storage tank. Because the pipes can be moved, they would be considered personal property. Second, the insulation covering the pipes would also be considered personal property in this instance. Accordingly, COMPANY must charge sales tax to its customers for the installation of insulation on the pipes.

** III. Tanks.** The final item at issue is storage tanks. According
to your letter, the tanks are not fastened to the ground, but are placed on
a bed of gravel. The tanks are filled and stay in place for the life of the
operation and then generally are salvaged. Occasionally, the tanks are moved
from one site to another.

Above ground tanks are usually considered personal property unless they are
so attached to the realty that they become part of it. �It has been found
that when a tank is field erected and would require structural dismemberment
to be removed from its host real property or when the real property upon which
said tank is situated would be damaged or disturbed that said tank is to be
considered real property for purposes of taxation.� See Appeal No. 91-0330. From
this settlement of the appeal, the Commission has set two guidelines that determine
when a tank is real property: 1. structural dismemberment is required to
remove the tank and, 2. substantial damage to the underlying real property
would occur when the tank is moved. These principals generally apply to the
test for all real versus personal property questions. The storage tanks insulated
by your client are moveable without structural dismemberment. They can be
put on a truck and moved to another site. Secondly, the tanks are placed on
a bed of gravel causing no real property damage when they are removed. Accordingly,
the tanks insulated by your client would not be deemed real property.

Charges to install personal property in connection with other personal property
or to renovate personal property are taxable. See Union Pacific R.R.
v. Auditing Division, 842 P.2d 876 (Utah 1992). The insulation of a storage
tank that is personal property is a taxable transaction. This rule applies
to any tank that is tangible personal property at the time of installation,
even if the tank subsequently becomes real property. On these transactions,
the Company would need to collect sales tax from its customers on the total
charge for materials and labor and remit it on its sales and use tax return. As
it is the customer who is considered the final customer of the insulation under
these circumstances, the Company may purchase the insulation materials tax-free
using the resale exemption.

In conclusion, COMPANY needs to collect and charge sales tax on all installation work as described above. We are aware of your concerns regarding other competitors not charging sales tax on similar services. We are discussing means of updating the examples in Publication 42, Sales, Installation and Repair of Tangible Personal Property Affixed to Real Property to address this issue and to alert the industry of our policy.

Please contact us if you have any further questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/PL

01-025