Is dredging dirt, mud, silt, or sand out of a waterway to add boat slips and improve access a taxable real property repair, or nontaxable new construction?

Plain-English summary

A property owner with real estate bordering a ship channel — including underwater property in the channel's "second cut" — got a Corps of Engineers permit to dredge the underwater area. The dredging would add more boat-mooring slips and improve public access to the channel, and would be done by a hired contractor. The owner's representative asked whether the dredging costs are subject to sales and use tax.

The Comptroller's answer turns on what the dredging actually does to the waterway:

• Repair/remodeling of an existing configuration: dredging done to repair or remodel a man-made waterway, or a naturally occurring channel that's previously been widened, deepened, or otherwise reconfigured, is taxable as a nonresidential real property repair and remodeling service under Rule 3.357.
• New construction: dredging a waterway specifically to make it deeper or wider than it currently is counts as new construction, and labor for new construction is not taxable.
• Mixed projects: if the same contractor is also building something new (the letter gives the example of a new pier) alongside the dredging, the charge for that new construction must be separately stated from the charge for the taxable repair/remodeling dredging service — bundling them together risks the whole charge being treated as taxable.

What this means for you

Property owners planning waterway dredging (boat slips, marinas, channel access)

Whether your dredging project is taxed depends on whether you're restoring/reconfiguring an already-modified waterway (taxable) or genuinely deepening/widening it beyond its current dimensions (new construction, nontaxable labor). If your project also includes building new structures like piers, make sure your contractor itemizes that separately from the dredging charge.

Marine and waterway contractors

Structure your invoices to separate new-construction labor (nontaxable) from repair/remodeling dredging labor (taxable) whenever a single project includes both. Document whether the waterway being dredged has previously been altered — that history determines whether the dredging itself is repair/remodeling or new construction.

Accountants and tax professionals

This is a straightforward application of the general repair-vs-new-construction distinction under Rule 3.357 to the specific context of waterway/channel dredging: prior modification history of the waterway (not just the physical act of dredging) determines tax treatment.

Common questions

Q: Is dredging a boat channel to add mooring slips taxable?
A: It depends on whether the channel has previously been widened, deepened, or reconfigured. If so, the dredging is taxable repair/remodeling. If the dredging genuinely makes the waterway deeper or wider than before, it's nontaxable new construction.

Q: What if the project includes building a new pier along with the dredging?
A: The new construction charge (the pier) should be separately stated from the dredging service charge, since new construction labor isn't taxable while repair/remodeling dredging is.

Q: Can I rely on this letter for my own dredging project?
A: No. This opinion is rendered based on the facts presented, and other facts, though similar, may yield different results.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.357 (Nonresidential Real Property Repair, Remodeling)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200004194L

Original ruling text

April 14, 2000

Dear **:

I am responding to your e-mail of March 30th sent to our tax help Internet
address.

Facts: You have a client who owns real estate part of which is in the
** ship channel's second cut (part of the real estate actually
includes underwater property). Your client has received a permit from the Corps
of Engineers to dredge the underwater property. The dredging will benefit your
client because it will add more slips for mooring boats and will provide
greater public access to the second cut. Your client will hire a contractor to
dredge the area.

Question: Are the dredging costs subject to sales and use tax?

Response: If dredging is done to repair or remodel a man-made waterway, or a
naturally occurring channel that has previously been widened, deepened, or in
any way reconfigured, the dredging is taxable as a nonresidential real property
repair, and remodeling service. See Rule 3.357.

If the person dredging the waterway is also constructing new improvements to
realty (e.g. new pier), the charge for the new construction should be
separately stated from the charge for the taxable service. The labor for the
new construction is not taxable. Dredging a waterway to make the waterway
deeper or wider is considered new construction.

To download a copy of rule 3.357, please go to our web site address at
and click on "The Sales Tax" under the quick links
column. Scroll down to "Current Rules", click on "State Sales Tax" and scroll
to the specific rule.

This opinion is rendered based on the facts presented. Other facts though
similar, may yield different results.

If you have any questions or require additional information, you may call
1-800-531-5441, extension 6-5809. You may also submit inquiries to our tax
help Internet address at .

Sincerely

Emilio S. Lerma
Tax Policy Division