How did Texas tax a business that manufactured and installed septic tanks, wastewater treatment plants, and culvert pipe as improvements to real property?

Plain-English summary

The taxpayer manufactured wastewater home-treatment plants, septic tanks, and culvert pipe, then used its own labor, equipment, and concrete work to install them in the ground and connect them for customers.

The Comptroller classified the business as a contractor improving real property under Rule 3.300(b)(2), not as a manufacturer entitled to Rule 3.300 manufacturing exemptions. The tax treatment depended on the contract:

• Under a lump-sum contract with no separation between labor/services and materials, the contractor paid tax when buying incorporated materials and charged no further tax to the customer.
• Under a separated contract, the contractor could buy incorporated materials with a resale certificate and collect tax on the materials charge to the customer.

The letter also described a change effective January 1, 1988. Repair or remodeling of nonresidential real property became taxable on the total sales price under Rule 3.357(b), with incorporated property purchasable for resale. Residential work and new nonresidential construction remained under the contractor treatment in Rule 3.291.

What this means for you

The historical letter treated manufacturing and installing the same item as contracting when the item became part of real property. It also made the billing format and the distinction between residential repair, nonresidential repair, and new construction decisive.

Common questions

Could the installer claim a manufacturing exemption? No. The Comptroller said its contractor status prevented it from using the Rule 3.300 manufacturing exemptions.

Who paid tax under a lump-sum contract? The contractor paid tax on incorporated materials as their consumer.

What happened under a separated contract? The contractor could purchase incorporated materials for resale and collect tax on the materials charge.

Did the 1988 nonresidential remodeling rule apply to new construction? No. The letter kept new nonresidential construction under Rule 3.291 contractor treatment.

Citations and references

• 34 Tex. Admin. Code Rule 3.300(b)(2) (manufactured and installed improvements to realty)
• 34 Tex. Admin. Code Rule 3.291 (contractors)
• 34 Tex. Admin. Code Rule 3.357(b), (d) (repair and remodeling of nonresidential real property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8711L0850E01

Original ruling text

November 26, 1987

Dear **:

Thank you for your recent letter regarding the applicability of sales tax to
your business of manufacturing and installing waste water - home treatment
plants, septic tanks and culvert pipe.

In your letter, you described your business operations as:

I manufacture waste water - home treatment plants, septic tanks, and culvert
pipe.

I have several hours labor involved in setting them up. Then I put
reinforcement wire around them and pour them with redi-mix cement.

I dig the hole and set them in the ground for the customer and hook them up.

I have 3 days labor with 2 or 3 men, a backhoe digger and 2 trucks working.

Based upon this business description, you qualify as a contractor who makes
improvements to real property. Rule 3.300(b)(2) states:

"Installed items. Persons who manufacture and install items which become
improvements to realty are contractors and are subject to the provisions of
Rule 3.291 concerning Contractors."

As a contractor, you are obligated to handle your tax obligations in one of two
ways:

(1) If the contract is lump sum, whereby no separation is made for labor and
services separate from materials, you are required to pay tax at the time of
your purchase of materials physically incorporated into the property of your
customer. As a lump sum contractor, you are the consumer and no further tax
accrues to the customer.

(2) If the contract is separated as to labor and services and materials, you
may purchase materials physically incorporated into the property of your
customer on a resale certificate and collect tax on the materials charge from
your customer.

Since you are a contractor, you do not qualify for any of the exemptions
available to manufacturers under Rule 3.300.

Effective January 1, 1988, if you repair or remodel nonresidential real
property, your tax obligations will change.

Rule 3.357(b) states that all repairmen and remodelers working on
nonresidential property must collect tax on the total sales price to their
customers. All tangible personal property purchased by the repairman or
remodeler and incorporated into the real property may be purchased on a resale
certificate.

For all work done on residential property and for new construction on
nonresidential property, you are classified as a contractor subject to Rule
3.291 (discussed earlier).

Rules 3.291 and 3.357 are enclosed for your information. Section (d) of Rule
3.357 is currently being revised. Please contact me before January 1, 1988 to
receive a current copy of this rule.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,

Julie Pesl
Tax Policy Division