When were installed warehouse racks treated as new construction rather than taxable tangible personal property?

Plain-English summary

“Rack-supported systems” held up the warehouse walls and roof and could not be moved without collapsing the building. When installed as part of constructing a new warehouse, those systems were treated as new construction under Rule 3.291. New-construction labor was nontaxable, while materials or equipment were taxable to the end consumer, with the contract type determining the parties' tax responsibilities.

Other shelving systems did not become permanent real-property improvements, even if bolted to floors, walls, or ceilings. They remained tangible personal property, so the entire charge—including the racks, erection, installation, and transportation—was taxable whether billed lump-sum or separately and whether installed in a new or existing warehouse.

A general contractor working under a separated new-construction contract could give a resale certificate for non-rack-supported systems. A sale of racks without installation was also a taxable sale of tangible personal property, including transportation charges.

Common questions

Were all bolted warehouse racks real-property improvements? No.

What made a rack-supported system different? It supported the warehouse's walls and roof and was installed as part of new construction.

Was installation of ordinary rack systems taxable? Yes. The total installed charge was taxable.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8907L0946E01

Original ruling text

July 18, 1989

Dear ***:

Thank you for your letter requesting confirmation of the responses
you had received regarding the sale and installation of warehouse
racks.

You explained that your company sells and installs racks (shelving
systems) in warehouses. Some of these systems are bolted to the
floor, walls, and perhaps ceiling and may be moved although moving
will probably never occur. Other systems are referred to as "rack
supported systems". This means that the walls and roof of the
warehouse is actually supported by the racks. These racks are not
moveable, because movement would result in the collapse of the
warehouse.

You also explained that your company installs the rack systems in
existing warehouses and in warehouses under new construction. The
"rack supported systems" must be installed at the time of new
construction.

The sale and installation of the "rack supported systems" that are
installed as a part of the construction of a new warehouse is
considered new construction. The application of tax is determined
by the type of contract your company has with your customer.
Rule 3.291 explains the tax responsibilities of persons performing
new construction under both lump-sum and separated contracts. The
charge for new construction labor is not taxable. The materials
or equipment are taxable to the end consumer regardless of the
type of contract.

Systems that are not "rack supported systems" do not become
permanent improvements to realty. The sale and installation of
these systems is the sale and installation of tangible personal
property. The total charge (sales price of racks, erection,
installation charge, transportation charge, etc.) is taxable
whether you bill the job to your customer as a lump-sum amount or
separately state materials and labor. This applies whether the
customer is the warehouse owner or general contractor and whether
these racks are sold and installed into existing or new
warehouses.

However, if your company sells and installs racks that are not
"rack supported systems" for a general contractor performing new
construction, he must pay the tax to your company on the total
charge or issue a resale certificate. General contractors
operating under separated contracts to improve real property are
considered retailers and may issue resale certificates as provided
in Rule 3.291.

When your company sells the equipment (racks) and does not install
the racks, you are selling tangible personal property. You must
collect tax on the sales price of the racks, transportation, etc.

I apologize for the responses that your company received that
appear to be conflicting.

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

You may also write to Tax Correspondence, Comptroller of Public
Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence