How did Texas tax railroad-track materials and labor for new construction versus repair, remodeling, or renovation?

Plain-English summary

Materials actually incorporated into railroad track remained exempt from Texas sales and use tax. The letter listed rails, ballast, bridges, trestles, cross ties, and other track materials. Materials for a depot or construction not directly essential to train operation were taxable.

Repairing, remodeling, or renovating existing track was a taxable real-property service. Under a lump-sum repair contract, the provider could buy exempt track materials with a resale certificate but collected tax from the railroad on the entire charge. Under a separated repair contract, the railroad could give an exemption certificate for the materials, while the provider collected tax on the separately stated labor.

New-construction labor was nontaxable. Under a lump-sum new-construction contract, the contractor bought qualifying track materials with an exemption certificate and did not tax the railroad's lump-sum charge. Under a separated contract, the contractor used a resale certificate for the materials, accepted the railroad's exemption certificate, and did not tax the new-construction labor.

What this means for you

Railroad contractors should separate essential track work from depot or other nonessential construction and identify whether the project is new construction or work on existing track. Contract form controlled which certificate was used and what amount was taxed.

Common questions

Were rails and cross ties exempt? Yes when incorporated into the track. Were depot materials exempt? No under this letter. Was existing-track repair labor taxable? Yes. Was new-construction labor taxable? No.

Citations and references

• 34 Tex. Admin. Code Rule 3.357

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9112L1142C11

Original ruling text

December 11, 1991

Dear ****:

Thank you for your letter to verify whether or not the letter dated
November 10, 1988, that you received from Jo Ann Dieck of this office is still
current.

Recent changes in the sales tax law have not affected this exemption. To
restate the information in Ms. Dieck's letter, the materials which are actually
incorporated into the railroad track (e.g., rails, ballast, bridges and
trestles, cross ties, and other track material) qualify for exemption from
Texas sales and use tax. Materials for a depot or other construction not
directly essential to the operation of the train are taxable.

However, the letter does not address the taxability of repair or
remodeling labor that became taxable January 1, 1988. Although the track
materials may be exempt from tax, the labor to repair, remodel, or renovate
existing tracks is taxable as explained in Rule 3.357, Real Property Repair and
Remodeling.

Under a lump-sum charge or contract to repair, remodel, or renovate
existing track, the service provider may purchase the track materials tax free
by issuing a resale certificate to the supplier. Tax must be collected from
the railroad company on the total lump-sum charge. If the charge for the track
materials is separated from the charge for labor, the service provider may
accept an exemption certificate from the railroad company in lieu of tax on the
track materials. Tax must be collected on the separately stated charge for
labor.

New construction labor is not taxable. Under a lump-sum contract, the
contractor may purchase the track materials tax-free by issuing an exemption
certificate to the supplier. The lump-sum charge to the railroad company is
not taxable. Under a separated contract, the contractor may purchase the track
materials tax-free by issuing a resale certificate to the supplier, and may
accept an exemption certificate from the railroad company in lieu of tax.
Again, the charge for new construction labor is not taxable.

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

If you have any questions, please don't hesitate to write the Tax
Administration Division or call one of our tax specialists toll free at
1-800-252-5555.

Sincerely,

Joan Hale
Tax Administration Division