When did a plant-turnaround charge remain nontaxable real-property maintenance despite including some taxable repairs?

Plain-English summary

The Comptroller said Texas did not intend to change its plant-turnaround policy after Hearing No. 27832.

To qualify as real-property maintenance, work had to be scheduled and periodic, although the schedule did not need to specify the exact day and hour. It also had to concern operational and functioning real-property improvements and be necessary to sustain safe, efficient, continuous operation or prevent decline, failure, lapse, or deterioration. Rewrapping pipe after 30 years did not meet the scheduled-periodic test.

Repairs could not be sheltered merely by labeling them maintenance. If repairs and other taxable services were 5% or less of a lump-sum nontaxable maintenance charge, the whole charge remained nontaxable. The test applied independently to each vendor's lump-sum bill. Significant repairs had to be separately scheduled or the entire turnaround charge would be taxed.

The letter illustrated the operating-condition distinction: replacing worn belts on a machine that was running at shutdown was maintenance, while fixing a nonfunctional pump was a taxable repair.

What this means for you

Plant-turnaround treatment depended on scheduling, the condition of the improvement, and each vendor's mix of services. A small repair component could stay within a nontaxable maintenance charge, but a larger or separately identifiable repair component changed the result.

Common questions

Did maintenance have to be scheduled to an exact hour? No, but it had to be reasonably scheduled and periodic based on the business's operations.

How was the 5% test applied? Separately to each lump-sum service charge.

What happened when taxable repairs were 5% or less? The entire lump-sum maintenance charge remained nontaxable.

How did the letter distinguish maintenance from repair? Work on operating equipment, such as replacing worn belts at shutdown, could be maintenance; fixing a nonfunctional pump was repair.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(a)(3)
• Hearing No. 27832

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9204L1174D06

Original ruling text

April 23,1992

Dear **:

On March 11, 1992, ** wrote Mike Doyle about your concerns over a
recent ruling by an Administrative Law Judge in Hearing No. 27832. Primarily,
you were worried that our office would change our policy concerning plant
turnarounds as a result of dicta in the decision. Let me assure you, we do not
intend to change the policy.

First, I believe it would be helpful to review our understanding of the problem
of plant turnarounds as it existed in 1987. At that time, it was clear the
Legislature intended to tax repairs and restoration of real property but not
the maintenance of real property. There was substantial confusion as to how to
define these terms. As you will recall, the statute specifically gave the
Comptroller the authority to interpret the service taxes and define these
terms.

In order to determine where the line between repairing and restoring real
property and maintaining it should be drawn, Comptroller employees met at
length with industry representatives. Several issues were decided as a result
of these meetings. First, it was decided that in order to be considered
maintenance, the activity had to be conducted on a scheduled, periodic basis.
The recent ALJ decision correctly found that rewrapping pipe after 30 years did
not meet this test. I would note that the scheduled maintenance need not be
down to the day and hour, but it must be reasonably scheduled based on the
business activities of the company.

The next thing that was decided was that real property repairs could not be
shielded by calling them maintenance. In the presentation made by the industry
representatives there was no question that some repairs did occur during any
turnaround. However, these were represented as minor, e.g. replacing a broken
bolt. At that time, it was recognized that should the repairs be significant,
they would have to be separately scheduled or the entire charge for the
turnaround would be taxed. Essentially, the 5% rule applied in other mixed
transactions is also applicable to plant turnarounds.

Therefore, if repairs represent less than 5% of the cost of a lump-sum charge
for non-taxable maintenance service, the entire charge will continue to be
treated as non-taxable. I should note that the 5% rule applies independently to
each lump-sum service charge. For example, if five different companies provide
lump-sum billings for services rendered during a turnaround, we would look at
each billing, separately, to determine if repairs (and/or other taxable
services) were 5% or less of that billing.

Finally, the question as to what constituted maintenance was addressed. Unlike
personal property where the distinction between repair, restoration, and
maintenance labor is unimportant because all are taxed, the distinction in real
property becomes critical. Repair and restoration could have been defined so
broadly that it would have been unlikely that much, if any labor, would qualify
as maintenance. However, to do so would have been contrary to the apparent
intent of the Legislature.

Therefore, our office adopted a definition of maintenance that was tied to
operating and functioning improvements to real property. The definition of
maintenance of real property reads as follows:

All scheduled periodic work on operational and functioning improvements to real
property necessary to sustain or support safe, efficient, continuous operations
or to keep in good working order by preventing the decline, failure, lapse, or
deterioration of the improvement. Rule 3.357(a)(3).

It was contemplated that in a plant that was operating up to the point it was
closed down for maintenance, only janitorial services, activities to remodel or
modify real property improvements or activities to repair real property
improvements that were partially or totally non-functional, would be treated as
taxable services. All other activities would be considered maintenance. For
example, the replacement of the belts on a machine that was running at the time
of shut down would be considered maintenance under the definition, even though
the belts would undoubtedly have some wear on them. Fixing a nonfunctional
pump, however, would be a taxable repair of the pump.

I hope this alleviates your concerns. Should you have any further questions,
please feel free to call me.

Sincerely,

JOHN SHARP
Comptroller of Public Accounts