A company runs hydrostatic tests on underground storage tanks (USTs) and drills monitor wells/test holes to check for soil contamination, sometimes breaking concrete or restoring it afterward as part of the job. Which of these charges are taxable real property/repair services, and which are nontaxable testing?

Plain-English summary

A business asked the Comptroller how sales tax applies to a range of testing, drilling, and monitor-well services it performs, several of which can also lead to breaking or restoring concrete. The Comptroller responded to seven separate example scenarios:

Example #1 — Hydrostatic tank leak testing (standalone): Hydrostatic test equipment is connected to an underground storage tank (UST) and used, with calculations, to determine whether the tank is leaking, billed as a lump-sum charge per tank tested. A charge for running this test alone is not taxable.

Example #2 — Breaking concrete to investigate a leak: If the test shows a leak, the company breaks concrete over the suspected area to identify the problem, without repairing it or restoring the concrete, and separately bills cost-plus-10%-markup for rented barricades. A separately-stated testing charge is still not taxable, but breaking the concrete is taxable because it's the first stage of a repair — tax is owed on the rented equipment at the time of rental, and the charge to the customer for that work (including the barricade rental) is taxable because the job itself is taxable.

Example #3 — Repouring broken concrete: In the rare cases where the company repairs the broken concrete, it charges for the concrete (already tax-paid), hourly labor to pour it, and marked-up rental of an air compressor and barricades. The total charge to restore the broken concrete is taxable. The company may issue a resale certificate to buy the incorporated concrete tax-free (and take credit on its tax report if tax was already paid on it), but owes tax on all other materials bought, leased, or rented to do the restoration work — and the charges passed to the customer for the barricades and compressor are taxable too.

Example #4 — Installing a permanent monitor well: A hole is drilled through existing concrete and earth, soil samples are collected, and a PVC pipe monitoring well (sealed with a cap, manhole cover, and a 2x2 concrete slab) is installed permanently, with mileage, per-diem, and per-foot charges. Installing a monitor well is new construction. Under a lump-sum contract, all materials and equipment are taxable at the time of purchase and the labor is not taxable; under a separated contract, tax is collected from the customer only on the materials actually incorporated into the job, and the labor is still not taxable. This is governed by the contractor rules in Rule 3.291.

Example #5 — Same well installation without concrete to drill through: Same facts as Example #4 but there's no concrete to drill through first. Same answer as Example #4.

Example #6 — Contamination test hole, not made permanent: A test hole is drilled through earth or concrete to check for soil contamination, then filled with the drilled contents plus sand and bentonite (tax already paid on those materials) and capped with a 6-inch concrete plug, billed by total footage drilled. This is treated the same as Example #1 (the drilling/testing itself is not taxable), except that capping the hole is taxable restoration. If the capping is billed separately, tax must be collected on that separate charge; if it's combined with nontaxable service charges in one lump sum, the whole charge is taxable unless the taxable (hole-capping) portion is 5% or less of the total lump-sum charge.

Example #7 — Removing a monitor well: A monitor well is removed, the PVC pipe pulled out, the hole filled with a bentonite/concrete mix, and a 2x2 concrete pad poured over it, billed lump-sum. Removing the monitor well is demolition of an improvement to realty — a nontaxable service (though tax is owed on all materials used to perform it). But capping the hole and pouring the concrete pad are taxable restoration services. If billed as one lump sum and the taxable-restoration portion is more than 5% of the total charge, the entire charge becomes taxable — the letter specifically recommends billing the restoration work separately to avoid audit problems.

What this means for you

Environmental testing / UST leak-detection companies

A pure test — hydrostatic leak testing of a tank, or drilling a test hole solely to sample for contamination — is not taxable by itself, even when billed as a lump sum for the test. The moment the job crosses into breaking concrete, repouring/restoring it, or permanently capping a hole, that portion becomes a taxable real property service.

Monitor well installation and removal contractors

Installing a permanent monitor well is treated as new construction under the general contractor rules (Rule 3.291): tax on materials under a lump-sum contract, or tax on incorporated materials only under a separated contract, with labor nontaxable either way. Removing a monitor well is a nontaxable demolition service, but capping the resulting hole and restoring the surface (concrete pad, etc.) are taxable restoration charges layered on top of that nontaxable demolition.

Anyone billing testing and repair/restoration work together on one invoice

Watch the 5% rule: if a lump-sum invoice combines a nontaxable service (testing, drilling, demolition) with a taxable one (concrete restoration, hole capping), the entire lump-sum charge becomes taxable unless the taxable portion is 5% or less of the total. Billing the taxable restoration work as a separate line item avoids pulling the whole invoice into taxability.

Equipment renters and markup billers

Rental equipment used on a taxable job (barricades, air compressors) is itself taxable at the time of rental, and marked-up rental charges passed through to the customer are taxable whenever the underlying job is taxable — even if the testing/drilling portion of that same job is not.

Common questions

Q: Is a standalone hydrostatic tank leak test taxable?
A: No. A lump-sum charge for running the test alone is not taxable (Example #1).

Q: We break concrete to investigate a suspected leak but don't repair it — is that taxable?
A: Yes. Breaking the concrete is taxable because it's the first stage of a repair, even though the separately-stated testing charge itself remains nontaxable (Example #2).

Q: If we do repour the broken concrete, what's taxable and what isn't?
A: The total charge to the customer to restore the concrete is taxable. You can buy the incorporated concrete tax-free with a resale certificate (or take a credit if you already paid tax on it), but you owe tax on all other materials, equipment, and rentals (like barricades and compressors) used for the restoration, and those rental charges passed to the customer are also taxable (Example #3).

Q: Is installing a permanent monitor well taxable?
A: It's treated as new construction under Rule 3.291. Under a lump-sum contract, materials/equipment are taxed at purchase and labor is not taxed; under a separated contract, tax applies only to the materials actually incorporated into the job, and labor is still not taxed (Examples #4 and #5).

Q: We drill a test hole for contamination sampling and then cap it — is any of that taxable?
A: The drilling/testing itself is not taxable, same as a standalone test, but capping the hole afterward is taxable restoration. If billed separately, tax applies just to the capping charge; if combined into one lump sum, the whole charge is taxable unless the capping portion is 5% or less of the total (Example #6).

Q: Is removing a monitor well taxable?
A: No — removing a monitor well is a nontaxable demolition of an improvement to realty (though you owe tax on materials used to do the removal). But capping the hole and pouring a concrete pad afterward are taxable restoration services layered onto that job (Example #7).

Q: Can I rely on these answers for my own testing/drilling business?
A: No. This opinion is based on the facts presented, and different though similar facts might lead to different answers; it can be relied on only by the taxpayer to whom it was issued.

Citations and references

• 34 Tex. Admin. Code Rule 3.291 (contractors) — cited regarding the tax treatment of monitor well installation as new construction (Examples #4 and #5)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1184A03

Original ruling text

July 3, 1992

Dear ***:

This is in response to your letter dated June 5, 1992 regarding sales tax as it
applies to the services performed by ***.

The description of services provided by your business is restated below with my
response following each situation.

Example #1

Hydrostatic test equipment is connected to a UST and by using various
mathematical calculations it is determined whether or not the UST is leaking.
Our customer is billed a lump-sum price per tank tested. Response: The charge
to your customer for running a test (alone) is not taxable.

Example #2

If the test indicates there is a leak, we break concrete over the suspected
area and identify the problem. In most cases, we do not repair the problem or
restore concrete. At best, we provide barricades which we rent and bill our
customer cost plus a 10% markup. Response: A separately-stated charge for
running the test is not taxable. Breaking the concrete is taxable because it is
the first stage of repair. You owe tax on the rented equipment at the time of
rental; the charge to your customer is taxable, too, because the job itself is
taxable.

Example #3

In those rare instances where we do repour broken concrete we would charge for
the concrete used (which we already paid tax on), hourly labor charge for
pouring concrete, and barricade rental with mark-up. We rent the air compressor
and barricades and mark them up 10% Response: The total charge to the customer
to restore the broken concrete is taxable. You may issue a resale certificate
to buy the incorporated materials (including the concrete) tax free. (If you
pay tax on incorporated materials, you may take credit on your tax report.) You
owe tax on all other materials bought, leased, or rented to perform the
restoration work, including the barricades and compressor.

(Remember that the charges to the customer for the barricades and compressor
are also taxable.)

Example #4

A hole is drilled through existing concrete approximately 4 to 12 inches in
diameter extending through earth to a depth of 10 to 50 feet. While drilling
the hole, samples are collected from the dirt. After sufficient samples are
obtained, a piece of PVC pipe is placed in the hole. The pipe is sealed with a
cap and manhole cover. A 2x2 concrete slab is poured around the manhole. This
monitor well remains permanent for an undetermined length of time. Tax was paid
on all materials used. There is a mileage of $1.50 per mile and $135.00 daily
per diem when needed. An additional $25.00 per foot is charged for each foot
over 20 feet a well extends. Response: The installation of a monitor well is
considered new construction. All supplies, materials and equipment are taxable
at the time of purchase under the terms of a lump-sum contract; the labor is
not taxable. Under the terms of a separated contract, tax is collected from the
customer on the charge for materials that are actually incorporated into the
job; the labor is not taxable. See Rule 3.291 on contractors.

Example #5

Same as example #4 above except there is no concrete to drill through.
Response: Same as #4.

Example #6

A test hole is drilled through earth or concrete to determine if the soil is
contaminated. Upon completion, the hole is filled with the contents and sand
and bentonite. Tax was paid on the sand and bentonite at the time of purchase.
The hole is capped with a 6" concrete plug. The customer is billed by total
footage drilled. Response: Same answer as #1, except that capping the hole is
taxable restoration. If you bill separately to cap the hole, you must collect
tax on the separate charge. If the charge is combined with charges for
nontaxable services, the total charge is taxable unless the portion
attributable to the hole capping is 5% or less of the total lump-sum charge.

Example #7

A monitor well is removed and the hole is plugged. After drilling through the
concrete, the PVC pipe is pulled out and the hole is filled with a mixture of
bentonite and concrete. The hole is then covered with a 2x2 concrete pad. The
job is billed lump-sum. Response: Removing a monitor well is demolition of an
improvement to realty. This is a nontaxable service, and you owe tax on all
materials used to perform the service. Capping the hole and putting down the
concrete pad are taxable restoration services. If the job is billed lump-sum,
and the charge attributable to taxable services constitute more than 5% of the
lump-sum charge, the total charge is taxable. (I recommend charging separately
for restoration, to avoid any problems in an audit.)

This opinion is based on the facts presented. Different facts, though similar,
might lead to different answers. If you have any questions, feel free to write
or call me at 1-800-531-5441, extension 5-0330, or 512/463-4600.

Sincerely,

Bettie Peterson
Tax Administration Division