Is labor to build and attach a metering station to an existing pipeline taxable as remodeling, or exempt as new construction?

Plain-English summary

A taxpayer in the pipeline business asked the Comptroller about the sales tax treatment of labor charges to build and attach a metering station to an existing pipeline. A metering station in this letter is made up of pipe, meters, valves, a storage tank, a separator, a flow computer, a pressure tester, a gas sampler, a small building, and a fence.

The Comptroller answered two related questions:

1. Is the labor to construct the meter station taxable? Yes. The metering station is a modification of the pipeline (real property) — it upgrades the pipeline by adding the ability to meter, sample, and test the gas flowing through it. Labor to remodel nonresidential real property is taxable. However, if the contract separately states the charges for installing the fence or preparing the foundation for the building, those specific labor charges are not taxable, because the fence and building are not attached to and are not part of the pipeline. The Comptroller also pointed to Rule 3.357(b)(3): a contract that mixes remodeling labor and new-construction labor is entirely taxable if the labor isn't separately stated and more than 5% of it is remodeling labor. In this taxpayer's case, the job-costing breakdown submitted did not separately state the equipment-installation charges, so that contract came out taxable.

2. Is building a metering station "new construction" (potentially exempt) or "remodeling" (taxable), given that it ties into an existing pipeline? The Comptroller confirmed it is remodeling, not new construction, because the pipeline it connects to already exists. The taxpayer had been treating hot-tap and meter-run labor as taxable in prior audits for the same reason, and the Comptroller agreed that was correct. The letter also noted that how easily a structure can later be removed and reused elsewhere is not what determines whether work is new construction versus remodeling — that ease-of-removal question is more relevant to a separate issue of whether something counts as real property (a fixture) or tangible personal property.

What this means for you

Pipeline and oil-and-gas contractors

If you're adding equipment (meters, valves, sampling or testing equipment, etc.) onto a pipeline that already exists, expect the labor to install that equipment to be taxed as real property remodeling — even if the new equipment is housed in its own small building or behind its own fence. The way to reduce taxable labor is to make sure your contract separately states which labor is for truly unattached items (like a fence or a building foundation not tied into the pipeline) versus labor attached to the pipeline itself.

Anyone drafting construction/service contracts with mixed labor

This letter is a reminder that under Rule 3.357(b)(3), lumping remodeling labor together with new-construction labor in one undifferentiated price can make the whole job taxable if remodeling is more than 5% of it. Itemizing labor by task on your invoices and job-costing sheets can matter directly to your tax bill.

Accountants and tax professionals

The key distinction the Comptroller draws is: work performed on/attached to an existing structure is remodeling (taxable labor); genuinely new, freestanding structures not tied into the existing structure are treated separately. Whether a piece of equipment could easily be unbolted and moved elsewhere is not the test for new construction versus remodeling — it may bear on the different question of real property versus tangible personal property.

Common questions

Q: Is labor to build a metering station on an existing pipeline taxable?
A: Yes. The Comptroller ruled it is taxable labor to remodel nonresidential real property, because the metering station is a modification/upgrade of the pipeline it's attached to.

Q: Is any part of that work exempt?
A: Only if separately stated — labor to install the fence around the station or to prepare the foundation for its building is not taxable, since those items are not attached to and are not part of the pipeline.

Q: Does it matter that the equipment could be removed and reused at another site?
A: No. The Comptroller said the relative ease of removing a structure does not control whether a job is new construction or remodeling of an existing structure — it may instead help decide whether something is real property or tangible personal property.

Q: What happens if a contract doesn't separately state remodeling versus new-construction labor?
A: Under Rule 3.357(b)(3), if the labor charges aren't separately stated and more than 5% of the work is remodeling labor, the entire contract's labor becomes taxable.

Q: Can I rely on this letter for my own pipeline project?
A: Not directly. This is a redacted letter addressed to one taxpayer based on the facts they described; the Comptroller says the opinion is based on the facts presented and may change if the facts differ. Use it as an illustration of the Comptroller's reasoning, not a guarantee for your own situation.

Citations and references

Rules cited:

• 34 Tex. Admin. Code Rule 3.357(b)(3) (contracts mixing remodeling and new-construction labor; taxable if not separately stated and remodeling exceeds 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/9304L1234F11

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9304L1234F11

Original ruling text

April 19, 1993

Dear ****:

Thank you for your letter of March 23, 1993, concerning the taxability of labor
charges in connection with the construction of a pipeline metering station.

A metering station is built and attached to an existing pipeline. The station
consists of pipe, meters, valves, storage tank, separator, flow computer,
pressure tester, gas sampler, 6' by 8' building, and fence. Your questions are
restated below with responses:

1. Would the labor costs in constructing a meter station be taxable?

Response. The meter station constitutes a modification of real property, i.e.,
the pipeline, in that it represents an upgrading of the pipeline by allowing
metering, sampling, testing, etc.. Labor to remodel nonresidential real
property is taxable. Separately stated charges to install the fence or prepare
the foundation for the building would not be taxable as these structures are
not attached to and are not part of the pipeline. Enclosed Rule 3.357 (b)(3)
states that a contract containing both remodeling labor and new construction
labor is taxable when the labor charges are not separately stated and include
more then 5% remodeling labor. The job costing breakdown provided with your
letter did not separately state charges to install various pieces of equipment.

2. Would the construction of a metering station be considered new construction
   or would it be repairs and remodeling since, the station ties into a existing
   pipeline? It has been our understanding through previous sales tax audits that
   a hot tap and meter run costs (material and labor) are taxable for the
   following reasons:

1) The pipeline that the meter is being attached to is already in existence and
therefore the meter run is considered an improvement and not new construction
which makes labor costs taxable.

2) Meter runs can be removed with relative ease and the meters used at other
sites.

Response. As stated in Response 1, the meter station is considered remodeling
of the pipeline and not new construction. You are correct in paying taxes on
labor to install the meter runs in your example. The relative difficulty found
in removing a structure is not controlling in determining whether a job is
considered new construction or remodeling of an existing structure. It may
assist in determining whether a structure is an improvement to realty or
tangible personal property.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division

NOTE: Previous Accession Number 9304104L