Is a 'lane closure' (barricade) service provided to a highway contractor a taxable service, or is it treated as equipment rental for Texas sales tax purposes?

Subject

Lane Closures / Barricade Services Provided To Contractors — Treated As Rental Of Equipment, Not A Taxable Service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1271F10

Plain-English Summary

A taxpayer asked the Comptroller how to tax "lane closures" performed under a Texas Department of Transportation (TxDOT) highway resurfacing contract. A lane closure involves setting up barricades to shut down a lane of a highway while resurfacing work happens.

The Comptroller's answer: the "lane closure" service itself is not a taxable service. Instead, the Comptroller treats the total charge for the lane closure (barricade) work as a rental of the barricade equipment to the contractor. That means it is taxed the same way any other equipment rental would be taxed — even though the equipment ends up being used on a contract to improve real property (the highway) for an exempt organization like TxDOT.

The letter then explains why the contractor can't simply buy or rent the barricades tax-free just because the ultimate customer is an exempt government entity. HB 85, effective October 1, 1993, gave contractors performing improve-real-property contracts for organizations exempt under Tax Code Sec. 151.309 or Sec. 151.310 (which includes TxDOT) two specific tax-free purchase options:

1. Tangible personal property that gets incorporated into the real property can be purchased tax-free.
2. Tangible personal property (other than machinery, equipment, and their accessories and repair/replacement parts) can be purchased tax-free if it is necessary and essential to the contract and is completely consumed at the job site.

Barricade equipment doesn't fit either category: it isn't incorporated into the highway, and — critically — the letter states that tangible personal property that is rented or leased is not considered "completely consumed at the job site." So the HB 85 consumable-materials exemption doesn't reach rented equipment like barricades, and the rental charge remains taxable.

What This Means For You

If you provide lane closures, barricades, or similar traffic-control equipment to highway contractors: Charge and collect sales tax on your total charge as you would for an equipment rental — don't treat the charge as an exempt service, even when the job is ultimately for TxDOT or another exempt government entity.

If you are the contractor renting barricade/lane-closure equipment for a TxDOT (or similarly exempt) job: The HB 85 exemptions for contracts to improve real property for exempt organizations only cover (a) property incorporated into the real property, or (b) other property that is necessary, essential, and completely consumed at the job site. Rented or leased equipment does not qualify as "completely consumed," so you cannot buy or rent barricade services tax-free under HB 85 just because your customer is exempt.

Timeline note: HB 85 took effect October 1, 1993, roughly two months before this letter (dated December 2, 1993). The letter applies the then-new HB 85 framework to explain why it does not exempt the barricade rental — the exemption exists for contracts with exempt organizations generally, but rented equipment falls outside its "completely consumed" requirement.

Q&A

Q: Is a "lane closure" or barricade service a taxable service in Texas?
A: No. This letter says it is not a taxable service. Instead, the total charge for it is treated as a rental of equipment and taxed the way other equipment rentals are taxed.

Q: Does it matter that the barricades are used on a TxDOT contract, and TxDOT is a tax-exempt organization?
A: No. The letter states the rental charge is taxable "even if used in performance of a contract to improve real property for an exempt organization" — the exempt status of the ultimate customer doesn't make the rental charge exempt.

Q: Could the contractor use the HB 85 exemption to buy the barricade rental tax-free?
A: No, according to this letter. HB 85 lets a contractor buy tax-free (1) property incorporated into the real property, or (2) other property (not machinery/equipment) that is necessary, essential, and completely consumed at the job site. Barricades are rented equipment, and the letter specifically states rented or leased property is not considered "completely consumed at the job site," so neither HB 85 exemption applies.

Original ruling text

December 2, 1993

Dear *:

Thank you for your letter concerning the taxability of "lane closures"
for a Texas Department of Transportation highway resurfacing contract.

The "lane closure" service that you described is not a taxable service.
Instead, the total charges for the "lane closure" services (barricade services)
are treated as rentals to the contractor and are subject to sales tax like
other rentals of equipment even if used in performance of a contract to improve
real property for an exempt organization.

HB 85, which was effective October 1, 1993, does provide some exemptions
for contractors who are performing contracts to improve the real property for
exempt organizations such as the Texas Department of Transportation. A
contractor may purchase tangible personal property that is incorporated into
real property tax-free if used in performance of a contract for an organization
exempted under Sec. 151.309 or Sec. 151.310 of the Texas TaxCode. In addition,
a contractor may purchase tangible personal property, other than machinery or
equipment and its accessories and repair and replacement parts, tax-free if it
is necessary and essential for the performance of the contract with the exempt
organization and completely consumed at the job site. Tangible personal
property that is rented or leased is not considered completely consumed at
the job site.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line
is 512/475-0030. You may also write to Tax Administration, Comptroller of
Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9311091L.3 and/or 9311091L