During a scheduled refinery turnaround, is replacing machinery and equipment that was still working taxable 'restoration,' or nontaxable 'maintenance'?

Plain-English summary

An oil and gas refinery periodically schedules a planned "turnaround" — a shutdown period used to provide preventative maintenance to its machinery and equipment. During a turnaround, the refinery performs many activities while it is inoperative, including inspection, maintenance, repair, remodeling, and restoration, to prevent the decline or failure of processing machinery and equipment. The taxpayer asked the Comptroller whether replacing an item of machinery or equipment during a scheduled turnaround — where that item was still operative and functioning at the time it was replaced — counts as taxable "restoration" or nontaxable "preventative maintenance" under the rules.

The Comptroller responded that, during a turnaround, activity meeting the definition of "restoration" in Rule 3.357 is instead treated as "maintenance." Specifically, a charge for replacing functioning and operable machinery or equipment during a scheduled, periodic refinery turnaround meets the definition of maintenance, provided the machinery or equipment is attached such that it is an improvement to realty. Because labor to maintain real property is not taxable, that replacement labor is nontaxable.

The letter quotes Rule 3.357's definition: for operational and functioning improvements to realty, "maintenance" means scheduled, periodic work necessary to sustain or support safe, efficient, continuous operations, or to prevent the decline, failure, lapse, or deterioration of the improvement. It further explains that "scheduled" means anticipated and designated to occur within a given time period or production level, and "periodic" means ongoing or continual, or at least occurring at intervals of time or production that are generally predictable.

The Comptroller emphasized that this treatment applies only during a turnaround: it is only during a turnaround that taxable restoration is treated as nontaxable maintenance. Any charges during the turnaround for repair and remodeling remain taxable. An editor's note attached to the letter references a later letter (200211552L) suggesting this point be clarified further: that charges for repair and restoration during a regularly scheduled shutdown or turnaround are taxable if those services are performed on items that were not functional prior to the shutdown or turnaround. The letter also references an earlier letter from Mr. Sharp (9204L1174D06), enclosed to help the taxpayer's client distinguish between maintenance and repairs, and notes that the opinion is based on the facts presented and may change if the facts differ.

What this means for you

Refineries and chemical plants running scheduled turnarounds

If you replace machinery or equipment that is still working (operative and functioning) during a scheduled, periodic turnaround, and that equipment is attached as an improvement to realty, the labor charge for that replacement can qualify as nontaxable maintenance rather than taxable restoration — but only because it happens during the turnaround itself. Outside of a turnaround, the same replacement work would not get this treatment.

Distinguishing maintenance from repair and remodeling during a turnaround

Even within a turnaround, not everything is nontaxable. The letter is clear that charges for repair and remodeling performed during the turnaround remain taxable. The dividing line described in the letter's editor's note is whether the item being worked on was functional before the shutdown began: work on items that were not functional prior to the shutdown or turnaround is treated as taxable repair or restoration, not maintenance.

Accountants and tax professionals documenting turnarounds

Because the taxable and nontaxable labor charges must be separately identifiable for sales and use tax purposes, and because the letter notes that turnaround-related restoration work "usually exceeds the five (5) percent rule," taxpayers should keep records that clearly show the turnaround was scheduled, that it was periodic, and which charges relate to maintaining still-functioning equipment as opposed to repairing or remodeling equipment that had already failed or was not functional going into the shutdown.

Common questions

Q: Does replacing working equipment during a turnaround always avoid sales tax?
A: Only under the specific facts described here: the replacement must occur during a scheduled, periodic turnaround, the equipment being replaced must have been operative and functioning at the time of replacement, and the equipment must be attached such that it is an improvement to realty.

Q: What happens to repair and remodeling charges incurred during the same turnaround?
A: They remain taxable. The letter states that any charges during the turnaround for repair and remodeling are taxable, even though replacement of still-functioning equipment during that same turnaround can qualify as nontaxable maintenance.

Q: What do "scheduled" and "periodic" mean for this purpose?
A: Per Rule 3.357 as quoted in the letter, "scheduled" means anticipated and designated to occur within a given time period or production level, and "periodic" means ongoing or continual, or at least occurring at intervals of time or production that are generally predictable.

Q: Does this maintenance treatment apply outside of a turnaround?
A: No. The letter states that it is only during a turnaround that taxable restoration is treated as nontaxable maintenance.

Citations and references

• 34 Tex. Admin. Code Rule 3.357 (referenced in the letter for the definitions of "restoration" and "maintenance," and quoted for the definitions of "scheduled" and "periodic")
• Letter 9204L1174D06 (referenced as an enclosed letter from Mr. Sharp distinguishing maintenance from repairs)
• Letter 200211552L (referenced in an editor's note as the source of a suggested clarification to this letter's turnaround/repair paragraph)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9502L1343B09

Original ruling text

February 10, 1995

Dear **:

Thank you for your letter of January 19, 1995. You asked whether

replacement of machinery and equipment during a scheduled turnaround at

an oil and gas refinery meets the definition of maintenance. I apologize

for the delay in responding to your question.

Scenario:

An oil and gas refinery periodically schedules a planned turnaround in

order to provide preventative maintenance to the machinery and

equipment. During the turnaround, there are many activities that are

performed while the refinery is inoperative to provide inspection,

maintenance, repair, remodeling or restoration in order to prevent

decline or failure of the processing machinery and equipment. The

taxable services associated with the repair, i.e. remodeling or

restoration during the turnaround, usually exceeds the five (5) percent

rule whereas the taxable labor and nontaxable labor charges must be

identifiable for sales and use tax purposes. There is no question that

the turnaround which is scheduled and supported by taxpayer records,

fits the definition of preventative maintenance.

Question:

If an item of machinery and equipment is replaced during a scheduled

turnaround and that item was both operative and functioning at the time

of replacement, is this activity (labor or services) considered taxable

restoration or preventative maintenance based on the definitions as

found in the rules?

If your answer to the above question is "yes," then please define the

terms lapsing, deterioration, and decline as described in the rules as

opposed to the attempt to prevent further failure, lapsing, decline or

deterioration which is part of the definition of preventative

maintenance.

Response: During a turnaround, activity that meets the definition of

"restoration" as defined in Rule 3.357 is treated as "maintenance." A

charge for replacement of functioning and operable machinery and

equipment during a scheduled periodic turnaround of the refinery meets

the definition of maintenance provided the machinery or equipment is

attached such that it is an improvement to realty. The charge for labor

to maintain real property is not taxable.

Maintenance of real property is defined in the enclosed Rule 3.357 as

follows:

For operational and functioning improvements to realty, maintenance

means scheduled, periodic work necessary to sustain or support safe,

efficient, continuous operations, or to prevent the decline, failure,

lapse, or deterioration of the improvement.

As it relates to maintenance, the term "scheduled" means anticipated and

designated to occur within a given time period or production level.

As it relates to maintenance, the term "periodic" means ongoing or

continual or at least occurring at intervals of time or production which

are generally predictable.

During a turnaround, and only during a turnaround, is taxable restoration

treated as nontaxable maintenance. Any charges during the turnaround for

repair and remodeling are taxable. [Editor's note: per 200211552L, it was suggested that

this paragraph be clarified to state "the charges for repair and restoration during a regularly, scheduled

shut down or turnaround are taxable if those services are performed on items that are not functional

prior to the shut down or turnaround.]

I have enclosed a copy of a letter from Mr. Sharp (9204L1174D06) to help your client

distinguish between maintenance and repairs.

This opinion is based on the facts presented. If there are any

additional or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct

line is 512/475-0037. You also may write to Tax Administration

Division, Comptroller of Public Accounts.

Sincerely,

Lindey Osborne

Tax Administration Division