Does the Texas exemption for services performed on certain exempted tangible personal property (Tex. Tax Code Sec. 151.3111) apply once that property becomes a fixture or improvement to real property, such as a steam boiler installed in an electric generating plant?

Plain-English summary

The Texas Comptroller's Tax Administration Division responded to a taxpayer who had written earlier that year asking whether the exemption in Tex. Tax Code Ann. Sec. 151.3111 — for services performed on certain exempted tangible personal property — applies to tangible personal property that has become a fixture or improvement to real property. The taxpayer's example was a steam boiler in an electric generating plant, purchased on or after January 1, 1995.

The Comptroller concluded that the exemption does not apply to real property. The taxpayer had argued that Sec. 151.3111 assumes the property is being "sold" at the time the taxable service is performed, and that because the boiler couldn't be sold without detaching it from the realty, it should be treated as tangible personal property (and thus exempt) for purposes of the statute. The Comptroller rejected this as circular reasoning that only works if you first assume the provision applies to real property — and since this is a tax exemption, it "must be narrowly construed."

Instead, the Comptroller explained that Sec. 151.3111 doesn't assume a sale is happening at all: it exempts a taxable service performed on tangible personal property, but only if an exemption would apply to the sale of that tangible personal property if it were being sold at the time it is serviced, and only where the exemption is based on the nature of the property, its use, or a combination of the two. The letter also noted there's no general prohibition on selling property (like a boiler) without detaching it from realty — condominiums, for example, are sold without being detached from realty.

The Comptroller further reasoned that when Sec. 151.3111 was enacted, only services on tangible personal property were taxed — not real property repair, remodeling, or restoration — so there was no need for the exemption to reach services that weren't yet taxable. The subsequent enactment of Sec. 151.0101(a)(13), which made real property repair and remodeling a taxable service, would have been unnecessary if Sec. 151.3111 already covered tangible personal property that had become part of realty. The letter also pointed to a limited exclusion the legislature had just enacted for refinery and chemical plant production units purchased on or after January 1, 1995 — noting that this narrow exclusion would have been needless if the legislature already believed such work was exempt under Sec. 151.3111.

What this means for you

Owners and operators of industrial facilities (plants, refineries, and similar real property)

If you install tangible personal property — like a boiler, production unit, or similar equipment — into your facility such that it becomes a fixture or improvement to the real property, don't assume that an exemption which applied to the property (or to services on it) as tangible personal property continues to apply once it's incorporated into realty. According to this letter, the Sec. 151.3111 exemption for services on certain exempted property does not extend to real property.

Businesses relying on Sec. 151.3111 for maintenance, repair, or remodeling work

The exemption only covers a taxable service on tangible personal property where the property itself would be exempt if sold at the time it's serviced, based on its nature, use, or both. Once that property is part of realty, this letter treats it as outside the exemption's scope — real property repair and remodeling is instead addressed separately, including as a taxable service under Sec. 151.0101(a)(13).

Accountants and tax professionals advising on real property vs. TPP classification

This letter is useful for understanding the Comptroller's narrow-construction approach to Sec. 151.3111: it rejected an argument that the statute implicitly extends to realty, reasoned from the later enactment of Sec. 151.0101(a)(13) and a limited refinery/chemical-plant exclusion, and emphasized that exemptions are construed narrowly against the taxpayer.

Common questions

Q: Does the Sec. 151.3111 exemption for services on certain exempted property extend to tangible personal property that becomes part of real property?
A: No. This letter states plainly that the exemption "does not apply to real property."

Q: What was the example discussed in the letter?
A: A steam boiler in an electric generating plant, purchased on or after January 1, 1995, that becomes a fixture or improvement to the realty once installed.

Q: Why did the Comptroller reject the taxpayer's argument that the boiler could be treated as tangible personal property because it could be detached and sold?
A: The Comptroller called this circular reasoning — it only works if you first assume the statute applies to real property. The Comptroller also noted there's no general bar on selling property without detaching it from realty (citing condominiums as an example), so detachability doesn't determine the outcome.

Q: Why does the enactment of Sec. 151.0101(a)(13) matter to this conclusion?
A: The letter reasons that if Sec. 151.3111 already exempted services on tangible personal property that had become realty, it would have been unnecessary for the legislature to later make real property repair and remodeling a taxable service under Sec. 151.0101(a)(13).

Q: Can another taxpayer rely on this letter?
A: The letter states the opinion "is based on the facts presented" and that "[i]f there are any additional or different facts, the opinion may change." STAR letters generally may be relied on only by the taxpayer to whom they were issued.

Citations and references

Statutes and rules:

• Tex. Tax Code Ann. Sec. 151.3111 (exemption for services on certain exempted property)
• Tex. Tax Code Ann. Sec. 151.0101(a)(13) (real property repair and remodeling as 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/9509869L

Original ruling text

September 25, 1995

Dear *****:

Early this year you wrote Joe Galvan regarding the applicability of Tex. Tax
Code Ann. Sec. 151.3111 to tangible personal property that has become a fixture
or improvement to realty. Mr. Galvan asked me to reply to your letter.

After considering how the provision has been applied in the past and in light
of recent legislation, we would have to say that it does not apply to real
property. You provide an example of a steam boiler in an electric generating
plant that is purchased on or after January 1, 1995.

You theorize that to determine whether a taxable service is exempt, Sec.
151.3111 assumes that the property is being sold at the time the taxable
service is performed. You also conclude that the electric generating company
in your example could not sell the boiler without detaching it from the realty.
Therefore, detached from the realty it would be tangible personal property and
exempt. This appears to be a circular argument and the theory works only if
one presupposes that the provision applies to real property. We would have to
reach to extend the exemption by implication. Because this is an exemption, it
must be narrowly construed.

The statute does not assume that the property is being sold. The exemption
actually applies to a service that is performed on tangible personal property,
provided that an exemption would apply to the sale of the tangible personal
property if it were being sold at the time it is serviced. In addition, the
exemption has to be based on the nature of the tangible personal property, its
use or a combination of its nature and use. Also we know of no prohibition to
selling the boiler without detaching it from the realty, condos (for example)
are sold without being detached from the realty.

When the provision was enacted, only services on tangible personal property
were taxed. Neither the sale of realty nor services to repair, remodel or
restore real property were taxed so that there was no need to extend an
exemption to services not subject to tax.

Also, if the legislature did in fact intend to have the provision apply to
tangible personal property that was incorporated into realty, then it would
have been unnecessary to later enact Sec. 151.0101 (a)(13), real property
repair and remodeling, as a taxable service. If Sec. 151.3111 applied to
taxable services performed on tangible personal property incorporated into
realty, then services to such property would have been taxable even after the
property became realty unless it was exempted when purchased as tangible
personal property.

If, as you say, the legislature did not wish to distinguish between property
that does or does not become incorporated into realty, then all maintenance to
real property is taxable because the real property was tangible personal
property before it became realty. That is because maintenance to tangible
personal property is taxable unless some exemption applies at the time it is
purchased. Also, it would not matter whether the real property is residential
or non-residential. As you know, maintenance is not included as a taxable
service under Sec. 151.0101 (a)(13).

Finally the legislature, during its most recent session, provided a limited
exclusion from Sec. 151.0101 (a)(13) for the type of property you are inquiring
about. Refinery and chemical plant production units purchased on or after
January 1, 1995, qualify for exemption when purchased as tangible personal
property. The production units become incorporated into realty. The recent
exclusion from the tax when work increases the production capacity would have
been needless if the legislature had intended to exempt that work under Sec.
151.0101 (a)(13).

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. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Tom Soto
Tax Administration Division