When a contractor installs a polyurethane pipe liner in a brand-new pipeline being laid alongside an existing one, does it charge sales tax on materials only, or on materials and labor both?

Plain-English summary

CORPORATION A repairs old pipelines using a patented process: a high-density polyurethane liner that fits tightly inside the "host pipe" to stop leaks. The same liner can also be applied to new pipe to prevent future corrosion. A client, instead of having its existing pipeline repaired with the liner, decided to lay a brand-new pipeline (with the liner already applied) right next to the old one. The contractor asked whether it should charge sales tax on materials only, or on both materials and labor.

The Comptroller's answer: laying the new line next to the old one is new construction of a pipeline, not repair or remodeling of the existing one. But the tax treatment still turns on when the liner is applied relative to the pipe becoming realty:

• If the liner is applied to the new pipe after the pipe is attached to realty, the contractor is performing new construction of real property under Rule 3.291. New-construction labor is not taxable, but the contractor must collect sales tax on the separately stated charge for materials.
• If the liner is applied to the pipe before it is attached to realty, the contractor is instead remodeling tangible personal property (the pipe, while still unattached, is TPP) under Rule 3.292. In that case sales tax is due on the total charge — materials and labor both.

What this means for you

Pipeline contractors and pipe-lining businesses

The taxability of your liner-installation charges depends on the sequence of your work, not just on what the client would otherwise have had done (repair vs. replacement). Track and document whether the pipe is already attached to realty at the moment you apply the liner:

• Liner applied after the pipe is in the ground/attached to realty: new construction — tax materials only, not labor.
• Liner applied before the pipe is attached to realty: remodeling of TPP — tax the whole invoice, materials and labor.

Property owners and pipeline operators

If you're choosing between repairing an existing pipeline in place versus laying an entirely new line next to it, be aware the sales tax treatment of the contractor's charges can differ significantly between the two approaches, and further depends on the contractor's installation sequence.

Common questions

Q: Is laying a new pipeline next to an old one considered "repair" of the old pipeline?
A: No. The Comptroller treated this as new construction of a pipeline, separate from repairing or remodeling the existing line.

Q: Do I charge tax on labor when installing a liner in a new pipeline?
A: Only if the liner is applied before the pipe is attached to realty (making it remodeling of tangible personal property, taxable on materials and labor). If the liner is applied after the pipe is attached to realty, labor for that new construction is not taxable — only the separately stated materials charge is.

Q: What rule governs new construction of real property for contractors?
A: Rule 3.291.

Q: What rule governs repair and remodeling of tangible personal property?
A: Rule 3.292.

Q: Can I rely on this letter for my own pipeline installation business?
A: No. This opinion is based on the facts submitted to the Comptroller, and other facts, though similar, may yield different results.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.291 (contractors and new construction of real property)
• 34 Tex. Admin. Code Rule 3.292 (repair and remodeling services to tangible personal property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9602L1402B13

Original ruling text

February 29, 1996

Dear ****:

Thank you for your letter concerning laying a new pipeline next to an old
pipeline.

Situation: CORPORATION A is in the business of repairing old pipelines with
a patented process using high density polyurethane liner that fits tightly
inside the host pipe which prevents leaks. This process can also be used on
new pipelines to prevent corrosion in the future.

You are installing your system in your clients new pipeline on their property.
The client has had this property for a number of years and instead of fixing a
pipeline they currently have with your liner, they are laying a new line with
your liner next to the old one. As a contractor, do we charge sales tax for
material only or for material and labor?

Response: This would be the construction of a new pipeline rather than the
repair or remodeling of an existing pipeline. However, the taxability depends
on whether you are applying the liner to a pipeline that is realty or to pipe
that is tangible personal property. If you apply the liner to the new pipeline
after the pipe is attached to realty, then you are a contractor and your new
construction labor is not taxable. You will be required to collect sales tax
on the separately stated charge for materials. See enclosed Rule 3.291
regarding the new construction of real property.

If you apply the liner to pipe before it is attached to realty, then the labor
is taxable because you are remodeling tangible personal property. Collect
sales tax on the total charges including materials and labor. See enclosed
Rule 3.292 on repair and remodeling services to tangible personal property.

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 Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9602096L