Is the labor to install new equipment in a refinery or chemical plant taxable, and does an October 1995 capacity-expansion exclusion change the answer?

Subject

Refinery/Chemical Plant — Increased Or Expanded Capacity Improvement In Production Unit — New Construction Effective 10/1/95

Plain-English summary

This letter answers four related questions from a contractor who repairs, restores, maintains, and installs new tangible personal property at a refinery or chemical company. The refinery or chemical company keeps its own inventory of replacement parts on hand.

The Comptroller's answer turns on two separate legal changes, one for equipment purchases and one for real property improvements:

• Manufacturing exemption for equipment/machinery (starting 1995): If the new tangible personal property the contractor installs qualifies for the manufacturing exemption and was purchased in 1995, the labor to install it as part of a repair or remodel of that equipment is exempt under Sec. 151.3111 of the Tax Code -- but only if the equipment is tangible personal property, not an improvement to realty. In 1994, this exemption did not yet exist for manufacturing machinery or equipment, so the same repair/remodel labor was taxable that year (though a purchase in 1994 could get a 75% state tax rate reduction rather than a full exemption).
• Real property capacity-expansion exclusion (starting October 1, 1995): Labor to repair or remodel nonresidential improvements to realty is normally taxable. But effective October 1, 1995, an improvement to a processing unit in a petrochemical refinery or chemical plant that increases the processing unit's capacity is excluded from the definition of taxable real property repair or remodeling, per Rule 3.362. That exclusion did not exist in 1994.
• Plain third-party installation labor: Setting new tangible personal property in place (installation) is not, by itself, one of the taxable services (repair, restoration, remodeling, maintenance, or fabrication/assembly). So third-party installation labor that is genuinely nothing more than installation is not taxable -- unless it's billed by the seller of the item, in which case it becomes part of the item's taxable (or exempt) sales price along with the item itself.

The letter stresses that the answer depends heavily on whether the equipment being installed counts as tangible personal property or as an improvement to real property, and on the purchase/service year (1994 versus 1995 and later).

What this means for you

Contractors performing refinery or chemical plant installation work

Whether your installation labor is taxable depends on what you're installing and when. If you're installing new equipment that qualifies as exempt manufacturing machinery purchased in 1995, and the installation is part of repairing or remodeling that equipment (and the equipment is tangible personal property, not realty), the labor is exempt under Sec. 151.3111. If instead you're working on an improvement to realty -- like a processing unit -- the repair/remodel labor is normally taxable, unless it falls under the post-October-1995 capacity-expansion exclusion in Rule 3.362.

Refineries and chemical plants buying installation services

If you purchased the manufacturing machinery or equipment in 1994, before the manufacturing exemption existed, repair or remodel labor on it was taxable (though the purchase itself could qualify for a 75% state tax rate reduction). If you purchased in 1995, and the machinery/equipment is tangible personal property, related repair/remodel labor is exempt. If your project instead increases the capacity of a refinery or chemical plant processing unit and started on or after October 1, 1995, ask whether Rule 3.362's exclusion applies to the real property improvement labor.

Accountants and tax professionals

Track three separate variables for each installation labor charge: (1) is the property being worked on tangible personal property or an improvement to realty; (2) does the work qualify as repair, remodeling, restoration, maintenance, or fabrication/assembly (taxable categories) versus pure installation (not separately taxable unless billed by the seller); and (3) which year and, for realty improvements, whether the October 1, 1995 capacity-expansion exclusion under Rule 3.362 applies.

Common questions

Q: Is installation labor for new equipment that qualifies for the manufacturing exemption taxable?
A: It depends. If the equipment is tangible personal property (not an improvement to realty), was purchased in 1995, and the installation is part of a repair or remodel of that exempt equipment, the labor is exempt under Sec. 151.3111. If the equipment is an improvement to realty, Sec. 151.3111 does not apply to the service.

Q: Does it matter if the equipment was purchased in 1994 instead of 1995?
A: Yes. The Sec. 151.3111 labor exemption does not apply to repair or remodeling performed in 1994, because manufacturing machinery and equipment did not become exempt from sales tax until 1995.

Q: Is third-party installation labor taxable?
A: Generally no. The Tax Code taxes specific services -- repair, restoration, remodeling, or maintenance of tangible personal property, repair/restoration/remodeling of nonresidential realty improvements, and fabrication/assembly labor. Plain installation (setting an item in place) is not one of those taxed services, unless the installation charge is billed by the seller of the item, in which case it becomes part of the taxable (or exempt) sales price.

Q: What is the October 1, 1995 capacity-expansion exclusion?
A: Effective October 1, 1995, an improvement to a processing unit in a petrochemical refinery or chemical plant that provides increased capacity in the processing unit is excluded from the definition of taxable real property repair or remodeling, as explained in Rule 3.362. This exclusion did not exist in 1994.

Q: Could this answer change for different facts?
A: Yes. The letter states its opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Citations and references

• Tex. Tax Code Sec. 151.3111 (exemption for repair, remodeling, and maintenance labor on certain manufacturing machinery and equipment)
• 34 Tex. Admin. Code Rule 3.362 (repair, remodeling, restoration, and maintenance of certain property, including the capacity-expansion exclusion)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1432G05

Original ruling text

August 8, 1996

Dear *****:

Thank you for your letter concerning the taxability in the following
situations involving installation labor.

Situation: A contractor repairs, restores, and provides maintenance on real
property in a refinery or chemical company. The contractor also installs new
tangible personal property purchased by a refinery or chemical company. The
refinery or chemical company stores an inventory of all replacement parts.

Question 1: If the contractor installs new tangible
personal property that qualifies for the manufacturing exemption for the 1995
year, is the installation labor of the exempt equipment or machinery taxable?

Response: The installation labor can involve a variety
of services that are taxable or not taxable depending on the circumstances.
For example, installing new tangible personal property as part of the repair or
remodeling of qualifying manufacturing machinery or equipment that is not an
improvement to realty is a repair or remodeling service to tangible personal
property. If the service is performed in 1995, the labor to repair or remodel
exempt machinery or equipment is exempted by Sec. 151.3111 of the Tax Code. On
the other hand, if the exempt machinery or equipment that is repaired or
remodeled is an improvement to realty, Sec. 151.3111 does not apply to the
service.

The labor to repair or remodel nonresidential
improvements to realty is taxable. However, effective October 1, 1995, an
improvement to a processing unit in a petrochemical refinery or chemical plant
that provides increased capacity in the processing unit is excluded from the
definition of taxable real property repair or remodeling. I have enclosed Rule
3.362 that explains this exclusion.

Question 2: Is this installation of tangible personal
property considered third-party installation and not taxable?

Response: The Tax Code specifically taxes certain
services including the repair, restoration, remodeling, or maintenance of
tangible personal property and the repair, restoration, or remodeling of
nonresidential improvements to realty. In addition, the labor to fabricate or
assemble tangible personal property is taxed. Assuming that the third-party
installation labor is none of these services, then the charge to set in place
(install) tangible personal property is not taxable unless billed by a seller
of a taxable item. In that case, any installation labor billed by the seller
is part of the total sales price and is also exempt because the manufacturing
machinery and equipment is purchased in 1995.

Question 3: If the contractor installs new tangible
personal property that qualifies for the manufacturing exemption for the 1994
year, is the installation labor of the exempt equipment or machinery taxable?

Response: See the response to question 1. If the
machinery or equipment is tangible personal property, the exemption of services
in Sec. 151.3111 does not apply to repair or remodeling services performed to
qualifying manufacturing machinery or equipment during 1994 because
manufacturing machinery or equipment did not become exempt until 1995.

If the machinery or equipment is an improvement to
realty and the service is repair or remodeling, the exclusion for an
improvement to a processing unit in a petrochemical refinery or chemical plant
that provides increased capacity in the processing unit did not exist in 1994.

Question 4: Is this installation of tangible personal property considered
third-party installation and not taxable?

Response: See the response to question 2. Please remember that any installation
labor billed by the seller is part of the total sales price and that a purchase
in 1994 would result in a reduction of 75% of the 6 1/4% state sales tax rather
than an exemption.

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 9608606L