When a contractor repairs railroad track versus depots or parking areas for a railroad company, what parts of the job are taxable?

Subject

Railroad Company — Materials Used To Construct Or Repair Nonessential Structures (Depot)

Plain-English summary

A contractor was preparing a bid for a project on behalf of the A, B and C RAILWAY COMPANY (ABC), and asked the Comptroller how the work would be taxed. The project could involve pavement repair, crack repair, soil stabilization, or flexible base subgrade construction at "XYZ FACILITY," and could touch either parking areas or the railroad's track.

The Comptroller broke the answer into pieces, depending on what's actually being worked on:

• Parking facility repairs at XYZ: The total charge -- whether billed as one lump sum or as separate material and labor charges -- is taxable as the repair, restoration, or remodeling of nonresidential real property.
• Repair, restoration, or remodeling of track bed or essential railroad structures: Track materials are exempt as supplies essential to operate the train. But the labor to remodel, repair, or renovate existing track is taxable under Rule 3.357 (Repair and Remodeling of Real Property).
• Materials to construct or repair depots or other nonessential structures: These materials are taxable. The labor on them may be exempt as new construction labor under Rule 3.291, or taxable under Rule 3.357, depending on which rule applies to the specific work.

The letter also spells out how the exemption on track materials actually gets applied at the purchasing and billing stage:

• Under a lump-sum charge or contract to repair, remodel, or renovate existing track, the contractor can buy the track materials tax-free from its supplier by issuing a resale certificate. Tax is then collected from the railroad company on the total lump-sum charge.
• If the charge for track materials is separately stated from the labor charge, the contractor can instead accept an exemption certificate from the railroad company in lieu of tax on the track materials, and tax is collected only on the separately stated labor charge.

The Comptroller notes this opinion is based on the facts presented, and that other, similar facts could produce a different result.

What this means for you

Contractors bidding on railroad repair or construction work

Break your bid into its component parts before assuming a tax treatment. Parking-lot or nonessential-structure work (like depots) is taxed differently than track work. For track jobs, whether you use a resale certificate (lump-sum billing) or an exemption certificate (separately stated materials) depends entirely on how you structure your invoice to the railroad.

Railroad companies commissioning repair or construction projects

Expect to pay tax on the full lump-sum charge for track repair/remodeling contracts, or on just the separately stated labor charge if materials are billed separately and you provide an exemption certificate. Materials used to build or repair depots or other nonessential structures are taxable regardless of how the contract is structured.

Accountants and tax professionals advising railroad contractors

The key distinction is "essential railroad structures" (track bed, track materials) versus "nonessential structures" (depots and similar buildings), and separately, parking facilities. Track materials qualify for the essential-supplies exemption, but labor on existing track is taxable under Rule 3.357. New construction labor on nonessential structures may fall under the new-construction exemption in Rule 3.291 instead.

Common questions

Q: Is repairing a railroad's parking lot taxable?
A: Yes. The letter states that repair of parking facilities at the facility described is taxable as the repair, restoration, or remodeling of nonresidential real property, whether billed as a lump sum or with separated charges.

Q: Are track materials taxable?
A: No -- track materials are exempted as supplies essential to operate the train. However, the labor to remodel, repair, or renovate existing track is taxable under Rule 3.357.

Q: Are materials to build or repair a depot taxable?
A: Yes, the letter states materials to construct or repair depots or other nonessential structures are taxable. The labor on that work may be exempt as new construction labor under Rule 3.291, or taxable under Rule 3.357.

Q: How does a contractor buy track materials tax-free?
A: Under a lump-sum contract to repair, remodel, or renovate existing track, the contractor may issue a resale certificate to its supplier to buy the track materials tax free; tax is then collected from the railroad on the total lump-sum charge. If materials are billed separately from labor, the contractor may instead accept an exemption certificate from the railroad for the materials, and tax is collected only on the separately stated labor.

Q: Could this answer change under different facts?
A: Yes. The letter states the opinion is based on the facts presented, and that other facts, though similar, may provide a different result.

Citations and references

Rules:

• Rule 3.357 (Repair and Remodeling of Real Property) -- taxes labor to remodel, repair, or renovate existing track, and governs taxability of depot/nonessential-structure labor
• Rule 3.291 (new construction labor) -- may exempt labor to construct nonessential structures such as depots

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1438G14

Original ruling text

September 25, 1996

Dear **:

This is in response to your request for a ruling on
the taxability of a project that your company is proposing to bid on. The
project is on behalf of the A, B and C RAILWAY COMPANY (ABC) and involves
pavement repair, crack repair, soil stabilization or flexible base subgrade
construction at XYZ FACILITY (XYZ).

Response: If the project involves the repair of
parking facilities at XYZ, the total charge, whether separated or for a single
lump-sum amount, will be taxable as the repair, restoration, or remodeling of
nonresidential real property.

If the project is for the repair, restoration, or
remodeling of track bed or essential railroad structures the following applies:
Track materials are exempted as supplies essential to operate the train;
however, the labor to remodel, repair or renovate existing tracks is taxable
under Rule 3.357-Repair and Remodeling of Real Property. The materials to
construct or repair depots or other nonessential structures are taxable. The
labor may be exempt as new construction labor, under Rule 3.291, or taxable
under Rule 3.357.

Under a lump-sum charge or contract to repair,
remodel, or renovate existing track, the service provider may purchase the
track materials tax free by issuing a resale certificate to the supplier. Tax
must be collected from the railroad company on the total lump-sum charge. If
the charge for the track materials is separated from the charge for labor, the
service provider may accept an exemption certificate from the railroad company
in lieu of tax on the track materials. Tax must be collected on the separately
stated charge for labor.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct
line is 512/463-4502. You may also write to Tax Policy Division, Comptroller
of Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9609709L