Does a rubber-tired, electrically-powered 'people mover' passenger transportation system, guided by a steel guidebeam rather than running on rails, qualify for Texas's rolling stock sales tax exemption?

Plain-English summary

A client had built a permanent "people mover" passenger transportation system: rubber-tired, electric-powered vehicles that ride over and are safely locked onto their own exclusive guideway, made up of a support structure, a steel guidebeam/rail, concrete running surfaces, and a power distribution system. Horizontally-mounted wheel pairs lock the vehicle to the guidebeam, which both prevents derailment/guides the vehicle and supplies power through a power rail and electric contacts. An Automatic Train Control system manages speeds, stops, and door operations. The taxpayer asked whether this system qualifies as tax-exempt "rolling stock" under Rule 3.297(f) and Tax Code § 151.331.

The Comptroller's answer: no. The letter walks through prior authority in detail. Hearing No. 21,658 addressed whether rolling stock must be permanently mounted on rails, tracing a chain of Comptroller decisions: an older ruling (the sales tax rule then in effect, "Rule .017") defined rolling stock as equipment "operated on" railroad rails, but Decision No. 9339 (1978) had misread that as requiring the equipment be "incorporated" (i.e., more permanently affixed) onto rails. Hearing No. 21,658 corrected that misreading, holding that rolling stock is exempt "by its very nature" under § 151.331's text (which contains no permanency requirement), and overruled Decision Nos. 9339 (1978) and 17,464 (1986) on that point -- meaning even a trackmobile used to haul and switch railcars qualifies despite not being permanently mounted.

But that same hearing did NOT remove the requirement that the equipment actually be "operated on rails." The people mover in this letter is not operated on rails -- its guidebeam/guidewheel assembly is used purely for power supply and directional guidance, not for physically supporting the vehicle's weight the way rails support a locomotive or railcar. So it falls outside rolling stock. The letter also answered three related questions: (2) the "rails" requirement in past hearings/rulings always used the plural "rails," and no authority was found addressing "monorail" systems specifically; (3) § 151.331 is understood to cover locomotives and railcars operating on steel rails, not rubber-tired buses on concrete guided by a guidebeam -- subway cars and trolley cars on rails powered by a center rail would be exempt; and (4) the exemption criterion is whether equipment operates on rails, not whether its wheels are rubber or metal (though all researched rolling stock that operated on rails used steel wheels, aside from the trackmobile's rubber wheels used between tracks).

What this means for you

Transit agencies and people-mover system operators

A guidebeam-guided, rubber-tired transit vehicle -- even one that's permanently installed and runs on an exclusive dedicated guideway -- does not qualify for the rolling stock exemption unless it actually operates on rails in the traditional sense. Subway cars, trolleys, and similar vehicles running on steel rails and powered by a center rail would be treated differently.

Rail and rolling-stock equipment owners

Rolling stock no longer needs to be permanently mounted on rails to qualify (following Hearing No. 21,658's correction of Decision Nos. 9339 and 17,464), but it must still actually operate on rails -- equipment that's merely guided or powered by a rail-like structure, without being supported by rails, falls outside the exemption.

Accountants and tax professionals

This letter is a useful trace of how the Comptroller's "rolling stock" interpretation evolved: from a permanency requirement based on a misreading of the word "incorporated," through Hearing No. 21,658's correction, to the current operative test of "operated on rails" without a permanency requirement. Note the letter's own caution that its transportation-equipment guidance elsewhere "may be affected by recent court cases," so confirm current status before relying on it.

Common questions

Q: Does rolling stock have to be permanently mounted on rails to be exempt?
A: No, per this letter -- Hearing No. 21,658 overruled Decision Nos. 9339 and 17,464 on that point, holding the exemption applies by the nature of the equipment, without a permanency requirement.

Q: Does a rubber-tired vehicle guided by a guidebeam (not running on rails) qualify as rolling stock?
A: No, per this letter -- the vehicle must actually "operate on rails," and a guidebeam used only for power/guidance (not physical support) doesn't satisfy that.

Q: Would a subway car or trolley powered by a center rail qualify?
A: Yes, per this letter -- the Comptroller states it would exempt subway-type cars, locomotives, or trolley cars operating on rails and powered by a center rail.

Q: Does the exemption depend on whether the wheels are rubber or metal?
A: No, per this letter -- the criterion is whether the equipment operates on rails, not the composition of its wheels.

Citations and references

Statutes, rules, and administrative decisions:

• Tex. Tax Code Ann. § 151.331 (Vernon 1982) (rolling stock, locomotives, fuel/supplies exemption)
• 34 Tex. Admin. Code Rule 3.297(f) (rolling stock)
• Hearing No. 21,658 (fiche No. 8801H0863A07) (permanency not required; overruling Decision Nos. 9339 and 17,464)
• Comptroller's Decision No. 9339 (1978) and No. 17,464 (1986) (overruled on the permanency point)
• Comptroller's Sales Tax Ruling No. .017(7)(E) (former "rolling stock" definition)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9702258L

Original ruling text

February 4, 1997

Dear **:

This is in response to your request for a ruling on whether your client's

"people Mover" passenger transportation systems qualify as rolling stock

pursuant to 34 TAC Section 3.297(f) and Texas Tax Code Section 151.331, based

upon the following facts.

Facts:

Your client has been contracted with to build and install a permanent passenger

transportation system to move people from one location to another.

The transportation system will include rubber-tired, electric powered vehicles

traveling over and safely locked onto their own exclusive guideway.

The guideway includes a support structure, a steel guidebeam/rail, running

surfaces (typically concrete), and a power distribution system.

Pairs of horizontally-mounted wheels positively lock the vehicle to a steel

guidebeam/rail, which is anchored to the guideway structure between two

concrete running surfaces. The guidebeam/guidewheel combination prevents

derailment and provides continuous guidance for the moving vehicle. In

addition, the guidebeam/guidewheel assembly provides the power supply by means

of a power rail and electric contacts on the vehicles.

Issue:

An Automatic Train Control system ("ATC") manages the operation of the entire

passenger transportation system: controlling vehicle speeds; headways, stops,

and door openings in stations; and integrating all functions to enhance

reliability and performance of the system.

The issue at hand is whether or not the referenced passenger transportation

vehicles qualify as "rolling stock" as provided in Rule 3.297(f). Please

address the following questions pertaining to the above stated facts.

It is our understanding that "rolling stock" is any equipment with wheels which

is permanently mounted on rails.

1. Are these electric-powered, rubber-tired, rail-guided passenger cars

described above considered "rolling stock" by the State of Texas? If these

vehicles are not considered as "rolling stock" please give support as to why

they do not qualify including any relevant Comptroller's Decision numbers,

Comptroller's Position Letter or similar Comptroller's Letter Ruling.

Response: The passenger transportation system depicted in your enclosed

drawings are not considered rolling stock for sales tax purposes.

Rolling stock does not have to be permanently mounted on rails in order to

qualify for exemption. Hearing No. 21,658 (fiche No. 8801H0863A07) addressed

the definition and permanency of equipment operated on railroad rails (rolling

stock), as follows:

Comptroller's Sales Tax Ruling No. .017(7)(E) defines "rolling stock" to mean

and include any equipment which is incorporated on railroad rails. Under this

ruling the key element is whether or not the equipment is permanently mounted

or permanently operated on railroad rails and not the use the equipment is put

to by its operators. (Emphasis added.)

However, the statute which exempts rolling stock provides, in its entirety:

Rolling stock, locomotives, and fuel and supplies essential to the operation of

locomotives and trains are exempted from the taxes imposed by this chapter.

Tex. Tax code ann. Section 151.331 (Vernon 1982)

There is no requirement in the statute that rolling stock be permanently used

or mounted on rails in order to qualify for the exemption; rolling stock is

exempt by its very nature. The sales tax rule in effect at the time Decision

No. 9339 was written (Rule .017) defined "rolling stock" as "any equipment

which is operated on railroad rails" (emphasis added). It seems that Decision

No. 9339, which is the only authority for the "permanency" requirement, may

have been based on a misinterpretation of Comptroller's rule .017, since the

author incorrectly substitutes the word "incorporated" for "operated" in the

definition of rolling stock. "Incorporated" implies more permanency than

"operated". In 1982 the Comptroller dropped the definition of "rolling stock"

from the rule, and the successor to Rule .017, Comptroller's Sales Tax Rule

3.297 (34 Tex. Admin. Code Section 3.297), is silent on the subject; nor does

it make any mention of a "permanency" requirement. Therefore, since the

trackmobile is rolling stock (it is used on rails to haul and switch railcars)

it is exempt. Comptroller's Decision Nos. 9339 (1978) and 17,464 (1986) are

overruled with respect to the rolling stock issue.

This hearing negates the need for the rolling stock to be permanently operated

on rails, but does not negate the requirement that rolling stock be "operated

on rails." The bus depicted in the drawing that you provided is not operated

"on rails", but merely uses the guidebeam/guidewheel assembly for power and

guidance and not for support of the bus as would a locomotive or rail cars mounted and operated on rails.

2. Is the "rolling stock" criteria based upon the number of rails used? Must

the rails be used solely for directional guidance or may they be used for

directional guidance and a separate rail(s) be used for power supply?

Response: In the hearings researched, all addressed rolling stock that

"operated on rails" as opposed to being guided or powered by rails and all used

the plural term "rails" as opposed to the singular term "rail." I did attempt

to research "monorail", but did not come up with any hearings or letter rulings

that addressed that term.

3. Is the "rolling stock" criteria based upon the elemental composition (e.g.:

iron, steel or concrete) of the rail or guidance system?

Response: Texas Tax Code Sec. 151.331 (a), provides the statutory exemption

for rolling stock; train fuel and supplies, as follows:

Rolling stock, locomotives, and fuel and supplies essential to the operation of

locomotives and trains are exempted from the taxes imposed by this chapter.

In the context presented by this section, we conclude that it refers to

locomotives and rolling stock pulled by locomotives that are operated on steel

rails rather than buses running on rubber tires over concrete surfaces and

guided and powered by a guidebeam. We would exempt subway type cars and

locomotives or trolley cars operating on rails and powered by a center rail.

4. Is the "rolling stock" criteria based upon whether the wheels are rubber

tires or metal wheels?

Response: The existing criteria for rolling stock is whether it is operated

on rails and not the composition of the wheels or the rolling stock or

locomotives. Although, in the research that I conducted all rolling stock in

question, when operating on rails, did use steel wheels rather than rubber

tires. The trackmobile, cited in my response to your question #1, did have

rubber wheels that it used when moving between railroad tracks.

You may wish to request edited copies of the following microfiche which address

rolling stock issues.

6602H0259E12 7801H0268A12

7012L0782G14 8207L0466B04

7607L0026A08

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