Is the fee a wood-products manufacturer charges a land-clearing contractor to remove and process cleared trees/wood taxable, and does it matter whether the land is for new residential construction or where the wood is actually processed?

Plain-English summary

A contractor clears land, and a wood-products manufacturer removes the trees and wood materials for a fee, then processes the wood into products it sells. The contractor asked whether the manufacturer's removal fee is taxable, and whether it would matter if the manufacturer processed the wood right at the job site instead of hauling it to a central facility.

The Comptroller ruled the fee is taxable as a real property service (waste removal) under Rule 3.356(a)(3), regardless of where the wood is processed. But there's an important exception not found in the rule itself: effective October 1, 1995, waste removal services are not taxable when purchased by a contractor or home builder as part of new residential construction, or an improvement immediately adjacent to the new residential structure. If a new residential structure will be built on the cleared land, the manufacturer may accept the contractor's certification of that fact -- via an exemption certificate stating the improvement is new residential construction -- instead of collecting tax.

Procedurally, the manufacturer must presume the service is taxable and collect tax UNTIL it receives that certification. And if it later turns out the work didn't actually qualify as new residential construction, liability for the tax shifts to whoever signed the certification (the contractor, builder, or developer), not the waste removal provider. Critically, this exemption is available only to the home builder, developer, or contractor actually responsible for the new residential construction contract -- a waste removal provider may NOT accept this certification from an individual homeowner or from a contractor/builder working on nonresidential property.

What this means for you

Wood-products manufacturers, waste haulers, and land-clearing service providers

Collect tax by default on waste-removal/wood-removal fees, and only exempt the charge when your contractor customer gives you a proper exemption certificate stating the work is part of new residential construction (or an immediately adjacent improvement). Where the site is processed doesn't matter to taxability.

Home builders, developers, and land-clearing contractors

You can get waste removal services tax-free for genuine new residential construction work by certifying that fact to your vendor -- but understand you become personally liable for the tax if that certification later proves wrong. This route isn't available if you're building nonresidential property, and individual homeowners can't use it either.

Accountants and tax professionals

Note the liability-shifting mechanism here: certifying an exemption transfers tax risk from the seller to the certifying party, a recurring pattern across several Texas exemption-certificate schemes, and one worth flagging to clients who plan to sign such certifications.

Common questions

Q: Is a wood/waste removal fee after land clearing generally taxable?
A: Yes, per this letter, as a real property service under Rule 3.356(a)(3), regardless of where the wood is processed.

Q: When is waste removal exempt?
A: Per this letter, effective October 1, 1995, when purchased by a contractor or home builder as part of new residential construction or an immediately adjacent improvement, with a proper certification.

Q: Who's liable for the tax if the new-residential-construction certification turns out to be wrong?
A: The person who issued the certification -- the contractor, builder, or developer -- per this letter, not the waste removal service provider.

Q: Can an individual homeowner or a nonresidential contractor use this exemption?
A: No, per this letter -- it's limited to a home builder, developer, or contractor responsible for the new residential construction contract itself.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.356(a)(3) (waste removal as a taxable real property 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/9707598L

Original ruling text

July 7, 1997

Dear ***:

Thank you for your letter of June 24, 1997. You asked if fees charged to
remove refuge after land is cleared are taxable.

As I understand it, a contractor clears land. A manufacturer of wood-based
products removes the trees and wood materials for a fee. The manufacturer then
processes the wood into the products he sells. You questioned whether the
removal fee charged by the manufacturer to the contractor is taxable. Also,
you asked if the answer would be different if the manufacturer processed the
wood products at the contractor's job site.

Response: The fee the manufacturer bills the contractor is taxable regardless
of whether the wood is processed at the job site or hauled away to a central
distribution site for processing. The waste removal is taxable as a real
property service as defined in section (a)(3) of Rule 3.356. However, there is
an exception not found in the rule.

Effective October 1, 1995, waste removal services are not taxable services if
purchased by a contractor or home builder as part of new residential
construction or another improvement immediately adjacent to the new residential
structure. If a new residential structure will be built on the cleared land,
the manufacturer may accept certification of this fact from the contractor in
lieu of collecting tax on the waste removal service.

The manufacturer should presume that the waste removal service is a taxable
service and collect tax on the total charge until he obtains a certification
from the contractor that the service is part of new residential construction.
If it is later determined that the work does not qualify as a nontaxable
service as certified by the contractor, builder, or developer, the person who
issues the certification will be held liable for the tax.

The contractor or home builder may use an exemption certificate to provide the
certification. The certificate should state that the improvement is new
residential construction and that the person making the certification is liable
for the tax if the service is determined to be a taxable service.

Waste removal services are excluded from the definition of taxable services
only when purchased by a home builder, developer or contractor responsible for
the new residential construction contract. That means that a waste removal
service provider may not accept a certification from an individual
resident/home owner or contractor/builder of nonresidential property.

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. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division