A company plans to build a permanent oil-tool testing rig facility — a derrick, mast, substructure, and supporting equipment permanently mounted on a concrete foundation with embedded I-beams forming a tracking system, using TWO separate contractors (one for site planning/foundation, one for installing/hard-wiring the derrick and equipment). Does this qualify as new construction (an improvement to realty) for Texas sales tax purposes, and does splitting the work across two contracts change that?

Plain-English summary

A company planned to build a permanent rig testing facility to develop, test, and provide instruction on oil tools for a customer. The facility includes a derrick, mast, substructure, and supporting equipment mounted on a concrete foundation with two wells roughly 12-14 feet apart, with two I-beams permanently embedded in the concrete forming a "Tracking System" (using hydraulics) that lets the derrick move between the two holes. The derrick attaches to the I-beams via a "lip," and there's no way to remove it without cutting the lip or the derrick's legs — the company intended the whole facility to be permanent, and there was no pre-existing test rig facility at the site.

Two separate companies would build it: an engineering firm handling site planning and pouring the concrete foundation (including setting the I-beams per the second firm's specifications), and a second firm installing the derrick itself plus hard-wiring the other site equipment, under a detailed contract covering "Rig Up and Test" and the "Rig Tracking System." The taxpayer asked three related questions: (1) does this qualify as new construction/an improvement to realty; (2) does splitting the work across two contractors change that classification for either firm's work; and (3) is the ENTIRE project (both contracts together) new construction.

The Comptroller answered yes across the board, citing Administrative Hearing No. 13,462 as supporting authority. The construction is new construction because there's no pre-existing facility and the equipment is permanently, irremovably installed. Using two separate contracts doesn't change the outcome — BOTH contracts qualify as new construction, as long as each involves both incorporating materials AND installation labor, and as long as the client's intent for the property to become a permanent realty improvement applies to both contracts. The Comptroller flagged one important caveat: the second contractor's work would NOT have been new construction — it would instead have been treated as a materialman's sale of materials — if that second contract had NOT actually included the incorporation (physical installation) of the derrick system itself.

What this means for you

Businesses building permanent equipment installations using multiple contractors

Splitting a single permanent-improvement project across separate contracts (e.g., one for site prep/foundation, another for equipment installation) doesn't automatically split the tax classification — both contracts can independently qualify as new construction, as long as each genuinely combines incorporated materials with installation labor and reflects the same permanent-improvement intent.

Contractors performing only part of a larger permanent installation (e.g., site prep without equipment installation)

If your specific contract does NOT include actually incorporating/installing the equipment itself — just supplying materials, for example — you may be treated as a materialman selling materials rather than performing new construction, which carries different tax consequences. Check what your specific scope of work includes, not just the overall project's classification.

Accountants and tax professionals structuring multi-contractor permanent-improvement projects

This letter is a useful precedent for confirming that a genuinely new, irremovable, permanently-intended installation retains its "new construction" classification even when the work is divided among multiple contracts/contractors — the classification travels with each contract's actual scope of work (materials + installation labor + permanent intent), not with the overall project as a monolithic whole.

Common questions

Q: Does building a brand-new, permanently-installed rig testing facility qualify as new construction for Texas sales tax purposes?
A: Yes — there's no pre-existing facility at the site, and the equipment is permanently and irremovably attached.

Q: Does splitting the work between two separate contractors change the tax classification?
A: No — both contracts can independently qualify as new construction, as long as each combines incorporated materials with installation labor and reflects the same permanent-improvement intent.

Q: Is there any scenario where a contractor's portion of this kind of project would NOT be new construction?
A: Yes — if a contractor's specific contract doesn't actually include incorporating/installing the equipment itself (just supplying materials, for example), that contractor's work would instead be treated as a materialman's sale of materials.

Q: Can I rely on this letter for my own permanent-equipment installation project?
A: No. It's based on the facts presented, and the letter notes the opinion may change on additional or different facts.

Citations and references

• Comptroller's Administrative Hearing No. 13,462 (supporting authority for new-construction classification)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9803165L

Original ruling text

March 5, 1998

Dear ***:

Thank you for your letter of February 17, 1998, concerning sales and use tax
treatment on the construction of a permanent rig testing facility.
Specifically, you are seeking guidance on whether or not the facts as outlined
in this transaction are sufficient to support a claim of an improvement to
realty constituting "new construction".

Scenario. Your client (Taxpayer) intends to construct a permanent rig testing
facility in the CITY A area. The facility will include a derrick, mast,
substructure and other supporting equipment. The derrick, mast and substructure
will be mounted on a concrete foundation with essentially two holes (wells).
Permanently imbedded in the concrete will be two I-beams which will be used
along with hydraulics as a Tracking System that will allow a derrick to track
between the two holes. The distance between the two holes is twelve to fourteen
feet. The derrick itself will be attached to the Tracking System through the
use of a "lip" on the I-beams. The Taxpayer has indicated that there is no way
to remove the derrick from the I-beam unless the lip is cut away or the legs of
the derrick are cut. The Taxpayer intends for this facility to be permanent.
The overall intent of the facility is to develop, test, or instruct on the use
of oil tools developed for a customer. All work will be considered "new" as
there is no existing test rig facility in use at this site.

Taxpayer currently plans to use two different companies to create the testing
facility. The first company is an engineering company that will complete the
site planning and will pour the concrete foundation. Additionally, the
engineering company will set the I- beams that are to be used as part of the
Tracking System which will allow the derrick to track between the holes. The
second firm will advise the engineering company where to place the I-beams. The
second firm will then be responsible for the installation of the derrick as
well as the placement and hard-wiring of other site equipment. The contract
(Section 7000 - "Rig Up and Test" and Section 8000 - "Rig Tracking System")
between the second firm and the Taxpayer specifically addresses in detail the
work to be performed and provides a description of the Tracking System. You
have provided excerpts from the contract (Exhibit A). After installation and
upon satisfactory completion of the work, the Taxpayer will sign a Certificate
of Acceptance with the second contractor (Exhibit B).

Issues. You have identified the following issues that you seek guidance on.

Issue 1: Will the construction of the test rig facility be considered an
improvement to real property for Texas sales and use tax purposes?

Response. The construction of the test rig facility appears to be new
construction. This is supported by the position letter in Administrative
Hearing 13,462.

Issue 2: Will the use of two separate contractors to fulfill distinct parts of
the construction impact the overall classification (as an improvement to
realty) of the job? Specifically, if the engineering firm that performs the
site planning and pours the concrete foundation is considered to be making an
improvement to real property will this have an impact on the taxability of the
work being performed by the second firm that is installing the derrick, mast
and substructure and is hard-wiring the other equipment?

Response. Both contracts will be considered new construction. The second
contract would have been viewed as the sale of material by a materialman and
not new construction if the second contract did not encompass the incorporation
of the derrick system by the second firm.

Issue 3: Will all of the construction (both contracts) be considered "new
construction" for sales and use tax purposes? Specifically, will the use of two
contractors impact classifying the work as "new construction" in total?

Response. The use of two contracts, both incorporating materials and
installation labor, will not impact the classification of this job as new
construction presuming that the facts supplied and the "intent" of the client
for the property to become permanent improvements to realty applies to both
contracts.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division