When refinery units purchased from another company are dismantled and re-erected at a new location owned by the buyer, does incorporating them into realty count as nontaxable new construction or taxable remodeling?

Plain-English summary

A refinery operator purchased refinery processing units from another company, planning to completely dismantle the units, transport them to a different location the operator owns, and erect them there. The operator asked whether erecting these units at the new location qualifies as nontaxable new construction.

The Comptroller noted the facts as presented were unclear about whether the erection firm was actually installing/incorporating the units into realty, and proceeded on the assumption that yes, the units were being incorporated into realty with the intent of becoming an improvement to it (inviting the taxpayer to clarify if the facts differ).

On that assumption, the Comptroller applied Administrative Hearing No. 28,070 (1993), a prior administrative decision addressing exactly this question: whether labor to install refinery units counts as remodeling of the existing refinery, or as new construction of a freestanding improvement to realty in its own right. That hearing held that installing a stand-alone unit performing a specific process — as distinguished from a unit that's merely an integral part of a larger existing unit or structure — counts as new construction. Under Texas's construction-contract tax rules, lump-sum charges for new construction work are not subject to tax; instead, the contractor, constructor, or builder pays tax on all the tangible personal property it incorporates into the new unit as it becomes part of the realty.

Applying that precedent: the charge to incorporate a stand-alone processing unit performing a specific process into realty at a refinery is new construction, so lump-sum charges for the erection work here are not taxable.

What this means for you

Refinery and petrochemical operators relocating or re-erecting processing units

Whether re-erecting a previously-used unit at a new site counts as new construction (lump-sum labor untaxed) or remodeling (potentially different treatment) turns on whether the unit performs a specific, stand-alone process independent of a larger structure — not on whether the equipment is "used" or previously operated elsewhere. A genuinely stand-alone processing unit can qualify as new construction even when it's relocated rather than built from scratch.

Industrial and refinery construction contractors

Structure and bill new-construction-qualifying work as lump-sum where possible, since that avoids tax on the labor charge — but remember you still owe tax on the tangible personal property you incorporate into the unit as part of performing that work.

Accountants and tax professionals

Administrative Hearing No. 28,070 (1993) is the controlling precedent cited here for the stand-alone-unit-is-new-construction principle — useful whenever a client's project involves installing discrete processing equipment (not just refineries) that performs its own specific function rather than being folded into an existing structure.

Common questions

Q: Does relocating and re-erecting a previously-used refinery unit at a new site count as new construction?
A: Yes, per this letter and Hearing No. 28,070, if the unit is a stand-alone unit performing a specific process, rather than simply an integral part of a larger existing structure.

Q: Is the lump-sum labor charge for this kind of work taxable?
A: No, per this letter — lump-sum new construction charges are not taxable; the contractor instead pays tax on the tangible personal property it incorporates into the unit.

Q: What if the erected unit is just an integral part of a larger existing refinery structure rather than a stand-alone unit?
A: Per the cited hearing, that scenario would be remodeling rather than new construction — this letter's favorable outcome depends on the unit being genuinely stand-alone.

Citations and references

Statutes and rules:

• Texas Comptroller Administrative Hearing No. 28,070 (1993) (stand-alone processing unit installation is new construction, not remodeling)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9807713L

Original ruling text

July 30, 1998

Dear Mr. **:

Thank you for your recent letter concerning the erection of refinery units.

Your client owns and operates refinery units. They purchased some refinery
units from another company and plan to dismantle the units and erect them at
another location. These units will be completely dismantled, moved to another
location and erected at another location owned by the client.

Question: Will the erection of these units at a new location qualify as new
construction?

Response: Your scenario is unclear as to whether the erection firm actually
installs or incorporates the refinery units into realty. For the purposes of
this letter, I am presuming that they are incorporating the refinery units to
realty and that the intent is for the property to become an improvement to
realty. Please contact me if there are different facts.

Administrative Hearing No. 28,070 (1993) concerned whether labor performed to
install refinery units was considered remodeling of the refinery or new
construction of improvements to realty in their own right. The hearing found
that the installation of a stand-alone unit performing a specific process and
not simply an integral part of a larger unit or structure was considered new
construction. The lump-sum charges made for the work were not subject to tax;
the contractors, constructors, or builders of the new unit should, by law, pay
tax on all tangible personal property incorporated into the overall unit and
becoming part of the realty.

As a result, the charge to incorporate to realty a stand alone unit performing
a specific process in a refinery is considered new construction.

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