Part 3 – Pipe Works: Understanding New Construction vs. Repair, Remodeling and Restoration for Pipelines
In this month’s issue, we are concluding the contractor series with a look at the tax treatment for pipeline construction. This article summarizes the tax treatment of new construction work and real property repair, remodeling and restoration work and examines the tax application to pipeline construction work.
Contractors perform new construction. Taxable service providers perform nonresidential real property repair, remodeling and restoration.
When performing pipeline construction work, tax responsibilities depend on the type of:
- work being done (new construction, repair, remodeling, restoring or maintenance); and
- contract being used (lump-sum or separated).
As previously discussed in the August Tax Policy News article, The Sales Tax ABCs for Contractors and Taxable Service Providers, in a lump sum contract you charge one amount for both labor and incorporated materials. In a separated contract, you separately state your labor and materials.
A contract to build an addition to an existing nonresidential structure or to build a new structure is a real property improvement and taxed as “new construction.” The person making the improvements is a contractor. Note that the labor to “tie in” a new to an existing structure is taxable remodeling labor (see information below on repair, remodeling and restoration work). If this labor is included in the new construction contract and the charge for remodeling is less than 5 percent of the total job, it can be excluded from tax. If the charge is 5 percent or more, the charge for remodeling must be separately stated and taxed or the total contract will be subject to tax.
Contractors performing new construction under lump-sum contracts are consumers of all materials, consumable items and equipment used or incorporated into customers’ properties. As consumers, contractors must pay tax to suppliers when buying the materials. If the materials are purchased from out-of-state sellers, contractors must accrue and remit use tax on the materials, unless Texas use tax was collected by the out-of-state sellers. Contractors do not collect tax from customers on lump-sum charges or on any portion of the charges.
Contractors performing separated contracts are the retailers of all materials physically incorporated into the real property improvements. As retailers, contractors collect tax from customers based on the agreed contract price of the incorporated materials.
Repair, Remodeling and Restoration Work
Nonresidential repair, remodeling and restoration services are taxable. A person repairing, remodeling or restoring nonresidential real property is a taxable service provider, rather than a contractor.
All taxable service providers who repair, restore or remodel nonresidential real property either collect tax on the total sales price to their customers, or accept a valid Form 01-339 (front), Texas Sales and Use Tax Resale Certificate (PDF); Form 01-339 (back), Texas Sales and Use Tax Exemption Certificate (PDF); or Form 01-919, Texas Direct Payment Exemption Certification Limited Sales, Excise and Use Tax Certificate (PDF), instead of tax. When the work is for nonresidential real property repair, remodeling or restoration, there is no distinction between a lump sum or a separated contract.
Pipeline Construction Work
Last year, in a private letter ruling, the Tax Policy Division outlined the sales tax treatment of different pipeline construction and remodeling services.
For construction services, installing a new pipeline in a new trench is new construction, and the labor is not taxable. The new pipeline’s location in relation to an existing pipeline does not affect the tax treatment.
Additionally, removing an existing pipeline and installing a new pipeline at a lower or greater depth is new construction and the labor is not taxable if the pipeline’s depth changes substantially (the new pipeline’s depth must be at least one-third deeper or shallower than the existing pipeline’s depth). This excavation work to remove the existing pipeline and install the new deeper or shallower pipeline is complete demolition and new construction work, respectively. The labor is not taxable.
In all instances, connecting the new pipeline to an existing pipeline is nonresidential real property repair or remodeling and is taxable. Likewise, replacing the existing pipeline with a new pipeline at the same depth is taxable nonresidential real property repair or remodeling work.
For abandoning the pipeline, filling an existing pipeline with concrete is not taxable because it is complete pipeline demolition. If, however, the service provider caps the ends of an existing pipeline in order to abandon the pipeline in place, the labor is taxable nonresidential real property repair or remodeling.
Unless connected to the sale of a taxable item or service, inspection and testing services are not taxable.
To be nontaxable, stand-alone inspection and testing charges must not be related to any taxable equipment or nonresidential real property repairs, restoration or remodeling.
When nontaxable unrelated services and taxable services are sold or purchased for a single charge and the portion relating to taxable services represents more than 5 percent of the total charge, the total charge is presumed to be taxable. The service provider may later establish the percentage of the total charge that relates to nontaxable services. To do so, the service provider’s books must support the apportionment between taxable and nontaxable services.
If a service provider separately states the nontaxable unrelated services from the taxable services, they only charge tax on the taxable services.