Another Texas Contractor's Sales and Use Tax Conundrum: Is it "Maintenance" or Just Maintenance?

One of the many issues contractors must contend with for Texas sales and use tax purposes is whether an improvement to real property qualifies as “maintenance” under the Texas Comptroller’s Contractor Rule 3.291. The issue usually arises in the nonresidential context because repair and/or remodeling work performed on nonresidential (i.e. commercial) properties is generally taxable for Texas sales and use tax purposes, but work that qualifies as “maintenance” as defined in the Texas Comptroller Rules 3.291 and 3.357 is not taxable if billed on a lump-sum basis, and only partially taxed if billed on a separated basis. But, as noted below, the parameters of the term “maintenance” have and continue to raise important legal and factual issues.

The term real property “maintenance” is not a term specifically mentioned in Chapter 151 (Limited Sales, Excise and Use Tax) of the Texas Tax Code but rather exists in the Texas Comptroller’s Rules in the context of delineating the parameters of real property repair and remodeling. This concept appears to reflect the Texas Comptroller’s recognition that certain activities that qualify as “maintenance” should not be viewed as repair and/or remodeling work. In one earlier ruling, the Texas Comptroller explained that, while it “would have been easy to define ‘real property repair and remodeling’ such that no exclusion for maintenance existed, … that was not the intent of the Legislature.” See Tx Comptroller Letter Rul. 9405L1301G11 (May 25, 1994).

As in many other instances, the meaning of the term “maintenance” in the Texas Comptroller’s Rules carries a specific meaning that may not necessarily tie to the commonly understood or industry meaning of that term. The Texas Comptroller Rule 3.357 defines “maintenance” for purposes of the exclusion from taxability as follows:

34 Tex. Admin. Code §3.357(a)(7).

Perhaps the issue that arises most often in this context is whether work performed is “scheduled” and “periodic”. In one case, the Third Court of Appeals explained that Texas Comptroller decisions “have held that scheduled work is arranged in advance rather than on an as-needed basis.” See GATX Terminals Corp. v. Rylander, 76 S.W.3d 630, 635 (Tex. App.—Austin 2002, no pet.). The Court also noted that Texas Comptroller decisions “have held that periodic service is that which is performed in repeated cycles or at regular intervals [whereas] work that is prompted by a subjective judgment is not periodic.” See id.

In GATX Terminals Corp., the Third Court of Appeals held that the repainting of petrochemical tanks on average every ten years was not “scheduled” and “periodic” because the decision to repaint was largely made at the discretion of company managers and not by strictly objective standards. See id at 637. According to the court, the tanks were not placed on “arbitrary” maintenance schedules, but rather “[s]ubjective factors, independent of the condition of the paint, played a significant role in determining the frequency of repainting the tanks.” See id. Moreover, the average ten-year lifespan of the paint was “not evidence that GATX actually schedule[d] and paint[ed] its tanks at ten-year intervals.” See id. at 637-38.

By contrast, in Hearing No. 42,981 (Dec. 22, 2003), the Texas Comptroller ruled that the replacement of elevator cables qualified as maintenance where the taxpayer who replaced them had determined through experience at what usage point the ropes would need to be replaced and at what point the ropes would reach that point. In arriving at its decision, the Texas Comptroller noted that replacing the ropes only when needed would be taxable repair.

While there are many other rulings addressing the parameters of “maintenance” under the Comptroller’s rules, the above two decisions illustrate the inherently factual nature of this definition, and consequently there are many instances where disagreements between taxpayers and the Texas Comptroller can and do arise.

But there may also at least arguably be an even more fundamental legal question underlying this definition, viz, does the “scheduled” and “periodic” standard even reflect an appropriate interpretation of the statute? In construing the Texas Comptroller’s definition of “maintenance”, the GATX Terminals Corp. court was careful to note that the taxpayer “did not challenge the rule on the grounds that it contravened or was otherwise inconsistent with the legislative intent as expressed in Section 151.0101(a) of the tax code.” See id. at 633. As such, the only question in that case was whether the taxpayer’s activities met the definition of “maintenance” under Rule 3.357, not whether that was an appropriate standard under the Texas Tax Code in the first instance.

But the court did note that in the absence of Rule 3.357, “one might assume that repainting the tanks meets the common-sense definition of maintenance performed to prevent the tanks from rusting.” See id at 635. This statement may seem remarkable given that the Texas Supreme Court has often stated that “If a statute is clear and unambiguous, we must apply its words according to their common meaning….” See, e.g., State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006). The court’s observation at least arguably raises the question as to whether the commonly understood meaning of the term “maintenance” should govern in delineating the parameters of taxable real property repair and remodeling work under the Tax Code. The court in GATX Terminals Corp. seemed to acknowledge that the common-sense definition of the term “maintenance” may encompass more than just scheduled and periodic work.

In any event, careful consideration to these concepts should be factored into any analysis of the term “maintenance” for real property work for any taxpayer who wants to claim the exclusion. This applies not only at the inception of a contract but is also especially true in the event of a Texas Comptroller audit.

If you have questions regarding the information disclosed or on any other related matter, please contact David Colmenero at dcolmenero@meadowscollier.com or Alex Pilawski at apilawski@meadowscollier.com. To contact them by phone, please call 214.744.3700.