Sales Tax State Activity Update - July 2004

Are Rope Replacement and Adjustment Nontaxable Services in Texas?

The Texas Comptroller of Public Accounts, Administrative Hearing Section (“AHS”) recently concluded that rope replacement and rope adjustment services are nontaxable maintenance on real property.

The hearing and conclusion were in response to the Petitioner’s appeal of a sales and use tax audit, which resulted in an assessment of additional tax on its rope replacement and adjustment services. Petitioner installs, repairs, and provides maintenance for elevators and escalators. The Petitioner used a computerized scheduling system to plan and schedule rope replacement and adjustment services.

At the time of the audit, the relevant statutes and regulations in question indicated that maintenance to real property for operation or functioning improvement is “scheduled” and “periodic” work to sustain safe, efficient operations or to prevent decline in such improvement. Repair is to bring back to its original working order real property that is broken, damaged or defective. The AHS maintained that Petitioner’s maintenance agreement provides that Petitioner "will replace all wire ropes as necessary to maintain an appropriate factor of safety." It argued that this language clearly establishes that the rope replacement is done on an as needed basis, and is, therefore, taxable repair rather than nontaxable maintenance.

The judge agreed that replacing the ropes only when needed would be taxable repair, but concluded the Petitioner determined through experience at what usage point the ropes will need to be replaced, and at what point the ropes covered by the maintenance agreements will reach that point, and schedules and budgets for such rope replacements and subsequent adjustments every year the rope replacement and adjustment services were “scheduled” and “periodic”.

Therefore, rope replacement and adjustment services were not performed on an as needed basis but rather were “scheduled” and “periodic” and properly nontaxable maintenance services.

Comptroller of Public Accounts, Hearing Nos. 42,981, 42,982 07/04

---

Subscribe to CyberTax News and receive the latest indirect tax news, including rate changes, rule updates, compliance issues, and more, delivered directly to your email.

Email Address