200710980L



Date: October 8, 2007

To: Laura Biemer, San Antonio, Audit Supervisor
Scott Adams, San Antonio, Auditor
Allen Zaiontz, San Antonio, Auditor

From: Joe Mancuso, Sales Tax Policy 

Re: Defining Scheduled and Period Maintenance 

Thank you for your Tax Help inquiry. You stated that you are currently involved 
in an audit of **************, which consists of three large 
refineries operating in Texas. You have several questions concerning plant 
turnarounds. You stated that a plant turnaround usually consists of a scheduled 
shutdown of specific units or segments of the refinery (e.g.,  the FCC unit, 
the Alkylation unit, and the sulfur unit) to perform routine preventative 
maintenance on the units. Maintenance can consist of pre-turnaround activities 
necessary to bring the production unit down including, spent catalyst 
replacement, lubrication, insulation replacement, painting, as well as 
inspections and minor repairs of functioning equipment. Large equipment 
upgrades and repairs can sometimes take place in conjunction with the shut 
down.

You have reviewed Rule 3.357, STAR letters 200211552L, 9708697L, 9204L1174D06, 
and 200211552L; Hearings 42,518, 40,789 and 45,169, as well as the GATX 
Terminals Corp. v. Rylander, 78 S.W.3d 630 (Tex. App.-- Austin 2002, no pet.). 
You cite Hearing 45,169 as a situation when too many variances in shutdown 
intervals disqualified the work as periodic even taking into consideration 
budgets, production/demand levels, labor/material shortages and reliability. 

You request clarification or guidance on the periodic requirement, in order for 
scheduled turnaround intervals to qualify as real property maintenance, both on 
the length of the interval and the degree of variance in the interval between 
turnarounds as contemplated by Rule 3.357. In connection with this request, you 
asked several questions which I have restated and responded to as follows: 

Question a) - Would any of the following examples of variances in the scheduled 
turnaround intervals indicate that the scheduled work is not periodic and 
therefore does not qualify as exempt turnaround maintenance?

1. January 1998, January 1999, November 2000 - REFINERY

2. March 2001, April 2002, none in 2003, April 2004 - REFINERY

3. January 1998, January 1999 & May 1999, January 2000 & November 2000, none in 
2001, and March 2002 - REFINERY

4. April 2000, May 2001, none in 2002, none in 2003, September 2004 -
REFINERY

5. Plant wide turnaround in 1995, plant wide turnaround in 2001,  and 
scheduling a plant wide turnaround in 2005 - REFINERY, Plant wide 
Reliability Turnaround

Response:

Maintenance is defined in Rule 3.357(a)(7) as “…scheduled, periodic work that 
is necessary to sustain or support safe, efficient, continuous operations, or 
to prevent the decline, failure, lapse, or deterioration of the improvement.” 
The term "scheduled" is defined in Rule 3.357(a)(7)(A) as  “anticipated and 
designated to occur within a given time period or production level.” Rule 
3.357(a)(7)(B) defines "periodic" as “ongoing or continual or at least 
occurring at intervals of time or production that are reasonably predictable.” 

In addition to the requirement that maintenance must be scheduled and periodic, 
emphasis is also placed on the condition of the property. The terms "support" 
and “sustain" suggest that maintenance activities are planned and preventative 
in nature. No amount of scheduling or periodic documentation will cause repair 
work to be classified as maintenance. Rule 3.357(a)(7) states, “Maintenance 
does not include work to remodel, modify, upgrade, perform repair, or restore, 
even if the work is scheduled or periodic.” For example, the fact that certain 
repairs, such as fixing leaky valves, are scheduled or periodic every six 
months or that a piece of equipment breaks down and is repaired with a degree 
of frequency, will not result in those activities being nontaxable maintenance. 
If minor repairs are performed on property that is functioning and the effect 
is to support, sustain or continue the condition of the property instead of 
restoring, enhancing or improving some quality such as efficiency, and if the 
activity is performed at regularly scheduled intervals, then the activity will 
be presumed to be maintenance. See STAR document 8803L0864G08.  Rule 3.357 
provides that the repairs must be incidental or insignificant to the overall 
maintenance activities (for example, lubrication or replacement of belts, 
filters, etc.) and that insignificant or incidental is construed to mean 5% or 
less of the total contract amount.

Without proper documentation, it is impossible to say whether the interval 
variances indicate taxable repair/remodel or nontaxable maintenance. It may be 
that certain production levels were not met in the same time frame each year. 
It may be that the maintenance is not scheduled until a certain amount of 
production occurred. Market conditions may have slowed or increased the need 
for production resulting in the variances of time between each shutdown. 

However, because you did not state production levels in any of your examples, I 
will answer your questions presuming that the shutdowns were scheduled on a 
time period basis as opposed to a production basis and that there was initial 
documentation indicating actual maintenance schedules.  Note that working on a 
unit during the same month in two subsequent years does not in itself indicate 
that any of the work was ever scheduled or periodic.  Similarly, we would allow 
minor variances due to such things as weather and still conclude that work was 
scheduled and periodic.  However, wider variances may call for the application 
of Administrative Hearing 45,169, as stated above.

In Example (1), the lapse in the third maintenance period should disqualify it 
from the exemption.  It would not disqualify the two previous maintenance 
periods if they were both scheduled and periodic. 

Example (2) raises additional questions.  If the taxpayer scheduled this work 
every two years, March of 2001 may be the work performed on an as needed basis. 
If work was scheduled every year, the missed period in 2003 indicates that the 
2004 work is not periodic.  

Example (3) – Once again, the fact that turnarounds were performed roughly 
during the same periods in consecutive years does not qualify it as scheduled 
maintenance. A turnaround does not qualify if it is just periodic.  But, in 
this case, if we have a yearly schedule it appears that the May 1999 turnaround 
does not qualify.  The auditor should check to see why the November 2000 
turnaround occurred when it did.  If the plant came to a halt due to a 
breakdown, it should be disqualified as “as needed” work.  If the turnaround 
was postponed for a contractor’s schedule a two-month variance may be seen as 
justification as to why the turnaround took place in November of 2000 instead 
of January 2001.  However, without additional information, the November 2000 
and March 2002 turnarounds do not qualify.

Example (4) - Please see responses to preceding examples. However, it appears 
that the September 2004 turnaround should be disallowed.

Example (5) – The narrative states “and scheduling a plant wide turnaround in 
2005.”  We would need verification the other turnarounds were also scheduled.  
The phrase scheduled and periodic has a specific meaning.  The taxpayer needs 
to provide a schedule, procedure manual or some other document indicating that 
past and future turnarounds were part of this scheduled regular process.  A 
budget for repairs is not acceptable documentation. When the rule states 
“scheduled,” it does not mean scheduling a couple of months before the work is 
done or the inclusion of the test would have no meaning.  Generally speaking, 
being off a year in a 5 year plant-wide turnaround would appear to violate the 
principle of periodic. 

Question b) - Is there a threshold that taxpayers must meet in variances of 
intervals between turnarounds to qualify as exempt scheduled and periodic 
maintenance?

Response: Rule 3.357 does not set mandatory time limits on scheduled periodic 
work and there is no quantified standard, threshold, or benchmark in terms of 
months when a variance in scheduled turnaround intervals disqualifies the 
turnaround activity as periodic. On the other hand, the mere scheduling of a 
shutdown does not automatically qualify the work as real property maintenance. 
Conceptually, within the context of Rule 3.357(a)(7)(B), periodic activity is 
ongoing or continual or at a minimum occurring at intervals of time or 
production which are generally predictable. For example, turnarounds scheduled 
during the same calendar quarter each year can be considered periodic. 
Likewise, turnarounds scheduled based on production volume rather than time can 
also meet the periodic requirement. 

Question c) - Are the requirements different for a refinery versus other 
industries for turnarounds. 

Response: The requirements of Rule 3.357(a)(7) are intended to apply to all 
industries. 

Question d) - If regular intervals are required, are there examples of when it 
would be acceptable to have large variances between turnarounds thus changing 
the periodic requirement and if so what type of documentation would be required 
to substantiate the longer period? 

There are reasons why a turnaround could be delayed, even if the intent was for 
the turnaround to occur at the scheduled time. The concern that this can create 
is that if the interval is long enough then the work performed constitute 
repairs and maintenance that are provided on an as-needed basis which are not 
just preventive.  

Response: Abnormal, unusual or nonrecurring external factors that are not 
predictable, such as natural disasters, could be an acceptable reason for a 
large variance between turnarounds, however a five-year plan for scheduled 
turnarounds should take into consideration such factors as seasonal demand, the 
economy, labor pressures, EPA requirements, and reliability requirements. In 
addition, apparent gaps or lapses in a schedule could be due to scheduled 
periodic time frame based on production, which can vary with market conditions. 

As noted in Rule 3.357(d)(2)(A), the burden of proof that scheduled activities 
meet the criteria to be considered nontaxable maintenance lies with the 
purchaser. To qualify a purchase as nontaxable real property maintenance, the 
customer must prove by way of maintenance schedules or work orders or other 
similar forms of evidence that the services meet the definition of maintenance 
on real property. When gaps or lapses occur the customer should be able to 
provide documentation that would explain the variances.

Question e) - What is the maximum length of an interval between scheduled 
turnarounds? Hearing 28,746 seems to suggest that a maximum interval between 
maintenance activities would be 3-4 years. Is there an established maximum 
length?

Response: There are no maximum or minimum intervals between scheduled 
turnarounds for refineries. Each plant’s long-term and short-term preventative 
maintenance plans and resulting turnaround schedules should be evaluated on 
their own merits.  

Question f) - How many intervals are necessary to establish the periodic 
requirement? For instance, what if there were only one or perhaps two 
turnarounds for a new unit? Three turnarounds would seem to be a minimum 
requirement. Star document 9708697L seems to suggest that the first occurrence 
of a budgeted maintenance activity would not qualify.

Response: The first scheduled turnaround for a new unit could be nontaxable 
maintenance based on the nature of the work that is performed and the condition 
of the property. Again, if the work is performed on property that is 
functioning and the effect of the work is to support, sustain or continue the 
condition of the property consistent with a long-term preventative maintenance 
program, then it is nontaxable maintenance.

Question g) - Can we request or require records for periods prior to the audit 
period to establish the “scheduled and periodic” requirement given the 
four-year statute of limitations?

Response: Yes. As previously noted, Rule 3.357(d)(2)(A) places the burden of 
proof on the taxpayer to prove that the work meets the definition of 
maintenance on real property when records are requested. If the taxpayer has 
not provided sufficient proof within the audit period, it would be incumbent on 
the taxpayer to provide records for periods prior to the audit period to 
establish the “scheduled and periodic” requirement. A taxpayer cannot defeat an 
audit or an assessment of taxes by merely withholding its records.

Question h) - STAR documents 9203T1159F05 and 9708697L state that the same work 
must be performed during each turnaround to qualify as “scheduled and 
periodic.” If additional maintenance activities are substantially different 
from activities performed in prior turnarounds and are completed in conjunction 
with the “regular” work:

1. Would just the new additional activities be taxable? or,

2. Would both the prior “regular maintenance” and the new maintenance 
activities be exempt as scheduled and periodic maintenance of real property? 
or,

3. Would the entire turnaround be taxable given that additional activities not 
done previously were completed?

4. Must the same work be performed each time to qualify as scheduled and 
periodic?

Response:  As previously stated, no amount of repair activity with any degree 
of frequency will result in those activities being nontaxable maintenance and 
no amount of scheduling or periodic documentation will cause repair/remodel 
activity to be classified as maintenance. If an activity is performed on 
property that is functioning and the effect is to support, sustain or continue 
the condition of the property instead of restoring, enhancing or improving some 
quality such as efficiency, and if the activity is performed at regularly 
scheduled, periodic intervals then the activity will be presumed to be 
maintenance instead of repair, remodeling or modification. What should be 
consistent from one turnaround to another is the same basic preventative 
maintenance program and inspection procedures, i.e. if items pass inspection 
then no work is required, if an inspection of an item identifies work that is 
required, that work is maintenance or repair depending on the results recorded 
in the inspection report and the nature of the work that is performed. For 
example,  disassembly or teardown inspection procedures and the resulting 
repair or reassembly work that are part of the regularly scheduled preventative 
maintenance program may qualify as maintenance or it may not qualify because it 
is restoration work. The primary difference is that restoration is performed 
after some deterioration and maintenance is performed to prevent deterioration. 
  

Question i) - It is your understanding from the previously cited STAR documents 
that any remodeling or upgrades completed during a qualifying turnaround would 
fall outside the scope of scheduled and periodic maintenance and be considered 
taxable. Would this just involve upgrades/ remodeling or all remodeling 
activity? Is there a percentage threshold to follow (i.e., less than 5% and the 
entire project would be exempt?)

Response:  Rule 3.357(d)(2)(C) provides that a contract that includes 
maintenance and repair or restoration will be taxable in total if the charges 
for repairs and/or restoration services exceed 5.0% of the total charges and 
are not separately identified to the customer in the contract or billing. All 
separately stated charges for repair, restoration, remodeling, or other taxable 
services are taxable, even when the taxable services constitute 5.0% or less of 
the total contract price.

This opinion is based on the facts presented and current law. Other facts 
though similar may provide a different result.

If you need any additional information or have any questions my internet 
address is joseph.mancuso@cpa,state.tx.us, or you may call me at 
1-800-531-5441, extension 5-4653.

Sincerely,


Joseph T. Mancuso
Tax Policy Specialist




ACCESSION NUMBER: 200710980L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 10/08/2007
TAX TYPE: SALES