Texas Sales And Use Tax Rules For Construction-Related Services

The Texas sales and use tax rules surrounding contractors and other construction-related work are incredibly complex. Additionally, the rules are structured to have broad application and thus impact many industries, including general construction, oil and gas related services, demolition, and more. The application of these rules is a fact-intensive undertaking and should be performed on a case-by-case basis, but I have outlined a basic overview of these rules below.

What is a "Contractor"?

The Texas Comptroller defines a "contractor" as a person who performs one or more of the following real property improvements and who, in making the improvement, incorporates tangible personal property into the real property being improved: ¹

• "New Construction"
  • Building new improvements to residential or nonresidential real property; or
  • Completing any part of an uncompleted new structure that is an improvement to residential or nonresidential real property
• "Scheduled and Periodic Maintenance"
  • Making improvements to real property as part of periodic and scheduled maintenance of nonresidential real property ²
• "Residential Repair & Remodel"
  • Repair, restoration, maintenance, or remodeling of residential real property

Work performed by a "contractor" also specifically includes the initial finish-out work to the interior or exterior of an improvement to real property ³, and the addition of new usable square footage to an existing building. ⁴

Is Work Performed By a "Contractor" Subject to Sales Tax?

The taxability of "contractor" work depends on the nature of the controlling contract. Specifically, it depends on whether the contract is considered "lump-sum" or "separated". At the most basic level, a "lump-sum" contract is one in which charges for labor and materials are not separated. ⁵ Conversely, a "separated" contract is one in which labor and materials are separately stated and billed. ⁶

1. Lump-Sum Contracts
   
   The Comptroller's rules provide that a lump-sum contract for the provision of one of the above-discussed "contractor" services is not subject to tax. ⁷. However, the contractor will be required to pay tax on all purchases of incorporated materials and taxable services. ⁸
   
   
2. Separated Contracts
   
   With respect to separated contracts for the above-discussed "contractor" services, the Comptroller's rules state that the labor charge is not subject to tax, but the charge for incorporated materials will be subject to tax. ⁹ By extension, the contractor can purchase the same incorporated materials tax-free.

What About Construction Work Not Performed by a "Contractor"?

The Texas Tax Code does provide that certain construction-related services, defined as "real property repair and remodeling," are subject to tax. ¹⁰ "Real property repair and remodeling" is defined to exclude work on residential property (consistent with the discussion above), and therefore is limited to nonresidential or commercial property. ¹¹

The Comptroller's rules make clear that, for purposes of nonresidential repair and remodel services, the nature of a contract as "lump-sum" or "separated" is irrelevant – the entire charge is taxable in all cases. ¹² However, like the separated materials charge discussed above, the service-provider can purchase incorporated materials tax-free.

Potential Issues

The application of the "contractor" and other construction-related rules is complex by its very nature but can become downright confusing at times. For example:

• Is property residential or nonresidential, or is it a mix?
• Is the transaction lump-sum or separated, or does it involve elements of both?
• What about projects involving elements of both "contractor" work and nonresidential repair and remodel work?

Answering these questions requires an analysis of the specific facts of each case. As readers will likely understand, the complexity of these rules creates ample opportunity for taxpayers to encounter issues involving both assessments by the Comptroller's office and potential litigation.

State and Local Tax Services

Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.

At Freeman Law, our experienced attorneys regularly guide our clients through complex state and local tax issues—issues that are frequently changing as states seek to keep pace with technology and the evolution of business. Staying ahead requires sophisticated legal counsel dedicated to understanding the complex state tax issues that confront businesses and individuals.

Footnotes

1. 34 Tex. Admin. Code § 3.291(a)(3)

2. See also 34 Tex. Admin. Code §§ 3.357(a)(7), (c)(1), & (d)(2)

3. 34 Tex. Admin. Code § 3.291(a)(9)

4. Id.

5. 34 Tex. Admin. Code § 3.291(a)(8)

6. 34 Tex. Admin. Code § 3.291(a)(13)

7. 34 Tex. Admin. Code § 3.291(b)(3)(A)

8. Id.

9. 34 Tex. Admin. Code § 3.291(b)(4)(A)

10. Tex. Tax Code §§ 151.0101(a)(13) & 151.0047(a); see also 34 Tex. Admin. Code § 3.357(b)(2)

11. Tex. Tax Code §§ 151.0047(a)(1), (2)

12. 34 Tex. Admin. Code § 3.357(b)(2)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.