Do You Need to Charge Sales Tax on Labor in Texas?
The answer, as usual, is not always.
Is Labor Taxable in Texas?
I’m Mansoor Ansari with Nexus Tax Defense. Let’s discuss the taxability of labor and construction jobs.
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Residential Property:
The labor to repair, remodel, or restore residential real property is not taxable. -
Commercial Property:
The total amount charged for repairing, remodeling, or restoring commercial property is taxable.
Examples of Taxable Commercial Jobs
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Rebuilding any real property
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Upgrading any part of an already existing structure
Exceptions to Commercial Taxability
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Maintenance Contracts
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Ongoing maintenance labor is not taxable on commercial property.
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New Construction
Construction labor is not taxable if your contract is for any of the following:-
Building new structures
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Completing unfinished structures
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Initial finish out of work to the exterior or interior of the structure
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The Five Percent Rule
If you’re performing both remodeling and adding new square footage, your entire transaction becomes taxable if more than 5% of the job is dedicated to remodeling.
This is why it is important to itemize the invoice and separately charge tax on the taxable portions.
Call us if you have any questions. Thanks.
Frequently Asked Questions
Is labor taxable for residential construction in Texas?
No, labor for repairing, remodeling, or restoring residential real property is not subject to Texas sales tax. This includes services such as home repairs or improvements to a residence.
When is labor taxable on commercial construction projects in Texas?
Labor becomes taxable when it involves the repair, remodeling, or restoration of commercial property. In such cases, the total charge, including labor, is subject to sales tax.
What types of commercial construction labor are exempt from sales tax?
Labor is not taxable when it falls under certain exceptions, including new construction (e.g., building new structures or completing unfinished ones), initial finish-out work, and ongoing maintenance contracts.
What is the “Five Percent Rule” in Texas sales tax for construction?
If more than 5% of a job involves remodeling (as opposed to new construction), then the entire project becomes taxable. Properly itemizing invoices helps in accurately applying tax only to the taxable portions.
How should contractors handle invoicing to comply with Texas tax rules?
Contractors should clearly itemize their invoices, separating taxable remodeling labor from non-taxable new construction or maintenance services. This ensures compliance with Texas tax laws and avoids unnecessary tax on exempt services.